4 Surprising Ways Community Solar is Different from ESCOs

We wear out a lot of shoe leather educating New Yorkers about Community Solar Farms. Our experience has been that there is a lot of confusion. To add some clarity, from an objective perspective, we have written this article on how Community Solar is different from ESCOs (Energy Service Companies). 

The shorter answer as to how Community Solar is different from ESCOs can be found in the FAQ section of this site. This post, however, will go into more details.

What are ESCOs?

To understand how Community Solar is different from ESCOs one has to understand the history of how the latter they were born.

In 1996 the retail electricity industry in New York was deregulated (source).

This meant that the “supply” of electricity was separated from the “delivery” of that electricity.

The supply side was deregulated so that a new breed of Energy Service Company (ESCO) could compete to provide cheaper supplies of electricity on often better terms.

These better terms were included a fixed price for the supply of electricity. It could also include a predetermined rise in the cost of the energy supply over time. In both cases the value to the consumer was a degree of certainty over energy costs. This helped consumers with budgeting.

Based on these regulations your local utility was still regulated and would retain responsibility for “delivery” of the electricity into your home. They would also bill you for both the supply and the delivery in one bill.

Many of the electric utilities included in the deregulation are in Upstate New York. Their names are probably familiar to you if you are in their service territory. They include: Central Hudson Gas & Electric, Central Hudson Gas & Electric (NYSEG), Central Hudson Gas & Electric, Rochester Gas & Electric.

Community Solar is Different from ESCOs in 4 Ways

In discussing how Community Solar is a different from ESCOs the key is to understand that they are fundamentally different animals.

The first area Community Solar is different from ESCOs is in the trust factor.

New Yorkers have had to sometimes deal with fly-by-night energy companies structured as ESCOs. This has left a bad taste in the mouth of many consumers.

The bad reputation of ESCOs makes our job of educating households about Community Solar Farms that much more difficult.

One reason for this bad reputation is the “bait-and-switch” tactics sometimes used by ESCOs. Customers are promised a lower electricity rate only to have it raised at some point in the future, above their current rates.

“ESCOs have notoriously been cited for using deceptive sales tactics. 'Consultants' misrepresent themselves by pretending to be employees of the local utility company. The consultants push consumers into signing predatory contracts…”

Liz Krueger-New York State Senator, 2019

Do not get us wrong. There are some ESCOs which are ethical. However, many are not. The problem is that it is hard to figure out which one is which. Some of these questionable practices have been extensively covered by the press. For example, this article in Village Voice magazine.

The second area Community Solar is different from ESCOs is that a Community Solar Farm is not an energy company. It is simply an electricity producing farm with solar panels which is owned by the community in the form of subscribers.

These solar farms do sell electricity into the local utility “grid” – but they are not selling directly to consumers.

Furthermore, the legal organization of a Community Solar Farm is much more like a co-op. You might be familiar with a savings and loan co-op or a farm co-op. These are community owned entities which give back any profits to the community in the form of savings.

So where does the "savings" come from? Is it a sustainable economic model? The answer is tax certificates. The same regulations which created Community Solar Farms required utilities to purchase Renewable Energy Certificates (RECs) from the solar farms. 

These RECs can only be generated when solar power is produced and sold into the utility grid. So the solar farm gets two payments. It gets payment for selling solar energy into the grid. But it also gets payments for the RECs it sells to the utility.

Your "savings" come from the sale of these RECs. That is why this is a sustainable economic model.

The third area Community Solar is different from ESCOs is in their business models.

ESCOs offer a fixed rate energy price. This is difficult to do. It exposes them to severe risk when energy prices or demand spike. This is because they must pay a high price to buy the electricity but sell the electricity to you at a low price.

While some of this risk is “hedged” (that is, offset by financial contracts), most of it is not in the event of unexpected spikes. This can lead to severe financial strain on an ESCO. Even to the point of bankruptcy. 

The Community Solar Farm in contrast is not taking price or risk. The price of the electricity it sells into the grid is stable. This is because the cost of the fuel which generates the electricity – the sun! – is stable.

Instead of offering a fixed price for electricity a solar farm offers a guaranteed rate of savings on your utility bills. That is, your solar credits offset what you owe on your utility bill. However, these solar credits are given to you at a discount.

With our Community Solar Farm partners, the discount is 10%.

This means that with Community Solar Farms your electricity costs may fluctuate from month to month; however, at the end of the year you will see savings versus if you did not have a subscription to a solar farm.

The fourth area Community Solar is different from ESCOs is that the latter make their profit in large part from locking customers into long term contracts. That is what allows them to undercharge for the first few years of the contract so they can overcharge for the remaining years.

It is not surprising therefore that there are often severe cancellation fees to get out of these contracts. They are designed to provide a disincentive to end the contracts early.

In contrast, Community Solar has month to month contracts. Savings come from the Renewable Energy Certificates sold to the utility – not by locking you into a long-term contract.

Therefore, there is no fee to join and no fee to cancel. However, there is a notice period prior to cancellation. For our partners it is 90 days. This because the savings are based on a 3-month cycle.

Month #1 the solar farm produces electricity. Month #2 the utility offsets the costs on their bills by the solar credits generated in Month #1. Month #3 you get billed for the solar credits with a 10% discount. Therefore, any cancellation needs this 3-month cycle to complete itself.

The good news? You never pay for the credits until after they have been used to reduce your electricity bill.

Community Solar vs. Green Energy Companies

Green energy companies go to the heart of why Community Solar is different from ESCOs. This is because green energy companies are ESCOs. Something which is not often advertised.

We often hear the refrain, “I don’t need Community Solar because I already work with a green energy company.”

The two, however, are not substitutes for each other.

The value proposition of a green energy company is that the “supply” of energy they provide (remember that ESCOs supply the energy and utilities deliver it into your home or business) is from renewable resources.

The problem is that as ESCOs they suffer from the same drawbacks as any ESCO – outlined above.

There is another problem with green energy companies. Anyone can call themselves a green energy company, with often different meanings. For example, a company which offsets parts of its dirty energy with renewable energy can call itself a green energy company.

A good example is that many green energy companies call themselves green because they source some of their energy from Texas wind farms.

In this case, however, there is no way to ensure that the supply of "your" energy is from renewable resources. Furthermore, a Texas wind farm does nothing to clean up the air which you breathe.

In contrast, subscribing to Community Solar means the credits you receive are from renewable energy in your area.

Conclusion: Is Community Solar Better Than ESCOs?

In discussing how Community Solar is different from ESCOs we are not saying one is better than other. Our main point is that they are different. Each with its own pros and cons.

If you come across an ethical ESCO they might offer you value a Community Solar Farm cannot – namely fixed prices for your electricity. However, nothing is for free. This advantage comes with risk. A risk which might put your ESCO out of business, creating complexity for you.

On the other hand, Community Solar offers advantages ESCOs cannot provide. That is, a guaranteed savings on your utility bill and the knowledge you are reducing your carbon footprint. It is a much simpler business model.

Here is an important bottom line. The two are not mutually exclusive. You can get a green energy company acting as your ESCO and subscribe to Community Solar also. They can be complimentary business models for consuming energy.