A few weeks ago, we checked in on the solar market in our State of Solar issue.
If you want a general intro to the world of solar, that’s a great place to start. But when it comes to actually investing in this space, we need to get more specific.
The solar market is comprised of three distinct segments: Utility Solar, Residential Solar, and the least-understood of the bunch, Community Solar.
Each segment reflects a different channel for transforming sunlight into electricity – and each comes with its own unique economics.
Historically, residential and utility solar have taken the spotlight. But the merits of community solar are finally being recognized, with capacity in the US more than tripling over the past five years.
In this issue, we’ll break down these three segments, and explore why community solar could be the next big thing in energy.
We’ll also see how you might be able to capitalize on the bright future of community solar with a company called Neighborhood Sun.
Neighborhood Sun has built technology that serves as the essential link between community solar developers and their customers.
Their current financing round provides a rare opportunity to invest in something that could potentially benefit your community, your portfolio, and the planet.
Note: This issue is sponsored by Neighborhood Sun, with research & due diligence performed by the Alts team. As always we think you’ll find it very informative and fair.
Let’s go 👇
Table of Contents
Get your piece of the sun ☀️
With a cool new concept: Community Solar
As you’ll see in this issue, solar energy has massive downstream opportunities.
Neighborhood Sun connects people to local solar farms for clean energy.
It’s a game-changer for those who have an electricity bill, but are unable to install solar panels (for example those who rent their home, or live in an apartment or condo, etc..)
They’re raising $500,000 on WeFunder to expand into new markets.
Why invest in Neighborhood Sun?
- Obvious demand: Everyone wants to save money. Neighborhood Sun customers can save up to 30% on their electric bills.
- Revenue growth: They’ve grown revenue 318% over the past 2 years building out the Sun Engine platform
- Project growth: There are 134 community solar projects live on the platform
- Sustainable impact: Neighborhood Sun is a Certified B Corp using business as a force for good.
Join Neighborhood Sun in making solar energy accessible to all.
It’s better for your wallet, your planet, and your community.
A brief intro to The Grid
Before we hop into the solar market in detail, we need a brief primer on the grid.
A modern electricity grid has three main parts:
- Power plants, which generate electricity and feed the grid
- Transmission lines, which carry high voltage electricity from power plants over long distances (hundreds of miles).
- And distribution lines, which carry low voltage electricity locally to homes and businesses
One analogy for this system is that transmission lines are like the highways of the grid while, distribution lines are like the local roads.
In the modern world, ownership over this physical infrastructure tends to be split up between different companies. And this impacts the economic infrastructure that determines energy prices.
Electricity has two prices ⚡⚡
Traditionally, electricity grids have been vertically integrated, meaning utility companies own both the power plants and the transmission/distribution lines.
But in the 90s American legislators wanted to promote more competition. So today about two thirds of US electricity customers live in areas where electricity generation has been cleaved off from electricity distribution.
This bifurcated system has gained traction internationally too. Australia and the EU do this as well.
For the most part, generators and distributors are separate economic entities.
As a result, there are basically two separate prices for electricity in any given region:
- The wholesale price, which distributors pay to generators for feeding the grid
- And the retail price, which customers pay distributors for delivering power
Okay, I know what you’re thinking: we’re stumbling into the weeds here.
But see, these subtle details have enormous economic implications for the most popular form of solar electricity — utility solar.
The problems with Utility Solar
Utility solar adheres to the standard architecture of the grid, with electricity-generating panels linked directly to the grid’s transmission lines.
Historically, this time-tested approach has functioned well enough.
But in recent years, one major issue has started to appear…
Customers don’t get the benefits of cheap solar
Since 1976, the price of solar panels has fallen by an astounding 99%. It’s become an extremely cost-effective way to generate electricity.
But under the utility solar model, cost improvements don’t really flow through to end users.
Here’s why: Utility solar companies sell their electricity to the grid at the wholesale price. Then distributors pass it on to customers at the retail price.
The wholesale price that distributors pay is determined by power purchase agreements (PPAs) with operators.
PPA prices for utility solar in the US have declined as the technology’s levelized cost of electricity has fallen (LCOE).
Retail prices, however, have not followed this trend.
In fact, since 2000, average retail prices for electricity in the US have basically done nothing but go up!
The most obvious reason for this gap is profit-seeking by distributors, who are happy to play the wholesale/retail arbitrage game to pad their wallets.
But another reason is that the retail price of electricity is determined by a mix of energy sources, some of which are more expensive than solar.
And traditionally, end users don’t have a say in where their electricity actually comes from…
…Unless, of course, you take matters into your own hands with residential solar.
Is Residential Solar a solution?
Residential solar might seem like a solution to the problems plaguing utility solar.
By powering your home with rooftop panels, you avoid both the retail/wholesale and energy mix issues, and directly participate in improvements to the cost of generation.
Oh, and residential systems also open up the opportunity for net metering, where end users can sell electricity back to the grid and earn the retail price.
But while residential solar might be a step up, it’s far from perfect:
- First, most people simply cannot install it! Up to 80% of Americans live in housing ineligible for rooftop panels (apartments, condos, etc)
- Residential solar also comes with high upfront costs. Installation often exceeds $20,000.
- Solar projects have economies of scale when it comes to the installed cost per watt generated, making small-scale residential projects relatively less efficient.
If utility solar exists on one end of the spectrum, residential solar exists on the other.
So, an ideal form of solar would be one with a commercial scale that anyone can access (like utility) but with distributed generation that avoids the wholesale markets to offer cost improvements for end users (like residential).
Achieving that once seemed like a pipe dream. But now community solar is bringing that future within reach.
The latest idea: Community Solar
If you stumbled upon a community solar installation, you’d be forgiven for mistaking it for utility solar.
While you can find community solar set up on industrial roofs or apartment buildings, the classic open-field array is getting popular too:
But there’s one absolutely critical difference between the two: Unlike utility solar, community solar projects do not sell electricity to distributors wholesale. They sell it directly to consumers!
That’s because community solar projects are linked to distribution lines, not transmission lines.
And when you use these “local roads,” you get to avoid the tolls and fees that come with the highway (like the requirement to sell electricity to distributors wholesale.)
Instead, community solar projects use a process called virtual net metering to sell electricity directly to customers in the local area (hence the name “community” solar).
By avoiding the middleman, community solar projects can pass on the cost improvements of solar generation, saving customers money on their electricity bills (and yes, while still turning a very nice profit)
In other words, community solar solves both the price problem of utility solar, and the access problem of residential solar.
How Community Solar works
Community solar is far less of a headache than installing panels on your roof – and has no upfront costs.
Here’s how it works:
- You sign up for a local community solar project in your area, entitling you to a portion of the energy generated by that development.
- Your distributor continues to deliver electricity as normal, but your bill will be partially offset by community solar credits, which reflect the discounted cost of generation.
- You pay a subscription fee for your community solar farm. But since this fee is always at a discount to the value of the credits, you save money on your electricity bill each month.
Now, you might ask what distributors have to say about all this (especially considering community solar cuts out one their wholesale/retail arb game!)
Well, distributors still get paid delivery fees for delivering community solar electricity, and increased use of local lines can help ease congestion strains associated with busy transmission lines.
At the same time, there’s some evidence that distributors are starting to block more community solar connection requests — so yeah…it’s complicated.
Still, recent federal subsidies for community solar in the US (as well as state-level mandates) will help promote continued adoption of community solar – which is great news for companies like Neighborhood Sun.
Neighborhood Sun: Technology that powers Community Solar
The saying is a bit cliché at this point, but Neighborhood Sun is truly a picks-and-shovels play in the rapidly growing community solar market.
Neighborhood Sun isn’t an independent power developer, nor do they own their own community solar sites.
Instead, the company offers essential technological infrastructure that supports community solar projects – through their proprietary SaaS offering SunEngine.
SunEngine powers community solar
Recall that customers need to sign up for and subscribe to specific community solar projects to see the benefits on their electricity bill.
SunEngine is built as an end-to-end management tool for this process:
- Providing customer registration flow for community solar developers
- Partnering with distributors to support community solar credit allocation on customer’s bills
- And offering a billing and management platform for customers to handle their subscription over the lifetime of the project
Neighborhood Sun is well past the initial bug-testing or product market fit stages.
They have a proven track record in this space, having billed more than $41 million through SunEngine with over 25,000 individual subscribers.
As Neighborhood Sun’s flagship product, SunEngine facilitates the three revenue streams that power their business model.
The Neighborhood Sun Business Model
Neighborhood Sun occupies an interesting niche in the community solar space, since they’re really offering three separate (but related) services:
1) Customer acquisition for community solar projects.
Neighborhood Sun helps market and onboard new customers on behalf of community solar developers using a combination of direct sales and affinity group marketing (Johns Hopkins, for instance, offers discounted access to Neighborhood Sun as an employee benefit).
And the nice part of community solar is that, once you explain it to people, community solar sells itself.
Neighborhood Sun users save up to 30% on their electricity bills – and who doesn’t like more money in their pocket?
Developers pay Neighborhood Sun a one-time acquisition fee for each customer signed up.
2) Management for customers
Once customers are onboarded, the company also offers lifetime billing and management through SunEngine.
Developers pay Neighborhood Sun a recurring monthly fee per customer for this service, just like a traditional SaaS.
3) Licensing SunEngine through white-labeling
Finally, Neighborhood Sun is seeing increased interest in a new business line: solar developers licensing the SunEngine technology for their own white-labeled use.
Neighborhood Sun only recently completed the tech buildout necessary for developers to license and use SunEngine independently, so it remains to be seen how significant licensing fees will be in Neighborhood Sun’s future.
All told, this business model enabled Neighborhood Sun to generate nearly $5 million in revenue last year for a gross profit (before operating expenses) of about $2.5 million.
These figures indicate that, with continued scale, net profitability could be just around the corner.
And scale seems to be a priority, with Neighborhood Sun doubling their projects under management in 2023. Considering that there are almost 3,000 individual community solar projects nationwide, there’s ample room for continued growth too.
If you want to be a part of Neighborhood Sun’s growth (and help expand access to local-focused clean energy that saves people money), the company is currently raising a community fundraising round.
Investing in Neighborhood Sun
Neighborhood Sun has previously raised almost $7 million, including from institutional investors like the Maryland Technology Enterprise Institute and For Good Ventures.
Now, they’re looking to do another $500k financing round to help upgrade SunEngine, hire a COO & CFO, and expand into new states (including California, which recently improved access to community solar).
After Neighborhood Sun’s previous $1 million financing round in 2022, the company nearly doubled overall managed energy capacity while growing topline revenue by 160% – providing a strong track record for the company’s use of funds.
Here are the details of the current round:
- Investment format: Regulation CF via Wefunder
- Investment type: SAFE (Simple Agreement for Future Equity)
- Investor restrictions: None, although non-accredited have SEC imposed limits
- Min. investment: $250
- Valuation cap: $25m ($23m for the first $200k invested)
- Conversion discount to valuation: 15% (30% for the first $200k invested)
- Max. raise: $618,000
The Neighborhood Sun team
As you might have noticed, the solar industry is a place where the details really matter.
The Neighborhood Sun team is a group that understands these details inside and out – because they’ve spent decades in the solar industry, with experience that includes everything from the political, entrepreneurial, and financial sides of the space.
Gary Skulnik is the founder and CEO of Neighborhood Sun, having run the company since inception in 2016.
With more than 25 years in the clean energy industry (including in legislative advocacy roles), Gary knows community solar better than almost anyone else. He sold his previous company, Clean Currents, to SolarCity.
Cara Humphrey is the Chief Revenue Officer of Neighborhood Sun, overseeing the company’s sales team and customer acquisition strategy. Cara is a veteran solar entrepreneur, having previously co-founded Astral Power.
John Wilson is the Chief Technology Officer of Neighborhood Sun, managing all aspects of the SunEngine platform. Prior to joining the company, John spent 14 years as the VP of Operations at Bullfrog Power, where he was responsible for all IT and software development.
Closing thoughts
Community solar is a new trend that’s gaining recognition as an alternative to utility and residential solar.
I think Neighborhood Sun has tapped into something special here. They seem to hit upon a trifecta of value:
- Connecting consumers with local solar farms, ending the utility arb game
- Saving consumers money on their electricity bills, and
- Carving out a nice profit for themselves.
Their community round presents a compelling and unique way to invest in solar power.
Express interest in Neighborhood Sun →
That’s it for today. Reply with comments, we read everything.
See you next time,
Brian
Disclosures
- This issue was sponsored by Neighborhood Sun
- Due diligence on this deal was performed by Brian Flaherty and Stefan von Imhof
- Neither the author, nor the ALTS 1 Fund, nor Altea holds any interest in Neighborhood Sun
- This issue contains no affiliate links
This issue is a sponsored deep dive, meaning Alts has been paid to write an independent analysis of Neighborhood Sun. Neighborhood Sun has agreed to offer an unconstrained look at its business, offerings, and operations. Neighborhood Sun is also a sponsor of Alts, but our research is neutral and unbiased. This should not be considered financial, legal, tax, or investment advice, but rather an independent analysis to help readers make their own investment decisions. All opinions expressed here are ours, and ours alone. We hope you find it informative and fair.
