Source: First Solar.

Minnesota isn't known as a state with an abundance of sunshine, but it is becoming an early adopter in the community solar gardens movement that's slowly growing around the country. These community projects are usually small (around 1 MW) solar installations built around a city that allow renters, school districts, and businesses to buy the solar energy, usually in lieu of installing solar panels on their own roofs. 

In 2014, just 21 MW of community solar came online, according to GTM Research, compared to 6,201 MW of total solar installed nationwide.  

2015 is expected to be a much bigger year, with 115 MW installed and 18.1 MW in Minnesota alone. Xcel Energy (NASDAQ:XEL), the electric utility that dominates Minnesota, is expecting that 80 MW of community solar gardens will be installed by the end of 2016, a rapid adoption for a state not used to getting electricity from the sun. And some of the biggest players in the industry will be early movers in Minnesota's solar push.  

Most of SolarCity's installations are on residential rooftops, so community solar is a new business. Source: SolarCity.

SolarCity and SunShare jump into community solar
The first two movers in the Minnesota community solar market are SolarCity (NASDAQ:SCTY.DL) and SunShare. SolarCity announced this week that it will partner with Minnesota-based developer Sunrise Energy Ventures to build "up to one-hundred 1 MW(AC) community solar installations." Customers will be able to buy power from the solar gardens for 13 cents per kWh, and Xcel Energy will credit the subscriber for 14.7 cents per kWh, meaning customers save 1.7 cents per kWh by participating in the program. The program will launch in 2016, and as a Minnesota resident, I'll be an early adopter.  

SunShare is partnering with cities like Starbuck and Cologne, who will buy power from their community solar developments.  

These solar projects are an interesting way to bring solar energy to people who don't own homes that can support solar. But the drivers aren't the same market forces that have caused a solar explosion in recent years.

Minnesota's solar growth is driven by mandates
Even SolarCity's release announcing its solar gardens point out a drawback of Minnesota's community solar program. It's "mandated by law," not driven by market forces.

The 14.7 cent per kWh figure I quoted above is well over the average retail Minnesota electricity bill of 11.5 cents per kWh. In states like California and New York, SolarCity can offer customers power purchase agreements that are lower than their cost of electricity, meaning the market, not mandates, are driving adoption growth.  

This isn't to say the community solar program will be bad. But installers will have to lower costs in the future to make the program competitive long term. Otherwise, this will be a building boom, and the Minnesota solar industry will bust in 2017, when the investment tax credit falls from 30% to 10% for commercial projects, effectively making them about 25% more expensive.

Keep an eye on this growing solar trend
Minnesota may be leading the way in community solar, but it actually makes a lot more sense in states with higher electricity costs, more sun, or both. California (17 cents per kWh), New York (19.2 cents per kWh), Nevada (13.6 cents per kWh), and Florida (11.6 cents per kWh) would all benefit from this type of solar installation.

GTM Research predicts that community solar will grow to a 534 MW per year business in 2020. If that happens, this will be a big market for solar companies to adopt. But policies on the state and local level are needed to make that happen. At least Minnesota is taking steps to see if community solar will be a hit. Will more follow?

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.