Spwr Carport

Image source: SunPower.

For years, the solar industry has been creeping up behind the electric utility industry. At first, it was a small nuisance that utilities had to deal with but rapid cost cuts and growth made it a threat many utilities could no longer ignore.

Most solar installed in the U.S. is utility-scale solar, which can lead to headaches for utilities balancing the supply of electricity. But they generally know how much electricity those plants are going to supply and have mandates from states around the country to support such projects, so they haven't been all that combative with large solar projects. Residential and commercial solar, on the other hand, is a major threat because it allows customers to become generators of electricity and net metering means they can send electricity back to the grid. Many utilities didn't know how to handle this threat besides fighting customers and making it more expensive for them to go solar.

But some utilities are finding ways to profit off solar. The ones that do will pave a path to long-term profit and lower the risk in their business model. Here are the models utilities are trying and what you should watch for in the future. 

First Solar Cimarron Project Image

Utilities are deciding to own large solar projects like this one. Image source: First Solar.

Ownership
Utilities have long bought solar energy from solar projects, but until recently they weren't big buyers of projects themselves. But that's changed recently as utilities see the long-term cash flows and low risk as a model that fits well within a utility.

The two deals that have caught my eye this year are SunEdison's (NASDAQOTH:SUNEQ) 265 MW Three Cedars solar project in Utah that was partially sold to Dominion (NYSE:D). The utility paid $320 million for half of the cash equity in the project and 99% of its tax equity. When combined with an $80 million loan, the project was fully financed and SunEdison gets to keep half of its cash flows and Dominion gets an almost guaranteed return over the 20-year power purchase agreement with PacifiCorp. It's a good deal for both sides.  

Southern Company (NYSE:SO) made similar acquisitions of the 300 MW Solar Gen 2 and 300 MW Desert Stateline projects from First Solar (NASDAQ:FSLR). The utility bought 51% of the project's cash flow and its tax equity, while First Solar kept nearly half of the project's cash flow.  

These projects show one mutually beneficial way utilities and solar companies are working together. Utilities get immediate tax relief from owning these projects plus long-term cash flows, while solar companies like SunEdison and First Solar can pay for their investment and keep long-term cash flows as well. 

Solarcity Rooftop Solar Installers

Residential solar is a threat to utilities, so they're choosing to partner with customers and solar companies on community solar projects. Image source: SolarCity.

Community solar
The next solar boom to watch is in community solar. These are projects built around cities that residents can buy electricity from and utilities usually play a major role in their operations. It's like buying power from the solar system SolarCity (NASDAQ:SCTY) puts on your roof, except the project is built in a field instead of on a roof.

In fact, SolarCity has been one of the first movers in this area, saying it planned to build up to 100 MW of community solar projects in Minnesota alone. In Minnesota specifically, Xcel Energy would act as an intermediary for the solar project, providing payments for the community solar project developers as well as a rate discount to residents using the program.

First Solar recently announced a supply agreement to Clean Energy Collective, who is building community solar projects and will sell them "to residential customers and businesses directly on behalf of partner utilities." 

Community solar allows utilities to play a role in customers going solar, easing the friction that exists against rooftop solar.

New business models emerge
The leading solar companies in the solar industry know that they need utilities for their own long-term success. SolarCity, First Solar, and SunEdison have all made comments along those lines. The challenge has been finding utilities willing to embrace solar and a business model that works for both sides of this energy struggle.

Utility ownership of projects and community solar development may be win-win for solar and utilities. If they continue to grow, it could lead to a cleaner and cheaper energy future, which would be good for everyone.

Travis Hoium owns shares of First Solar and SunPower. The Motley Fool owns shares of and recommends SolarCity. The Motley Fool recommends Dominion Resources and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.