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Minnesota utility regulators on Thursday cut bill credits — and thus, savings — for subscribers to more than 700 community solar gardens in a plan estimated to save roughly $40 million a year for Xcel Energy customers.

The 5-0 decision by the Minnesota Public Utilities Commission was fiercely contested by solar garden operators and subscribers, including many cities, counties and schools who said they would lose significant expected savings because of the decision.

But Joseph Sullivan, vice chair of the PUC, said the formula used to calculate the relevant bill credits overestimates the value of small-scale solar power from the program, making it too expensive for Xcel customers who pay for the program even if they don't subscribe to a community solar garden.

"The impact on nonparticipants right now is so significant that we have to act, that's what it was," Sullivan said after the meeting that drew a full room of bystanders.

The Legislature created the solar garden program in 2013 as an alternative to rooftop solar. It allows Xcel customers to subscribe to third-party solar operators. In return, subscribers get a bill credit from the utility for energy Xcel must take from those solar gardens.

The bill credits are determined by state law and policy and have changed over time. But in May, the PUC asked Xcel to develop a plan to switch about 740 community solar gardens — the large majority under the program — from an early formula to a newer one that covers many newer gardens. That formula incorporates things like avoided transmission costs and environmental benefits to calculate a value of power from the smaller solar.

What Xcel eventually proposed would have saved $48 million in bill credits each year, money that would flow to the utility's customers.

Sullivan and his fellow PUC commissioners were not the only one to voice concerns about the program costs. Xcel, trade unions, Minnesota Attorney General Keith Ellison and the clean power nonprofit Fresh Energy are among those who argued the price should be reined in.

With no changes, community solar was expected to cost $329 million in 2024, and 93% of that would be paid by Xcel ratepayers in Minnesota. The average residential customer would pay about $7 a month for community solar in 2024, compared with $4 in 2022.

The program has defenders who credit community solar as bringing many benefits like growing a solar industry beyond what Xcel has done. And the idea of reducing bill credit rates drew opposition from the Minnesota Department of Commerce, and sharp backlash from subscribers, including hundreds of residential customers and a wide array of cities, counties and school districts who wrote to the PUC saying they would lose expected savings and in some cases owe money to garden operators.

The governments included big cities and institutions like Minneapolis, St. Paul, St. Cloud and the University of Minnesota, as well as smaller ones like Winona, Northfield, Sauk Rapids and the Rocori school district.

Chanhassen was one city to weigh in, saying it relied on expected savings in budgeting and planning and the projected cash was meant to ease property taxes.

"If the commission approves this change, we will stand to lose approximately [$750,000] in projected savings, which would be an approximately 88 percent reduction," wrote city manager Laurie Hokkanen.

About 25% of bill credits from solar gardens that will be switched to the new formula flow to governments, 16% to public schools, 13% to hospitals, clinics, churches and private schools and 17% goes to residential customers, according to Commerce. Roughly 28% of bill credits benefit private businesses and other subscribers.

Solar developers also argued the switch would chill clean energy production in Minnesota. Most subscribers sign 25-year contracts based on the bill credit rate, and the Minnesota Solar Energy Industries Association and others said changing those credits midstream would cause legal headaches and uncertainty for the industry.

Cooperative Energy Futures was one of several developers who warned subscribers would ditch their Applicable Retail Rate (ARR) gardens, making at least some of them insolvent.

"I'm sure that we as a regulatory community can come up with better ways to save ratepayers money than to make this change which will have a dramatic effect on ability to attract investment to Minnesota," said Betsy Engelking, vice president of policy for the Minneapolis developer National Grid Renewables, during the PUC hearing Thursday.

Fresh Energy and Ellison asked the PUC to take a middle-ground approach to soften the blow on certain subscribers like residential customers. However, Fresh Energy pushed back on the idea that keeping savings for some local governments was more important than reducing costs for Xcel customers.

"It is much fairer for taxpayers to pay for local services through their taxes than it is for all of Xcel's ratepayers, no matter where they live, to pay well above the value of [community solar garden] generation in order to fund public services in select jurisdictions that subscribed," wrote Allen Gleckner, the nonprofit's executive lead for policy and programs, in a letter to the PUC.

Xcel did not take a stance on the proposal regulators asked it develop. The company estimated its original plan would save the average residential customer $12.31 a year.

What the PUC approved would have a more favorable rate than the original Xcel plan for residential and small-business subscribers, though bill credits would still be less than in the current structure. Large commercial subscribers like cities and bigger business will essentially switch over to the new formula Xcel proposed but get a slightly smaller cut in the first year of the transition.

Xcel and PUC staff estimated the decision would save Xcel ratepayers between $28 million and $30 million in 2025 and between $38 million and $41 million after that — eventually adding up to more than $600 million over time.

Also on Thursday, Ellison said he secured in legal settlements $85,000 for customers of four Minnesota community solar garden operators who charged early termination fees Ellison said were unlawful. The companies were FastSun Solar, Cypress Creek Renewables, Generate Capital and Global Atlantic Financial Group Limited.