How to Treat Financial Benefits Households Get from Community Solar Programs

Do you factor the benefit into the tenant’s utility allowance or include it in annual income?

HUD’s Office of Multifamily Housing Programs recently published guidance on the treatment of financial benefits for HUD-assisted tenants resulting from community solar programs [Notice H 2023-09]. The notice applies to several of HUD’s Multifamily Housing programs, including project-based Section 8, Section 202, Section 811, and non-insured Section 236 interest reduction payment projects. It clarifies whether and how the financial benefits from these programs are factored into utility allowance and income calculations for HUD-assisted households.

What Is Community Solar?

The U.S. Department of Energy defines “community solar” as any solar project or purchasing program, within a geographic area, in which the benefits of a solar project flow to multiple customers such as individuals, businesses, and other groups. In most cases, customers are benefitting from energy generated by solar panels at an off-site array.

Community solar customers can either buy or lease a portion of the solar panels in the array, and they typically receive a credit on their utility bills for electricity generated by their share of the community solar system—similar to someone who has rooftop panels installed on their home.

Recent legislative actions have helped community solar programs grow rapidly across the country. The Inflation Reduction Act (IRA), for example, expanded or created several programs to finance solar facilities, including some targeted to affordable multifamily housing.

In the context of HUD-assisted housing, these customers may be tenants who receive financial benefits directly, either through individual metering or sub-metering, or owners of master-metered properties, who must then distribute such financial benefits to tenants. Many community solar programs and on-site solar incentive programs stipulate that financial benefits must be distributed to tenants as a condition of program eligibility.

For tenants of HUD-assisted sites, whether they receive a direct financial benefit, such as a credit on their electricity bill, or indirect financial benefits, such as financial benefits distributed not through an individual meter but by an owner, the question is whether that financial benefit must be factored into the tenant’s utility allowance or included in the tenant’s annual adjusted income. 

Comprehensive HUD Guidance

HUD had previously issued a memo on the treatment of solar benefits in master-metered buildings. The memo applied narrowly to master-metered buildings and explained options for non-financial benefits to be distributed to tenants in these properties. HUD’s most recent notice is more comprehensive and additionally covers financial benefits from community solar programs to HUD-assisted tenants in individually metered and sub-metered sites. Notice H 2023-09 covers the following scenarios:

1. Electricity is individually metered, and the tenant receives a financial benefit (a virtual net metering credit) that appears as a negative amount on the tenant’s electricity bill. In individually metered buildings, households have a unique account with their electricity provider.
2. Electricity is individually metered or sub-metered, but it’s administratively infeasible or not legally possible for the financial benefit to be distributed via individual discounts on tenants’ electricity bills, so the owner must find another means of distributing the financial benefits. Sub-metering is when a single meter allows for the monitoring of usage on individual electricity or other costs past a master meter.
3. Electricity is master-metered, such that residents don’t receive individual electricity bills, and the owner must find another means of distributing the financial benefits. Master metering is when a single meter measures the total amount of electricity consumption for the site and the owner receives one total bill for each billing period.

Factoring Direct Benefits into Utility Allowances, Annual Income

The notice details a two-step process to determine whether the solar credits in individually metered or sub-metered sites should be included in or excluded from the utility allowance baseline analysis or factored into a household’s annual income calculation for purposes of rent calculation or eligibility determination:

Step 1: Determine if solar credits affect utility allowance calculation. The first step is to determine the solar credit’s relationship to the utility allowance calculation. To understand the effect of a community solar credit on a unit’s utility allowance calculation, you need to obtain a copy of the tenant’s electricity bill, which can be accessed by the utility company if it isn’t already available.

If the solar credit reduces the cost of energy consumption by lowering actual utility rates, then the owner is required to submit a new baseline analysis in accordance with Housing Notice 2015-04 [Methodology for Completing a Multifamily Housing Utility Analysis], regardless of when the last analysis was submitted to HUD or the contract administrator for approval.

Here are two questions to answer for determining whether the credit is tied to the cost of consumption:

1. Is the credit a third-party payment (not from the electricity provider) on behalf of the tenant rather than a reduction in the cost of utilities? If “yes,” then the credit is not considered to reduce the cost of energy consumption as the cost for the utility provider to provide the consumed energy doesn’t change. And the owner isn’t required to submit a new utility allowance baseline analysis. If the answer is “no,” then the credit may be tied to the cost of consumption and the following question must be answered.
2. Does the credit amount fluctuate every month based on consumption (not based on solar output) and/or does the electric bill show a lowered utility rate per kilowatt-hour? If “yes,” then the credit is tied to the cost of utility consumption. The owner must submit a new utility allowance baseline analysis. If “no,” then the credit isn’t tied to the cost of utility consumption. The owner isn’t required to submit a new utility allowance baseline analysis.

Step 2: Determine if solar credits should be considered annual income. According to the notice, if the questioning in Step 1 determines that the solar credit is tied to the cost of consumption and, as a result, the utility allowance is affected, then HUD says the solar credit won’t count toward income. Otherwise, the second step is to determine if the solar credits fall within HUD’s definition of annual income for individually metered or sub-metered sites.

If a solar benefit appears on a household’s electricity bill as an amount credited from the total cost of the bill, HUD says that the credit should be treated as a discount or coupon to achieve a lower energy bill rather than a cash payment or cash-equivalent payment being made available to a resident. In this case, the credit won’t be counted toward income, as discounts on items purchased by a tenant aren’t viewed as “annual income” to the household. Generally, income isn’t generated when a household buys something at a cheaper rate than it otherwise would.

However, if there are credits on the electricity bill that are found to be third-party payments based on Step 1, there may be instances when the credits aren’t mere discounts and must be treated as income. For instance, a recurring monthly utility payment made on behalf of the household by an individual outside of the household isn’t considered a discount but is considered annual income to the household.

Indirect Benefits Factored into Annual Income Calculations

Some buildings are master-metered, meaning tenants don’t receive an individual electric bill. In other words, energy credits from community solar programs can’t be provided directly to tenants at these sites. However, solar programs and incentives may allow owners of master-metered properties to distribute financial benefits to tenants through alternative means such as providing direct cash benefits or additional building amenities like a security guard or shuttle bus.

The guidance in this recent HUD notice doesn’t differ from the prior memo on the treatment of solar benefits for residents in master-metered buildings that use community or rooftop solar power. The Insider previously covered the list of indirect benefits, and HUD’s assessment of whether these indirect benefits are considered income for the purpose of determining family rent or eligibility for HUD assistance, in Do Community Solar Benefits Distributed to Households Count for Annual Income?