Solar Rooftop Generation: A Primer for Real Estate Owners and Developers
The electricity industry’s movement toward renewable energy development presents a unique opportunity for owners and developers of large-scale real property (e.g., warehouses and distribution centers). Such owners are exploring the feasibility of reducing energy costs and “going green” through the installation of on-site renewable (solar) generation. One exciting and growing application of renewable electric generation entails the installation of rooftop solar, photovoltaic (“PV”) panels to convert the sun’s energy directly into electricity. The following is a primer on what real estate owners and developers need to consider before embarking on the installation of a rooftop PV system.
Whether a PV rooftop system is feasible depends on a number of factors, including the age and condition of the structure. Generally, roofs that are five years or younger may be sufficiently stable to sustain the PV equipment. As a general rule, approximately 100,000 square feet of roof space is required for a 1 MW solar array. Finally, an owner should review local ordinances to determine if there are any restrictions on, or special permits required for, such rooftop structures.
If a rooftop solar system is technically feasible, a developer would then need to consider the economics of such a system. In a typical model, the developer would lease its rooftop space to a contractor that would construct, own, generate and maintain the solar system. The contractor would enter into a long-term power purchase agreement (“PPA”) with the real property owner under which the contractor would sell electricity to the owner at a rate representing a discount from the otherwise applicable utility tariff. The length of the PPA would depend, in part, on the useful life of the solar system, which could be in excess of 15 years.
The contractor finances the construction of the solar system through the revenue streams represented by the PPA sales to the property owner and the sale of renewable energy certificates (“RECs”), which are tangible rights related to the beneficial environmental attributes associated with generating power from a renewable resource. RECs can be sold separately from the power generated to create them, and there are several markets (both voluntary and compulsory) in which RECs may be traded.
While the chief economic benefit for the owner associated with the rooftop PV system is the stream of energy savings associated with the PPA, an owner may wish to negotiate with the contractor for a share in the revenue attributable to the sale of RECs.
Because a rooftop solar system cannot produce electricity in every hour, an owner needs to consider the rate it will pay for electric service obtained from its local utility (or an alternative supplier) when its rooftop system is not producing power. (Rooftop facilities produce power on average for 6 to 8 hours per day.) Some utilities require a customer with “on-site generation” to take electric service under a “standby” service tariff with rates that may differ from the otherwise applicable tariff rates paid by the owner. This differential needs to be factored into the economic analysis of the solar rooftop generation.
With a contractor assigned the responsibility of owning, generating and maintaining the rooftop system, there are minimal regulatory considerations for the property owner under state and federal laws regulating utilities and the services they provide. While the contractor may be subject to limited regulation in certain jurisdictions, the owner, who is a retail purchaser of electricity under the PPA, will be subject to no public utility regulation and will need to consider, as noted above, the terms of service for those hours when its rooftop array is not producing.
If an owner or developer wishes to consider the sale of excess power produced by the rooftop PV system to either the local utility (a wholesale sale of power) or a customer located near the owner’s site (a retail sale of power), additional regulatory, technical and economic considerations will need to be examined.
Renewable energy, particularly rooftop solar energy, may offer an attractive opportunity for owners and developers of real property to lower energy costs and establish a market reputation for responsible energy usage. Rooftop solar installations are gaining in applications across the country, particularly in California, Texas and New Jersey. With careful consideration of technical, economic and regulatory factors, a real property owner or developer may find that a rooftop PV installation is a feasible energy solution.