The world is changing. The climate, economy, and technology are all changing. Ten years ago, the idea of a commercial real estate owner using their roof as a solar tenant space seemed complicated and expensive. But as we’ve already stated, things change.
Why is Rooftop Solar a Better Investment Now than in the Past?
The adoption of solar photovoltaic (PV) technology at a massive scale over the past decades has drastically reduced costs associated with PV equipment, installation, and maintenance. The reduced hard costs along with a more favorable regulatory environment has magnified the potential income that can be made from rooftop solar.
There are a few different ways to financially structure your commercial rooftop solar array. The simplest and most traditional way has been for the property owner/manager to own the array, pay for the installation, and use the energy generated by the system to offset utility costs (net metering), thus lowering operating expenditures and increasing revenue. This scenario, however, requires a significant upfront investment because the owner is essentially paying for the next 25 years of electricity in advance. Depending on the cost of electricity and the available incentives in your market, the return on investment (ROI) can be as low as three to five years. Although owning the system can sometimes take longer to see financial gains, once they do come, they tend to be larger and last longer.
Another way to take advantage of rooftop solar is through a solar site lease model. In this arrangement, the owner of the property will lease the roof space to a third-party investor (usually an experienced solar developer), who will finance and own the solar array. The owner of the property makes money in the form of rooftop lease payments for 20+ years from an otherwise unused portion of their building. On the other hand, the owner of the PV system makes money by selling the electricity to a third party, usually a utility. The rent paid by the solar array owner can be structured as fixed and all-inclusive (with or without an annual escalator), it can be based on the output of the system, or it can be a percentage of the array owner’s revenue.
A similar option to the solar site lease model is through a Power Purchase Agreement (PPA), except the property owner signs a contract to purchase the electricity generated by the array at rates below the utility retail rate. In exchange the developer pays for the system and uses the roof space at no cost. The primary benefit of the PPA model for the property owner is the reduced utility costs. These PPA deals last on average for about 20 years, which is less than the expected lifetime of the array (25-30 years).
The PPA and solar site lease models require no money down from the site owner and no equipment or maintenance obligations. These are great options for property owners who want to take advantage of solar without the responsibilities that come from owning and maintaining the array.
Beyond just the revenue that can be directly generated by the array, there are other ways that solar increases the value of a property. According to the Department of Energy, buildings with “Green” certifications (solar and other energy efficiency attributes) charge higher rents and have lower vacancies. In addition, some localities have passed laws which will penalize buildings that have not taken steps to reduce their carbon emissions (ex. NY Climate Mobilization Act).
From a public relations perspective, an investment in rooftop solar demonstrates to property stakeholders, tenants, and the public that the future of the building and the planet is a top priority. As the movement to vote with your wallet progresses, a reputation of corporate social responsibility is increasingly critical.
How Do I Know if My Roof is a Good Candidate for Solar?
The ideal building for a rooftop PV system will have a large flat roof that is not overly crowded with HVAC equipment, air vents, or other obstructions. It will also not be heavily shaded by adjacent buildings or nearby tall trees. A very old roof may not have the structural integrity to support the weight of a solar array. Any building that meets these criteria, from industrial/manufacturing facilities, warehouses, big-box retail stores, and malls to multifamily properties, offices, schools, and municipal buildings can benefit from investing in rooftop solar.
In addition to the building itself, the cost of electricity and the regulatory environment in the market where the building is located are major factors that contribute to the revenue that can ultimately be collected from the system. The higher the cost of electricity and the stronger the available incentives for solar in your area, the better the investment in solar. Below are a few examples of regulatory programs that make solar a particularly good investment.
- Los Angeles Department of Water and Power (LADWP) Feed in Tariff (FiT) Program – Allows property owners to sell 100% of the electricity generated by the rooftop system to the utility for a period of 10 or 20 years (as opposed to being consumed onsite).
- New Jersey Transition Renewable Energy Certificates (TREC) Program – A system earns one TREC for each megawatt-hour (MWh) of solar production. The value of the TREC generated by a non-residential rooftop system is fixed at $152 for 15 years. Revenue created by the sale of TRECs is in addition to savings achieved from reductions in utility bills.
- New York Value of Distributed Energy Resources (VDER) – The VDER program, which replaced the net metering program, compensates projects based on when and where they provide electricity to the grid. The value considers the wholesale price of electricity in your area, the avoided carbon emissions, the cost savings to customers and utilities, and other savings from avoiding expensive capital investments.
Examples of companies which have taken advantage of rooftop solar at an organizational level are: Apple, Facebook, Walmart, Safeway, IKEA, Volkswagen, Kohl’s, and Macy’s. Although this article is focused primarily on rooftop solar systems, large parking lots/carports and open plots of land are also good candidates for solar installations for many of the same reasons.
Common Concerns and Debunking of Myths
Is every roof a perfect fit for rooftop solar? No, but probably not for the reasons you think. There are a lot of negative misconceptions around rooftop solar which, in reality, turn out to be false. Below are a few myths about rooftop solar along with some other frequently asked questions.
- Won’t installing solar on my roof damage and/or shorten the life of the roof? MYTH. Adhering a solar array to the roof of a commercial building is something that should be done by an experienced professional. As long as you work with reputable developers and follow industry accepted norms (using mounting rails or a ballasted system with slip pads), the installation should cause no more damage than installing HVAC equipment. Solar consultants can also help verify that the design and cost are appropriate for your property by way of an Independent Engineering Report. It is generally safe to assume that buildings constructed in the last 25 years can support the weight of the array. In fact, the array can actually extend the life of a roof by sheltering it from the elements.
- What if I need to replace my roof after the array has been installed? Because the lifetime of the PV system is greater than 25 years, there is a potential that a replacement of the roof will be needed at some point during the lifetime of the system or term of the lease. With no moving parts and removable panels, the PV system can be removed easily and reinstalled after a roof replacement. It is important to include provisions in any lease or PPA for roof repairs/replacement, relocation of the equipment, and compensations for any lost revenue. In addition, most developers will require roof access for inspections and may request renewal rights after the 15- to 20-year initial lease term.
- Doesn’t installing solar PV system void my roof warranty? MYTH. It is an industry best practice to contact your original roof installer/roof warrantor prior to installing the solar array. The roofer will provide specific instructions for installation on your roof and experienced solar consultants will carefully help you preserve your warranty. Several steps, however, will need to be performed including allowing roofers to review and approve the installation procedure of the solar system prior to install. Typically, they will perform inspections both before and after the solar system has been installed to verify (1) its ability to be warrantied for solar and (2) compliance of solar construction/installation procedure. Solar consultants will also work with your roofer for options to extend the warranty for the life of the system or PPA for an additional cost. Your new warranty will be issued after installation is complete and approved.
- I need to perform maintenance on my roof to maintain my warranty. Does solar get in the way? Your roofer will inform you of required maintenance practices needed, and often will include those services in the price of the revised warranty extension. If maintenance is not included, working with a professional roofing consultant that offers a comprehensive annual plan can be incredibly beneficial to assure that your warranty and the needs of your asset are being met; especially if you own a portfolio of properties. These programs typically include bi-annual inspections and maintenance services, annual 10-year capital budgets, and cover leak calls.
- What about removing the array once it has exceeded its useful life? System removal can sometimes be costly, so it is important for owners to include protections regarding end of term removal of equipment in their leases. Regarding decommissioning of the system, experienced solar consultants can help estimate the salvage value and removal costs for inclusion in financial projections.
Just like with many technologies after decades of slowly increasing adoption, the costs of rooftop solar have dropped, the issues have been worked out, the regulatory environment is favorable, and from an investment standpoint the value has never been higher.