Solar Photovoltaic (PV) systems have had a growth spurt in the past decade, and are drawing interest from the commercial real estate community.  With improved element performance and a reduction in installation and operating costs, more retail, industrial and commercial properties are adding solar power systems when building or renovating facilities.  If you’re considering buying, selling, developing or financing a property with a solar system or a solar development itself – a targeted solar due diligence assessment is required to accurately determine how the solar system will impact a property’s value.

Many things impact the value of a solar system – the weather, system efficiency, market forces etc.  Just last month, the Ivanpah Solar Electric Generating System (the world’s biggest solar power plant of its kind located near the California-Nevada border) reported significantly lower energy production than the owners expected during its first year of operation.  Thorough solar due diligence is critical to fully understand the performance and return on investment that can be expected from a solar system – and thus make educated business decisions regarding the value of solar to your real estate asset.

Solar Market Insight

In January 2000, the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) estimated that the domestic photovoltaic (PV) industry could provide up to 15% of new U.S. peak electricity capacity expected to be required in 2020.  We’re well on our way: Clean Technica calculated that US Solar Capacity grew an impressive 418% from 2010-14.

The same publication reported that the price of solar panels has dropped 80% since 2008.  The report published in October of this year shows that the installed price of solar energy in the US is continuing to decrease steadily (by around 12-15% on a year-by-year basis). Medium prices for systems installed in 2013 were $4.7/W for systems ≤10 kW, $4.3/W for systems 10-100 kW, and $3.9/W for systems >100 kW.   SEIA (the Solar Energy Industries Association) reports that the US now enjoys a cumulative installed solar capacity of 15,900MW. 

Solar Due Diligence – Assessing Risk and Value

The increased number of PV systems appearing in real estate assets has created a need for a targeted solar due diligence process to assess risks and the value associated with solar systems.  A consistent standard and procedure to quantify the impact a solar system has on the asset’s value is needed for investors, developers and lenders to better understand and compare assets, and make better business and underwriting decisions.

To put a price on the presence of a solar system, the due diligence process should evaluate physical things (such as the system’s condition, cost to maintain etc) as well as solar market issues (such as available rebates, estimated revenue to be generated by the system, the extent to which market forces reward green buildings etc.) Before buying, leasing or financing a property with a solar component (or before installing a solar system at a site) a due diligence assessment should consider the following:

1. Feasibility of a Solar System at Your Property

Performance, quality and reliability of the solar system are of increasing importance to the photovoltaic markets worldwide.  Recent advances in PV cell technology – including multiple-cell interconnects, series/paralleling, and bypass diodes – have greatly improved levels of reliability. A number of software programs are available that model the performance of solar systems – including system lifecycle costs, financing, and feed-in tariffs – that can be used at the feasibility study and design stage of the solar project.  Generally, three things are considered in rating the performance of a module/cell configuration: power output (measured in watts); energy output (measured in watt-hours); and conversion efficiency calculated as power output from the array/power input from the sun x 100%.

Because the energy output of a solar system directly impacts its profitability, this should be calculated as part of the feasibility study.  The assessment should include a meteorological review based on irradiance forecasting that looks at how energy production is affected by local weather patterns/trends, and shading analysis of the panel design (to determine when a panel will fall into the shade, either because of surrounding objects/vegetation, or because of shadows cast by other panels in the solar systm.)

2. Leveraging Incentive Programs

In addition to national, state and local tax rebates and incentives that encourage green development by helping property owners offset the upfront installation costs, a number of additional programs and schemes exist that can help to improve the ROI of solar systems.  The solar due diligence assessment should also include an evaluation of applicable contracts and programs, and how these can be leveraged to improve ROI.

Obtaining Green Rating.  Solar energy produced on-site may be used to counter a properties energy consumption and footprint, thereby helping to qualify it for green rating programs such as Leadership in Energy and Environmental Design (LEED.)  LEED certification provides third-party verification that a property was designed and built using strategies aimed to optimize building performance and reduce environmental impact.  The LEED certification process involves quantifying all of the sustainable design attributes of a project, modeling the proposed energy and water consumption, and commissioning the buildings upon completion to verify the its high-efficiency performance.  By being recognized with a LEED certification, a solar investment improves ROI not only through reduced operational costs, but also through increased value as a result of market forces that favor sustainable properties.

Maximizing Available Rebates and Resale Schemes. Solar generating properties may open the door to incentives such as the Renewable Energy Certificate (REC) program, which offers another way to leverage on-site solar production.  EPA explains that a REC “represents the property rights to the environmental, social, and other nonpower qualities of renewable electricity generation. A REC, and its associated attributes and benefits, can be sold separately from the underlying physical electricity associated with a renewable-based generation source.”

Additionally, owners can capitalize on the revenue by selling the energy produced by the PV system.  For example, Solar Power Purchase Agreements (SPPA) is a financial arrangement in which a third-party developer owns, operates, and maintains the photovoltaic (PV) system, and a host customer agrees to site the system on its roof or elsewhere on its property and purchases the system’s electric output from the solar services provider for a predetermined period (more details at this link.)  A due diligence evaluation will provide information to update and rationalize the expected performance of PV systems for new owners and financiers.

3. Product Performance Over Time

Like other building components assessed during a property condition assessment, solar photovoltaic systems have a “useful life” (the duration before the system starts to deteriorate and no longer delivers the required output).  Due to a variety of environmental (weather for example, as discussed above) and system efficiency factors, all solar panels provide less energy than their maximum rated output.

According to a paper by National Semiconductor PV operating levels are expected at the outset to be 77% of rated output, dropping down to 67% 21 years out.  Advances in technology will continue to improve the output of solar panels, but Useful Life is an important consideration when assigning the value a solar system will have on a long-term property investment.

4. Zoning Requirements

When considering ground-based solar installations, such as the Ivanpah Solar Electric Generating System in California, the due diligence process should additionally assess compliance with applicable zoning codes.  Ground-based installations are generally controlled by local legislation which requires compliance with standards for the “placement, design, construction, operation, monitoring, modification and removal of such installations that address public safety, minimize impacts on scenic, natural and historic resources and to provide adequate financial assurance for the eventual decommissioning of such installations”.   Location and site arrangement are often controlled by designation of suitable sites in accordance with local zoning requirements, which include site coverage buffer zones, structures etc.  To understand the impact this will have on a (proposed) solar installation, an American Land Title Association (ALTA) survey should be made available.  Also, there should be confirmation that a title insurance policy has been issued. 

The Cost Benefit of Solar Systems

Solar systems have potential to provide great financial return to commercial real estate owners, investors and lenders.  With a growing number of incentive programs to offset installation costs, reduced operational costs, opportunities to sell solar energy and market forces that increasingly reward buildings with a lower environmental footprint, on-site solar production can be an effective way to enhance the value of an asset. However, to increase ROI (and better manage risks when lending on solar systems or properties containing them) it is imperative that available incentive programs are fully utilized and the functionality of a system is understood before a loan or transaction is made.