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.

Technical Feasibility/Permitting

Whether a PV rooftop system is feasible depends on a number of factors, including the age and condition of the structure’s roof. Generally, roofs that are five years old 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.

The structural integrity of the roof will typically be determined by an independent engineering inspection, and the existence of a warranty from the installer of the roof, particularly a long-term warranty from a financially viable party, will facilitate the financing and construction of the solar facility. In the absence of a warranty, building owners may be able to satisfy legitimate structural concerns of the contractor (and the contractor’s lender) through the procurement of a warranty, which can be expensive, or through the establishment of a robust preventative maintenance plan.

In addition to municipal permitting matters that a building owner should address, there are electric-related permitting and approval steps that the building owner (and/or the contractor building the solar facility) will need to satisfy, including: (a) municipal electric codes; and (b) utility electric interconnection requirements. The latter requirement will be particularly relevant if the building owner elects to participate in net metering, as described below.

Economics

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, operate 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. A single REC represents one megawatt-hour of electricity generated from a renewable resource. RECs can be sold separately from the power generated to create them, and there are several markets (in various states) in which RECs may be traded. For example, New Jersey has a particularly active market for the trading of solar RECs.

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. Additionally, a building owner could be eligible to participate in the “net metering” program of its local utility. Under such a program, which technically does not involve a “sale” of electricity, the owner could receive monetary billing credit or payment for excess electricity produced by the solar facility at a rate equal to the utility standard retail rate for sales to the owner. Contractors may negotiate for a portion of this economic benefit to facilitate the financing of the solar facility.

Regulatory

Because a rooftop solar 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 six to eight 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, operating 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. In addition to net metering, if an owner or developer wishes to consider the sale of excess power produced by the rooftop PV system to either the local utility (e.g., a direct wholesale of electricity to a utility), 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.

Access/Subordination

One of the primary documents that a building owner will need to negotiate with the solar-facility contractor, in addition to the PPA, is the roof lease. This agreement will confer several important rights on the contractor, including the right of access to the building owner’s roof for purposes of constructing, operating and maintaining the solar facility. Contractors (and their lenders) will be concerned with having access rights to the roof free from interference by building tenants or entities holding any mortgage on the building. Additionally, contractor lenders may request that building lienholders subordinate their rights to the lender’s security interest/lien so that the lender’s rights to access the roof and the solar facility are protected, for example, should the lienholder foreclose.

Renewable energy, particular rooftop solar, 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, Pennsylvania, 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.