Unlocking The Potential Of Commercial Rooftop Solar
In theory, solar power could supply all the electricity the world needs forever — or until the sun turns into a red dwarf, whichever comes first. The reasons why it doesn’t today are many and complex. They include difficulties connecting solar farms to the grid and pushback from local communities that are perfectly happy to see solar farms built just so long as they don’t have to look at them. Rooftop solar could solve many of those issues.
In a new report, RMI says that real estate investment trusts, otherwise known as REITs, in America control 38.5 billion square feet of rooftops on commercial buildings, parking lots, and garages that are suitable for solar panels. If fully utilized, they could generate 25 percent of all the electricity used in commercial buildings in the United States and about 10 percent of all electricity generated in America.
Not only would fitting all those rooftops with solar panels help the nation move toward zero-emissions electricity, but it would also generate significant incremental value for the REIT industry, according to a recent study by Morgan Stanley.
The RMI report lists five reasons why adding solar panels to commercial rooftops is a good idea:
- Existing infrastructure: Using existing rooftops or parking lots on already developed lands means the solar installations not only create value out of unproductive assets, but also avoid some of the regulatory barriers and permitting challenges faced by projects proposed on undeveloped land and don’t compete with other land uses.
- Optimal generation conditions: Many commercial buildings typically have large, low, flat roofs and are usually free of tree cover, allowing panels to be easily installed for maximum generation.
- Building electrification ready: As more and more jurisdictions pass building performance standards and/or phase out the use of natural gas, solar can help REITs to both electrify their buildings and lower their operating costs.
- EV charging offsets: Solar generation can offset increased power demand for EV charging for both tenant-owned fleets as well as for personal vehicle charging.
- Faster implementation: Offsetting buildings’ operational energy requirements provides a source of captive demand, lessening the impact of interconnection delays and allowing projects to be put in place sooner.
The combination of all these advantages can make these projects extraordinarily profitable for REITs. Morgan Stanley estimates that on-site solar would be “in the money” or cheaper than buying electricity from the grid for 90 percent of the top 50 REITs by 2025 and would result in revenue accretion of 3 percent.
Challenges To Commercial Rooftop Solar
While placing solar panels on the roofs of commercial buildings may seem like a no-brainer, there are challenges, some of which are related to the IRS code. It can be challenging for REITs to take direct advantage of federal energy tax credits for installing solar. While the Inflation Reduction Act included a provision making it easier for REITs to benefit from the sale of tax credits, there remain significant barriers preventing REITs from deploying solar at scale. At a minimum, the sale of tax credits by REITs is still complicated due to IRS recapture rules.
The average commercial lease is only three to five years, which means that there is the potential for the building to “go dark” due to vacancy during tenant turnover. The industry considers developing solar on industrial rooftops solely to serve the on-site load as risky due to a combination of vacancy and usage risk.
Community Solar Is The Solution
RMI says community solar may provide a solution to these challenges. Rather than structuring the project as “amenity solar” that only serves the tenants of the building, commercial projects can be a source of clean and renewable energy for the broader community in which the building is located.
In addition, by structuring a rooftop solar installation as a community solar project and selling the power at a discounted rate to low- and moderate-income residents and businesses, the project can benefit from an additional investor’s tax credit bonus of 10 to 20 percent, which can greatly increase the profitability of the solar project. Recognizing that most REITs are not in the business of acquiring and managing thousands of residential solar subscribers, this is best accomplished by partnering with an existing community solar developer, RMI suggests.
At the present time, the only states that have enacted laws that permit community solar on commercial buildings are New York, New Jersey, Illinois, Massachusetts, Maryland, California, Minnesota, Connecticut, and Virginia.
Making Commercial Rooftop Solar Happen
The first step in considering whether a solar system is a good idea for a particular roof is to determine whether it is in a viable location, the age of the existing roof, whether tenants, lenders, and partners consent, and making sure the property is not a redevelopment candidate. RMI recommends hiring an experienced and trusted solar technical advisor. From there, the task is to identify potential developers and run a competitive procurement process to find the best economics and partners to work with.
For building owners, it is about more than just the bottom line. The built environment in America is a major contributor to greenhouse gas emissions. According to data from the EIA, commercial and residential buildings were responsible for 35% of total energy-related carbon dioxide emissions in 2019 — and 70% of those emissions were attributable to the electricity needed to operate the buildings.
RMI estimates that rooftop solar on REIT-owned buildings has the potential to reduce emissions from purchased electricity by 45%, assuming the source of electricity is from thermal generation. The opportunity is most significant for industrial and self-storage buildings, which RMI says have the potential to generate more electricity from rooftop solar than they consume.
Morgan Stanley says that to align with a net-zero pathway, “non-residential and residential buildings must reduce emissions from purchased electricity by 75% and 65%, respectively, according to our analysis of data from the IEA’s net-zero trajectory for buildings. Rooftop solar installations could meaningfully advance progress toward net-zero targets.”
It adds that new installations of distributed solar resources — solar systems that are installed at the customer site and owned by the customer as opposed to the local utility — grew at a 10%+ CAGR over the past 5 years, twice the growth seen in total new installations in the US over the same period.
These installations are driven by three key dynamics that it expects will persist for an extended period of time:
- an improving “economic wedge” between distributed energy generation and utility rates
- improving economics of battery storage
- a large focus on decarbonization by corporations and governments.
Rooftop solar for commercial buildings owned by REITs won’t be easy, but it offers significant economic and social benefits for building owners, particularly in states that encourage community solar. Some of the estimates may be optimistic, but there is no doubt there is a significant opportunity here, particularly since there should be no NIMBY objections.
ESG considerations will vary by state, but for companies that wish to burnish their sustainability credentials, installing rooftop solar on the buildings they own could be good for their bottom line and good for the community.
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