Navigant Research Blog

Solar PV on Leased Buildings: Drivers, Barriers, and Solutions

— June 17, 2015

Andrea Romano co-authored this blog.

Navigant Consulting works with the U.S. Department of Energy’s (DOE’s) Better Buildings Alliance (BBA) to understand barriers and solutions to promoting solar PV adoption. Currently, we are focusing on solar PV on leased buildings. We have teamed with the SunShot Initiative to develop a request for information to better understand the barriers, benefits, and solutions to installing solar on leased buildings. We are encouraging those active in the solar industry to voice their opinions so that we can develop tool to meet the market’s needs.

Why Leased Buildings?

As of 2012, there were 5.6 million commercial buildings in the United States, comprising 87 billion SF of floor space and representing a huge sustainability and clean energy opportunity. However, a large portion of these buildings are multi-tenanted leased spaces facing a split incentive in that the building owner does not typically pay the energy bills, but would bear the upgrade costs. A number of green leasing initiatives have developed concepts, tools, and guides to overcome this barrier for energy efficiency, but have not focused on solar PV. As a result, Navigant is focusing on this issue in 2015.

Benefits of Solar PV

In many cases, solar PV benefits both the landlords and tenants; however, the division of the economic and environmental benefits depends on the structure of the building lease. The lists below demonstrate the potential benefits.

Solar Benefits for Landlords

  • Reduces operating costs and exposure to volatility of energy prices (due to reduced utility electricity consumption)
  • Enhances marketability of the building
  • Lowers occupancy costs, which facilitates the ability to charge higher rent
  • Improves tenant retention due to lower operating expenses

Solar Benefits for Tenants

  • Lowers electricity costs
  • Stabilizes electricity costs
  • Supports corporate sustainability goals
  • Demonstrates environmental responsibility to employees and the community

In general, for commercial buildings, reducing operating expenses through the installation of a PV system can provide a hedge against escalating energy prices. Buildings may see lower costs of capital and higher market value because of this reduced risk. Depending on how the lease is structured, some or all of these benefits can lead to increased revenue for the building owner. Additionally, solar helps diversify revenue streams, reducing the overall volatility of the property’s income.

Barriers to Solar PV

A number of factors affect the growth of the commercial solar market, with the greater obstacles being the lack of project standardization and high transaction costs. Within the commercial real estate market, owner-tenant facilities in particular have an added level of complexity:

  • Split incentive: Energy costs often paid by tenants and solar PV system is purchased and owned by building owner
  • Short payback requirement: Building owners want 2- to 3-year payback
  • Timeframe discrepancy between building lease and solar PV system life: Solar PV system has a 20- to 25-year life, which is often longer than building leases
  • Property owner creditworthiness: Many properties owned by LLCs without publicly rated investment quality
  • Property ownership entity: Determines 30% Business Energy Investment Tax Credit eligibility

Overcoming the Barriers

While many barriers to installing solar PV on leased buildings exist, companies are developing innovative solutions to address or overcome these challenges. The figure below summarizes the ideas by system ownership. Navigant Consulting is currently working with the DOE and BBA on a guide summarizing these strategies, and it will be available later this summer.

System Ownership Strategies

diagram

(Source: Navigant Consulting)

 

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