In the wake of the Inflation Reduction Act, the single largest climate-related investment in the history of the United States, the investment in renewable energy initiatives is taking off. And with a bevy of tax credits and incentive programs centered around solar projects specifically, solar energy is arguably now more accessible to individual homeowners and commercial and residential real estate owners than ever before.
In this article, we'll break down the basics of solar energy for commercial real estate, share resources on how to access funding for renewable energy projects, and get into some of the key benefits of this bountiful renewable energy source.
Let's start with the basics. What is solar energy? Solar energy is one of the most common sources of renewable energy and is, simply put, thermal energy produced by the sun. The sun produces more than 10,000 times the amount of energy used in the world and therefore is a relatively reliable energy source. Common methods of harnessing solar energy include:
There are two primary ways building owners and developers can take advantage of solar power: onsite solar projects and community solar projects.
In onsite solar projects, solar photovoltaic panels are mounted on either the roof of a building or the ground – wherever conditions are best at the property. Building owners can purchase the system outright, enter into a lease or power purchase agreement (PPA) with the solar installer, or take advantage of Commercial Property-Assessed Clean Energy (C-PACE) programs to reduce the upfront costs of installation and ensure that projects are cash flow positive.
Community solar projects consist of a collective array of solar panels installed offsite in a sunny location. Community solar customers will generally either buy or lease a fractional amount of the solar panel array, and then get paid back through credits on their electric bill relative to the solar energy generated from the project. Most solar projects guarantee savings. These projects are organized by region and often facilitated or incentivized by state and local governments.
How do businesses find and fund renewable energy projects? Nearly every state has some type of tax incentive program for renewable energy, including onsite and community solar. To find the best options for your specific situation, it can be helpful to search by state using the Database of State Incentives for Renewables and Efficiency. Local governments and utilities frequently offer special programs, tax rebates, and other financial incentives for solar projects, so be sure to ask your utility provider and check with your city and state governments for available energy efficiency programs. For example, New York's NYSERDA offers many different options by locale.
What are the Benefits of Solar?
For commercial real estate investors with suitable assets, solar energy provides two key top-line benefits: increasing cash flows while also reducing energy usage and carbon emissions. And with the costs of solar dramatically decreasing in recent years – along with an uptick in tax credits and other funding mechanisms – it is more financially feasible and widely available than ever before.
How does solar positively impact cash flows? Solar directly lowers a building’s overall operating expenses by significantly reducing consumption from the grid – and thus overall utility costs. Moreover, through a utility billing mechanism known as net metering, building owners are able to sell any excess solar energy generated back to the grid, creating further utility bill savings.
Additionally, solar panels are attractive to tenants, meaning that buildings with onsite solar often command higher revenues. Solar not only makes a highly visible statement about a building owner’s commitment to sustainability, increasing the public perception of environmental responsibility, but also reduces tenant utility bills in triple-net lease scenarios. These features are something that tenants are evidently willing to pay more for: per a study by the Department of Energy, buildings with solar panels enjoy higher rents and higher occupancy rates.
Finally, in addition to lowering overall operating costs and boosting topline revenues, solar is also a critical tool in any decarbonization strategy. Though the exact impact will depend on multiple variables like building size, roof space, location, and other factors, solar energy can either supplement or completely offset a property’s energy usage, making solar a powerful component of a real estate portfolio’s overall net zero pathway.
Solar energy has become increasingly popular with commercial real estate investors in recent years – and for good reason. With significant financial and environmental benefits, along with decreasing costs, a growing array of funding mechanisms, and shrinking payback periods, it is a win for both the ESG committee and asset management.