Envisioned a thread that discusses all things solar. Kind of like a Lunch and Learn. There was a thread like this for LIHTC and learned a lot from it. Looking forward to educate others on solar and learn what other CRE professionals know/are doing with their portfolios. I can kick it off.
Work at a multifamily developer that has bought and installed 6 solar systems on new developments over the past decade. We own about 60 properties so 10% of our portfolio has solar. We are examining adding solar to more of our existing properties. Most of the properties are affordable LIHTC, one community center, one market-rate multifamily. Here are the basic advantages and disadvantages as I see it.
Advantages
At a high level, over the long run solar pays for itself. Solar can pay for itself over 4-5 years. We installed a system in 2012 that has paid for itself 2.5x. The high upfront installation costs are offset by these 3 main variables:
Electrical savings- This is arguably the main benefit. The generation of solar power directly offsets the electricity bill. We find solar power offsets anywhere from 40-60% of our electricity bill annually depending on the property. The cost of electricity is going up and will continue to go up. We used to pay around $.12 per KW a few years ago now we're paying around $.17 per KW.
Federal Solar Tax Credits- By installing solar panels, the property owner can claim a 30% dollar for dollar tax credit that goes against installation costs. The credit is boosted to 40% if enough of the equipment is produced domestically (this is not easy to obtain).
Solar Renewable Energy Credit (SREC) Income (state dependent)- Many states have issued aggressive energy goals for their Renewable Portfolio Standard (RPS). An example would be X% of electricity must be solar generated. Some states have created a market for these renewable energy credits that power companies must buy according to law. There is a price per credit that is market dependent. We happen to own property in DC which has the highest price per credit. SREC Income brings in an additional $15k-$50k per year depending on the solar array size of the property.
Also for the LIHTC properties, we can put solar installation costs in basis and generate more LIHTC equity.
Disadvantages
Upfront installation costs- Installation is very expensive. You got to really commit to it. Its also a huge time investment working with the solar companies. Delays, change orders, and set up issues are common just like developing a new building. It's another thing for PMs to manage on top of everything else.
Weather dependent/property dependent- Nobody really knows how much solar power a system will generate on your specific property until the system is installed (after you spent the large upfront investment!). These solar companies have engineers that look at all the property level factors, but take it with a grain of salt. Solar panel technology has improved tremendously over the past decade, but our oldest solar system is the most efficient/best producing because its roof has the perfect storm of good solar generating qualities. We made a line chart KW production for each of the 4 properties with a few years of operating data, and not one was a straight line.
Maintenance- One thing that is not highlighted is the hidden maintenance costs. Panels need to be cleaned and monitored. Inverters (convert DC power to AC power) eventually break. If you own your own system, solar companies want nothing to do with maintaining it. You need to monitor the power tracking portal regularly. For example, we had a bullet hole in a few of our solar panels at one property that caused the system to massively underproduce. We didn't realize something was wrong until 4 months after because no one logged in the tracking portal or went on the roof of the property.
Feel free to add to advantages/disadvantages if I missed anything.
Interesting topic. Couple additional questions if you have the time.
I have read that the Infrastructure Bill is giving additional credits for installing solar, is that true?
How has the improvement in battery technology impacted the economics of installing solar, and relatedly, is it advancing/has it advanced enough to the point where we might see some projects become self-sufficient? I had always been told that in many places, the generation over the course of a year is enough to power a building, but storing that power overnight or through a succession of cloudy days meant you couldn't get true energy independence from the grid.
And related to the last point, how does the viability of these projects differ in markets where you have the opportunity to sell excess power back to the grid (I know this is possible in NYC)?
Thanks!
Sure. Yes the Infrastructure bill added 45L credits, which are in addition to Federal Solar Tax Credits. The credit is $2,500 per unit for multifamily developers. Only for new construction. You need to meet Energy Star requirements to obtain the credit, which has different set of standards than LEED.
Though battery technology has improved, I think we're far away from independence from the grid. I can't speak much to the impact of how improved battery technology has potentially improved the economics. I think a properties natural sunlight exposure plays a big factor and while technology can help mitigate a lack of exposure, it doesn't completely offset.
We look at selling excess power as extra gravy. We have the ability at some of our properties to do this but look at the electrical savings and receiving tax credits as the main selling points that make solar viable for us.
One thing I would like to throw out there is putting Solar on a property will also add a UCC if it’s financed. Which can be a pain when dealing with a bank property loan as it would be a lien the bank would have to go under. Not too big of a deal as you can just get it temporarily released. Getting all those ducks in a row and everyone to communicate can be a hassle.
Good thing to keep in mind and be prepared to figure out if planning getting a loan.
Great comment. A lease can be a pain. There may also be access rights. You'd ideally want a lease you signed to have language upfront allowing assignment for a financing or sale without consent. The usual suspects
Good idea for a thread. Two things to add from an energy market perspective
1. Time of use rates are coming and will generally make solar even more affordable as solar is strongest during the peak of the day (in summer at least). If these rates are effective, they should shift consumer behavior but I am skeptical.
2. Net metering laws/rules can have a big impact, especially if you are going with a large solar system that has the potential to generate more power than is used by the site. For the markets i know well, these rules are settled and FERC made rulings that were generally in favor of on-site solar but there's always some nuisance to be aware of depending on the state/utility/market.
Interesting point on Time of Use Rates. Just to clarify- are you saying because solar production is high during the day in the summer it would help offset the higher electrical consumption during this period?
Yes, that is what I am saying. Look at CAISO summer load curves over the years and you can see the impact. There's been some of that almost everywhere but CAISO is where it's most pronounced. Time of use rates are going to be less effective in place with that sort of load curve compared to states with less solar capacity and therefore larger peaks in midday loads
All these general comments are not helpful, especially to RE people.
where are TOU rates coming? Every market is radically different for power.
there’s only a handful of states where resi solar makes sense - those with v high power rates + strong solar exposure (resource)
where are TOU rates coming? Every market is radically different for power. - PA has had an option for a long time, its just finally being structured/priced in a win that could make sense to consumers. NJ is discussing them. MI is switching this year. As you said, every market is different and these are just a few I know off the top of my head.
there's only a handful of states where resi solar makes sense - those with v high power rates + strong solar exposure (resource) - Economically, I disagree. Solar is now pretty damn cheap to build at this point (assuming you can get panels and workers to install, which I believe is the current pain point) and states with REC markets still put a premium on it so it makes sense in the majority of states in the US right now. If you want to debate whether it's more efficient to put solar, wind, nukes, CC, etc thats a whole different animal and I would agree with you.
Very high level comments but a number of our portfolio companies have pivoted heavily into adding solar to roof space.
The basic economics sounds amazing versus development using some traditional measures of profitability. Typically REITs love to talk in terms of yield on cost, and companies see yield on cost for solar investment ranging from 10% to 15% (in Europe so elevated power prices assumed for first few years of CF), however if you account for the depreciation the IRR is more like 8% unlevered. Still a great return but if the useful life is only 20 years and if that means a full replacement is needed (both uncertain) then an investor has to keep in mind the future capex liability.
It's probably more relevant when thinking about buying assets with solar already installed - great to have the extra income but is there a hidden future cost.
Going off piste now but I invest across both real estate and infra and I have spent a long time trying to work out where is best to invest a $ in the whole value chain of renewable energy to make the best risk adjusted return.
I have ended on the most boring part - electricity grid companies. The sheer scale of capex required to allow for so many connections to the grid and the efficient monetisation of excess power means grid systems globally have to be completely overhauled. It's a necessity. Returns are regulated, yes, but the volume of investment needed keeps on increasing. Grid companies present a great through the cycle capex story, buy and leave for 10 years. Boring but sometimes boring is good!
Good stuff. Worth noting that several states have upfront incentives that they offer (or compel the electrical investor-owned utilities to offer), like “smart” inverter and/or battery storage rebates. OP already touches on state level RECs, which would be in addition to these upfront incentives.
I like the idea of deploying solar on MF and industrial. If your market is in a state that has utilities with workable net-metering programs and you’re able to capture up-front incentives and get favorable REC pricing, I can see the economics penciling very well. Once battery prices soften up a bit that’ll juice things even more.
Great thread, where are you located?
I work for a LIHTC developer in the Northeast and we’ve been putting solar on all new developments. We’re even planning all future projects to be Passive House certified. Since you’re a LIHTC developer I’ll talk specifics here…we’re evaluating the idea of paying all utilities for residents instead of deducting Utility Allowances since a Passive House certified building results in lower energy usage.
For those who aren’t familiar with this…
In the LIHTC world, the maximum allowable net rent is 60% Area Median Income minus a Utility Allowance that is usually released by the state/administering agency. So rent for a 1 BR unit could be $1,300 (60% AMI) - $200 (1 BR UA) = $1,100. The residents would then pay their own utilities and the idea is that the $200 is an estimate of what it would cost them. Another option for the developer is to charge the full $1,300 and pay all of the resident utilities themselves. In the past we’ve always deducted UAs and had the residents pay for their own utilities, it’s easier to project cash flow. But the introduction of Passive House certified developments has caused us to re-evaluate this. And the Solar panels certainly help as well.
Curious as to if anyone on this thread has done something similar?
We are largely in DC area. We have not looked into to passive house but our in-house GC is working on a passive house project. What type of incentives do cities offer for going passive house- are there additional tax credits/ grants on top of going solar? Also is there a construction premium associated with going passive house? It seems like the design elements required for passive house, such as strong insulation, would make the job quite a bit expensive.
That's an interesting idea on utility allowances. We always do independent utility study over the standard requirements to lower the utility allowances. Getting rid of utility allowances all together would have a huge impact. In the example you used that would equate to a 15% premium in rents.
There are some rebates to building Passive House in some states, I'm not sure of any additional grants. The GC's we work with have told us it adds 3 - 5% per project. Like you mentioned, the majority of that goes to insulation, windows, wall assembly, etc.
I should clarify, we would be able to get rid of the $200 UA but as developer, we would have to pay for all resident's utilities, so we'd be banking on the residents usage being under $200 (these are just example amounts). We're in the midst of evaluating this and will be ordering a Utility Study to help decide.
Nice thread. I have considered solar for both my residence and for our commercial properties but the pricing even after the tax incentives is just too high. I would need to have the panel in most cases for north of 17 years to breakeven. My utility charges 9 cents a KW.
Also in many of our markets, our utility company doesn't allow us to sell back excess power, they only give us a credit which can be applied to our future power needs.
I think solar has so much potential but if I am paying to put a system up at $4 per watt and in foreign countries, the prices are closer to a $1, then something is wrong. Heck my friend told me in Australia they can get panels with installation for 70 cents per watt and in India its like 35 cents per watt.
We're trying to figure out why installation cost are so high as well. On previous jobs we've done I've had trouble finding detailed breakdowns of costs for the job- there's like 4-5 line items. We've been quoted around $3/watt recently- wonder what the delta between $.70 and $3 is other than labor.
Yes the key will be to getting the costs down. I do know that 10 years ago the price was much higher so it looks like its working its way down but nowhere near other developed nations.
I have an EV and currently only 5% of every vehicle on the road is an EV, but the problem is our nationwide grid cannot support more than 25% of the cars being EV. We have to push for cheaper solar otherwise we are going to be in a world of hurt in a few years. My vehicle is a 90 kw battery so imagine needing one full a day of power from my roof to get a full charge on my car. That means I still have to pay for electricity to cover my home. Our govt is not paying attention to this impending crisis.
Thought I'd add some useful context I recently received as someone with zero knowledge in the space. I work for operator who's looking at installing solar at one of our office projects and was given the high-level breakdown of how it generally works for the solar companies. The last bullet refers to a question I had on where an office operator sees any sort of ROI from a solar company coming in and marginally reducing an already reimbursable expense. The answer was through roof rent.
Anyone have any experience adding solar to a building with FSG leases that have base years prior to solar?
Not sure what your question is? Are you referring to how this will impact NOI/capex?
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