Rooftop Solar Leasing Deals: Better Business for Renewables?

June 23, 2010

Owners of warehouses, shopping centers, schools and other large buildings now have some new space to rent out: the roof. They're striking long-terms deals to lease roof space to the local utility for solar power installations.

Driving this trend is mounting time pressure in many states for utilities to meet deadlines and quotas for renewable energy production. As of December 2009, nearly half of all states had enacted requirements (called a "renewable portfolio standard" or "alternative energy portfolio standard") for utilities to generate a certain percentage of electricity from renewable or alternative energy sources. Some states have imposed deadlines as early as 2013; most target 2020 or 2025. But when a state is planning to shift 20% or more of its power requirements to renewables, it must start securing that green power capacity sooner rather than later. Green power takes time to develop.

The recession also is spurring these leasing programs. Utilities can take advantage of the 30% federal stimulus tax credit, which gives more utilities an incentive to build and own new solar installations.

Consequently, several utilities are experimenting with (or expanding) programs to overcome economic or market obstacles to solar power installations. The costs, risks, complexities and long payback periods commonly associated with larger solar power has long inhibited the growth of this renewable energy source.

Here's how a commercial rooftop solar leasing program works: A utility leases rooftop space from a commercial building owner. From the owner's perspective, this is comfortable — rather like renting any kind of space. The owner gets a reliable long-term revenue stream (the monthly or annual lease fee for roof access and use). The utility pays to install the solar array and maintain it for the life of the project. The utility also gets to sell the power generated by those panels.

Two California utilities, Southern California Edison (SCE) and Pacific Gas & Electric (PG&E), have embarked on large-scale commercial rooftop leasing programs. Each has committed to implementing 500 MW of new capacity from rooftop solar — and each utility has also opted to lease half of that roof space directly. (The other half will be bid out to third parties.)

This means that each utility must strike leasing deals with local building owners for 1-2 MW of solar power capacity at a time -- thus building up 250 MW of capacity on a patchwork of previously empty roofs across their service area.

In North Carolina, Duke Energy expects its rooftop solar program to generate up to 10 MW/year, or e-mail. Press: Jason Walls, 704-382-5559.

This type of distributed approach to power generation is unfamiliar technical and administrative territory for utilities, but it does offer some advantages. SCE estimates that it can build out this capacity at a cost of about $3/watt — substantially less than the $5-7/watt common in conventional projects. Also, unlike ground-based solar farms, commercial rooftop solar projects don't generally require environmental permits or evaluation/mitigation of wildlife impacts — costly, time-consuming processes that add months or years to the time it takes many solar projects to get built. And finally, commercial rooftop solar projects typically can connect to existing transmission lines. (Most large solar projects require new transmission access.)

Many owners of warehouses and office buildings have held off on large-scale rooftop solar projects because typically they had to consume the power on site. It's hard to commit to a 20-year investment when tenants who would use the power typically only stay in a building 5-6 years. But in rooftop leasing deals, who buys the power is no longer the building owner's concern; they just get a reliable revenue stream from the utility.

There are some common drawbacks to commercial rooftop solar projects. The roof may require re-engineering or bolstering to support the weight of the solar array (especially in warmer climates not prone to snow loads). Sometimes these retrofits can subject older buildings to updated and costly building code requirements. Also, some tenants might not be able to tolerate months of workers installing solar panels right overhead.

Beyond California, the April 7, 2010, episode of the Building Priorities Briefing podcast reports: "Exactly how this model will expand is uncertain. It's not just implemented state by state, but utility by utility. Regions to watch are Northern Carolina, where Duke Energy has proposed an 8 megawatt program, and New Jersey, where PSE&G wants to install 120 megawatts. Utilities in Colorado, Arizona, and Texas are also lining up to install distributed solar resources, using this new ownership model."