Solar Energy in Commercial Real Estate: Navigating the Opportunities and Risks

A solar installation on the roof of a Prologis facility in Fontana, California (photo by Woody Welch)

A solar installation on the roof of a Prologis facility in Fontana, California (photo by Woody Welch)

The solar industry has come a long way since the 1970s as the expense of producing photovoltaic (PV) cells—the main technology used to convert sunlight into electricity—has plummeted. The cost to produce a PV cell has dropped from more than $70 per watt to less than 70 cents. As a result, large-scale utilities and residential customers have been installing solar systems or purchasing solar power at a swift rate, particularly over the past decade.

Commercial and industrial property owners, on the other hand, have been slower to adopt solar as an energy source despite a generous federal tax credit program that offsets installation costs. The solar investment tax credit allows investors in solar energy systems to claim up to 30 percent of their solar installation costs as a credit on their taxes. In December, the program was extended by five years and is widely anticipated to spur greater investment and innovation in commercial-scale solar power.

Yet commercial-scale solar energy is still a relatively new market with unanswered questions, which may explain why businesses have yet to embrace this resource to the extent that homeowners and large-scale utilities have. A recent webinar hosted by the ULI Greenprint Center for Building Performance brought together solar and real estate experts from Greenprint member companies who shared insights for incorporating solar energy into commercial and industrial real estate portfolios and explained the economics of solar power—both its risks and the opportunities it offers to enhance asset values.

A Potential Hedge against Rate Hikes

While there is no doubt that investing in solar and other renewable energy sources reduces greenhouse gas emissions and burnishes a company’s environmental credentials, how much a company can save in monthly operating expenses by generating on-site solar power depends on local and state regulations as well as how utility rates are structured.

As the per-unit cost of solar modules continues to drop, many companies are gravitating toward solar power because it does, in fact, boost their bottom line. In several markets, the cost to produce solar energy has dropped below that of purchasing natural gas– or coal-generated power from the utility grid. Around 2012, solar energy for commercial systems achieved what is known as grid parity in California where the average cost of solar power fell below the average cost of utility electricity, according to webinar panelist Bob Redlinger, commercial director at SunPower, a San Jose, California–based producer of solar technology and solar project developer.

“As solar costs continue to decline and, more importantly, utility rates continue to increase, we see this gap getting ever larger in terms of savings that are available from solar,” Redlinger said.

Bob Redlinger

Bob Redlinger

But other factors can affect the costs of solar power, complicating an apples-to-apples cost comparison between solar and conventional energy sources, Redlinger cautioned. Commercial solar energy producers benefit from a concept called net metering, in which surplus energy they generate can essentially be “stored” in the utility grid for later use through a utility rate credit. Net metering policies differ from state to state, however. Building codes also vary from market to market; the more restrictive they are, the more design, installation, and other soft costs can escalate, Redlinger explained.

In addition, some states do not allow third-party power purchasing agreements, a common way for businesses to purchase solar energy without owning the PV modules and other equipment. The rising cost of capital, possible interest rate hikes, and potential future expiration of utility incentives or tax credits will also shape decisions by commercial entities to invest in solar power.

FedEx Express hired SunPower to set up solar panels on its hub at the Oakland International Airport

FedEx Express hired SunPower to set up solar panels on its hub at the Oakland International Airport

Yet it may not be prudent to postpone investing in solar energy until every market uncertainty clears up, according to Redlinger. In addition, “waiting for further construction cost reductions might not optimize financial outcomes,” he said.

A Market That Favors Sellers, Not Buyers

Where should a commercial or industrial property owner interested in solar power begin? Commercial enterprises can either own their own solar installation, lease one, or enter into a power purchasing agreement with a third party to own, operate, and maintain an installation on a rooftop, in a parking lot, on a carport, or as a ground-mounted system.

Solar panels are the most common technology used to generate electricity from sunlight. But a relatively newer technology, building-integrated photovoltaic cells (BIPVs), is also gaining ground. Unlike panels, which are prefabricated modules, BIPVs are solar strips that can be applied to any part of a building’s envelope—the facade, windows, skylights, or roof—which allows them to generate electricity while improving a building’s energy efficiency. The technology can also be used in place of conventional building materials in new construction.

“In addition to energy efficiency and renewable energy generation, BIPV provides attractive aesthetics, effective daylighting, insulation, and shading to keep cool in the summer,” said panelist Udi Paret, general manager, building solutions, at Solaria, a Fremont, California–based BIPV manufacturer. “It can be used in many different applications so it offers a high degree of customization.”

Udi Paret

Udi Paret

Though the number of commercial installations has yet to reach levels seen in the residential solar market—there had been about 52,000 nonresidential installations in the United States by the third quarter of 2015, compared with 815,000 residential installations, according to the Solar Energy Industries Association (SEIA)—several Fortune 100 companies are building solar installations at their facilities.

Major retailers like IKEA, Costco, Macy’s, and Target are installing rooftop solar panels on their distribution centers, large department stores, and corporate offices. Technology companies like Apple, Amazon, and Verizon are opting for rooftop solar installations to power their energy-hungry data centers. Currently Walmart is the single biggest commercial producer of solar energy in the United States, having installed equipment generating 142 megawatts of solar energy at 348 locations, according to the Solar Means Business report from SEIA.

Yet for every Walmart or Costco, dozens of other commercial and industrial property owners and investors exist that may not have the internal capacity to navigate the “own versus lease” question and the increasingly crowded market of solar infrastructure and service providers. That is where a company like Black Bear Energy can help.

Boulder, Colorado–based Black Bear Energy—cofounded by Kim Saylors-Laster, former vice president of energy at Walmart, and panelist Drew Torbin, vice president for renewables at Prologis for several years—acts on behalf of real estate owners who do not have internal teams that can research and select solar installation projects on their own. “We find the best economic and contractual terms in the marketplace,” Torbin said in an interview after the webinar.

Drew Torbin

Drew Torbin

Beyond choosing the right providers, though, Black Bear Energy helps clients by identifying business opportunities and advantages that come with a solar installation, including lower operating costs, additional rental income, or tax advantages. “The solar industry would not be growing like it is if there wasn’t a black-and-white economic benefit,” Torbin said.

From Torbin’s perspective, real estate owners and other potential buyers of commercial-scale solar power need an advocate like Black Bear Energy because the market is dominated by sellers right now. Companies are routinely faced with a deluge of solicitations from solar manufacturers and installers, but may not always know the right questions to ask, the most advantageous terms available, or how solar power fits into their long-term business strategies.

“The commercial solar market is not presenting itself in an organized or competitive fashion,” Torbin said. “The disorganization is the main impediment to the commercial solar market’s expansion. Another obstacle is the recognition that the buyer should be setting the pace and telling the market what it wants. It is absolutely reversed right now, where the sellers are determining the products in the marketplace. So we need to turn that whole conversation 180 degrees.”

Black Bear Energy works with owners to create “focused and thoughtfully paced” solar energy programs across the entire portfolio or one asset at a time, Torbin said. He predicts that the commercial solar market will eventually right itself as property owners become savvier consumers. “We are entering the age of the enlightened and empowered commercial customer,” he said. “Their acumen around the additional value they can mine [through solar power] will go through the roof over the next few years.”

Prologis: Partnering with Utilities to Bring Sustainability to the Grid

One company that is investing heavily in solar power not only to reduce its reliance on fossil fuels, but also to enhance the value of assets across its global portfolio is Prologis, the world’s largest owner, operator, and developer of industrial real estate.

Known for its forward-thinking outlook on sustainability, Prologis has installed rooftop solar systems across its global network of supply-chain logistics, distribution, and light-manufacturing facilities and has partnered with utility companies to bring clean energy to local utility grids. With more than 650 million square feet (60 million sq m) of industrial space and nearly $70 billion in assets under management, Prologis is leveraging those assets in key markets to generate solar power that then goes back to the grid rather than remaining on site for use or storage.

Jeannie Renne-Malone

Jeannie Renne-Malone

“Nearly all of our electricity goes into the grid,” explained panelist Jeannie Renne-Malone, vice president for sustainability at Prologis. “What we see as a benefit to society is actually helping to increase the sustainability attributes of the grid where our projects are located.”

Prologis has essentially developed a line of business designing, developing, and constructing rooftop solar projects on its properties. While the project ownership structure varies depending on the market and country-specific regulations, projects developed by Prologis that are based in the United States typically are owned by a separate entity in order to take advantage of tax incentives. (As a real estate investment trust, Prologis is ineligible for these incentives.) The solar project is owned and operated by this entity, which pays Prologis rental income to lease the rooftop. The solar project owner earns revenues from local utilities for the solar energy the project generates and adds to the grid.

A Prologis distribution facility outfitted with a solar installation in Rancho Cucamonga, California (photo by Woody Welch)

A Prologis distribution facility outfitted with a solar installation in Rancho Cucamonga, California (photo by Woody Welch)

Prologis has developed notable solar projects and partnerships with utilities in southern California, Virginia, and Oregon, as well as in Japan and Europe. Since 2007, the company has developed solar installations on 95 rooftops in eight countries and generated 140 megawatts of solar energy, enough to power nearly 23,000 homes. The company’s goal is to generate 200 megawatts of solar power by 2020, Renne-Malone said.

“We expect a continued convergence of energy and real estate and plan to stay at the forefront,” she said. “We are always seeking innovative ways to benefit our shareholders, customers, and communities. If we weren’t looking at rooftop solar, we would be missing an opportunity to increase the value of our real estate and to provide added value to our customers.”

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