Despite the hype, solar energy is NOT for everybody.
Judging from the news media and aggressive advertising campaigns from solar companies, you would think that solar is a panacea.
“Free energy from the sun!”
“No money down!”
“Save the planet and lower your utility bills at the same time!”
Despite the rhetoric, we at Solomon estimate that fewer than 15% of US homes and a third of all commercial buildings are suitable for solar energy. Properties suitable for solar farms – in-ground installations that deliver energy from remote locations through an allocation of virtual net metering credits — are also few and far between.
Rooftop solar requires a few basic pre-requisites to be successful:
- Sufficient roof area. Solar is generally ill-suited to multi-story apartment or office buildings where the roof area is minimal and often cluttered with HVAC equipment.
- Unobstructed roof. Shade from trees and objects such as flag poles or HVAC equipment can wreak havoc with solar production. We estimate that fewer than 20% of residential rooftops meet this condition. By contrast, many commercial rooftops are in open areas with constant exposure to the sun.
- Poor roof condition. A solar installation will deliver production for at least 20 years. Suppose the roof is in bad repair and must be replaced within that 20-year term? Or the roof needs to be reinforced to absorb the weight of the panels (a frequent issue with commercial structures). Hence a new roof or reinforcements might be required before installation begins. In rare cases the roof work can be subsidized as part of the larger solar installation; for example, integrated roof tiles may be included in the basis of the project for purposes of calculating Investment Tax Credits and other subsidies. More often the roof repair or replacement will be an additional cost outside the solar project. As a result, the solar project may not generate the savings wished for.
- High utility prices. Unless you are a zealot to reduce carbon emissions, solar makes sense only if it will reduce operating costs. Consequently, utility territories with low utility prices will rarely be suitable for solar energy unless there are substantial subsidies available from state government or local utilities.
- Tax appetite. Many solar projects will pencil out to economic savings, but only if you can take advantage of the tax benefits derived from (i) the 30% Investment Tax Credit available through 2016 and (ii) the accelerated depreciation (sometimes referred to as MACRS or Modified Accelerated Cost Recovery System). These benefits will provide tax refunds but only if your taxes are great enough to take advantage of them. After all, if you pay no taxes you have nothing to recover or offset.
- Credit. Suppose you require financing from a lender or a third party wishes to own and operate your system under a lease or PPA (Power Purchase Agreement). You must have satisfactory credit to support the loan repayment or long term PPA.
- Bank covenants; lending restrictions. Often senior lenders to corporations will balk at waiving their priority liens against property including fixtures. Absent consents from these important stakeholders in a host’s land a developer will be reluctant to proceed with a solar project.
- Underlying lease term. This is an issue similar to credit. Suppose you own a building and wish to enter into a 20-year solar loan, lease or PPA agreement. You have a tenant with a 15-year lease. The lender may be unwilling to extend credit or enter into a third party financing arrangement if it is uncertain whether there will be a tenant (and hence payor) at the end of the lease term.
Similarly, solar farms pose similar and additional obstacles. Land must be level, drained and not subject to subsistence. Land must be located near overhead power lines that feed into the local utility grid; otherwise, running additional lines to the nearest utility lines might be unfeasible.
Some of these impediments to solar might be cured. For example, obstacles that cause shade can be removed and credit can be addressed by granting the solar lenders or financiers a priority lien on the property. Banks can waive their covenant restrictions. Virtual net metering can be used as an alternative to rooftop solar, providing all of the benefits without the many construction issues posed by rooftop construction.
Even where solar is not appropriate other alternatives – e.g., wind, cogeneration, geothermal, building controls, LEDs – might be more cost-effective and desirable.
In short, solar projects require a careful evaluation of site conditions, savings projections and alternatives. Frequently the process of analysis will generate other prospective solutions that were not anticipated. Before construction there should be no downside to exploring solar.