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Rooftop Solar

Posted on October 15th, 2010 by John Reeder

Retail Chatr has a post up with some details from a recent Ikea installation of solar panels on one of their rooftops in Canada.  The Ikea installation follows in the footsteps of several other large real estate owners’ decisions to utilize their under-utilized roofs to produce energy.  For instance, ProLogis has already installed solar panels on several of their rooftops in Europe and Southern California.  Walmart has also installed solar panels on several rooftops.

My firm has negotiated land transactions for thousands of acres of future solar installations covering hundreds of megawatts of solar plants in the California desert.  I’ve been doing these deals for the past two years, so I’ve become personally educated on the ground-mounted solar market.  The rooftop solar market is less familiar to me, though we have done a lot of homework on that market as well.

Like any capital expenditure, installation of solar panels on the rooftop is something that can be viewed in terms of your payback period for the investment.  As the Ikea article mentions, the annual income derived from their investment is $684,000 against an upfront cost of $4.6 million.  That ratio is much better than it would have been a few years ago, which I suspect can primarily be attributed to reduction in panel costs.  But the basic play on most of these deals is that your energy cost plus government incentives have to add up to a number that justifies the upfront CapEx.

These deals are at their core value add deals.  Take a piece of your real estate portfolio that is underutilized, and try to squeeze additional value out of it.  Real estate owners love value add deals, so you would think that they would love the idea of solar panels on the rooftop.  It might be a little more complicated than that.

I think the basic question that most people have on these installations is why they don’t happen more regularly, or what are the downsides of doing them.  There are a number of uncertainties (like anything) that all can be mitigated to some degree.  They are as follows:

  • Cost of energy.  If you’re an end user and you’re installing the panels to offset your own energy use, you’re essentially buying electricity futures.  You’re making a bet about the future cost of electricity.  You may be right to think that electricity prices will stay the same or go higher, but it’s still a potential risk.  The alternative to this model is to install the panels and then enter into a Power Purchase Agreement with a local utility.  The panels produce power on your roof, but you’re laying off the future energy price uncertainty on the utility.  You can rely on the income generated because it is essentially guaranteed by a utility. 
  • Suitability of the roof.  I’m certainly not the expert in this area, but my understanding is that in Southern California not all commercial or industrial rooftops are suitable to support the additional load that the panels would create.  I have heard that seismic regulations are part of the problem and that some rooftops do not qualify once you add the weight from the solar panels.  Building owners are also in some cases reluctant to put something on the roof that might puncture the surface or lead to having to replace the rooftop early, which is a cost that would far exceed the benefits of the income from the panels.  However, there are ways to mitigate both of these risks as evidenced by the number of building owners who are installing panels.
  • Creditworthiness of the end user.  This is less a problem for the big box retailers, as they are generally planning to use the energy that is produced.  But for big box industrial tenants, it’s not as simple as installing a system on the roof and then using the power generated.  In some cases you don’t have an owner/tenant, so if the owner installs the system they have to rely on the tenant being there during the system payback period.  The tenant’s could vacate, or go bankrupt, or their lease could simply expire.  This issue is a reason why the Power Purchase Agreement model probably works better for an industrial building.  You can install the system, sell the power to the utility, and you don’t have to worry about whether or not you have a credit tenant, or how long their lease is.

There’s no doubt that solar installations will be increasing in the future.  In many cases they make good financial decisions, and in other cases the good PR can tip the scale on a marginal financial decision.  I’ve said before that the solar energy business is a real estate intensive endeavor and I expect the traditional real estate players to become increasingly involved.  That will include real estate owners, developers and brokers.  If you’re in real estate, I would recommend paying attention as the market develops.

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October 15th, 2010 | Category: Uncategorized

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