The Economics of Solar Power:  Purchase or lease, operate or outsource?

6 min read

Solar power is becoming more of an economic and technological possibility for developers of multiunit affordable housing—the cost of solar panels, for example, has been dropping exponentially since 2008.

“If you looked at solar even a few years ago and decided against it, the time has come to look again,” says Jared Lang, Sustainability Manager for the National Housing Trust.

Lang emphasizes that solar differs from “going green” and from increasing energy efficiency. “We can green a building at no additional cost; and we can reduce our utility bills by 20 percent at no cost,” he says. “Addressing solar is something we’re learning to do in addition to all that.”

The National Housing Trust’s property ownership affiliate, NHT Enterprise Preservation Corporation, owns and operates approximately 30 affordable multi-unit properties—about 5,000 units—along the East Coast and in Illinois.  In 2013, NHT Enterprise established a separate entity to own and operate solar across five properties (with ten rooftops) in Washington, D.C—a pioneering financial model that makes solar on affordable housing economically viable.

Some of the benefits and limitations of current solar technology become apparent when Lang cites as an example redevelopment of the St. Dennis apartments in the Mount Pleasant neighborhood of Washington, D.C. “We covered the roof, about a total of two acres, with solar panels,” says Lang. “That now generates about $10,000 each year in electricity, which cuts our bill for common areas in half. We wish we could generate enough for all the common areas and residents, but, at least with current solar panels, we do not have enough roof space.”

This building illustrates the complexity of the solar  “purchase or lease” decision. The 20,000 kilowatt-per-year solar installation on the St. Dennis Apartments would cost $50,000, which would be reduced to $35,000 by a 30 percent federal solar investment tax credit. With utility bill savings and other tax credits, the payback period would be 3 to 4 years. But the property runs on a tight budget and had neither reserve funds to make the investment, nor ability to utilize the tax credit. So NHT/Enterprise looked into leasing the solar panels from an outside energy developer. A lease offered no upfront cost for the property. But to lease panels from a solar power company would have required NHT/ Enterprise to make about a $5,000 initial investment (mostly legal fees), and the solar company would have absorbed much of the financial benefit; a lease at St. Dennis would have only generated a return of about $1,000 a year for the property.

“We decided to set up our own third party entity and develop the solar portfolio-wide,” says Lang. “I can understand why some people would want to stay away from this. We’re in the real estate business, not the energy business, but it required us to do energy, too.  We put 14 solar systems on 10 buildings.”

Some of these buildings are solar thermal, which transform sunlight into heat; and the vast majority are solar photovoltaic, transforming sunlight directly into electricity —solar thermal provides larger energy benefits, but it is only appropriate at properties with central hot water.

NHT/Enterprise and its partners invested $1.25 million in the first NHT Renewable project, for which they received a $375,000 federal tax credit. Counting state incentives and income from the sale of electricity, NHT Renewable generates about $210,000 a year, resulting in a payback period of about four to five years.

Once a developer decides to install a solar facility, the next question is who should own the facility. Jerry Breed, a partner in Bryan Cave, LLP, who has worked on LIHTC and renewable energy deals across the US, explains, “Solar credits are allocated as income is allocated, while allocation of LIHTC follows depreciation.  As a result, more restrictions are placed on the distribution of cash flow where LIHTC and solar are used in the same partnership.”

To avoid such restrictions, developers can use a separate entity to own and operate solar facilities. The LIHTC partnership benefits by reduced utility costs, while the owner of the solar facility receives federal tax credit as well as state subsidies. Breed cautions, “The passive loss rules may restrict ability to utilize federal tax credits, so developers should consult tax advisors regarding the ability to claim solar credits and if not,  whether they should pass those credits to a third-party investor.”

“Whether solar makes sense varies on a deal by deal basis” says Breed. “Much depends on location of the project because state solar subsidies and incentives vary significantly and the economics of solar depend on the availability of state incentives.” Key are Solar Renewable Energy Certificates (SRECs) through which solar facility owners sell—via spot or long-term markets —to recover investments in solar.  SREC pricing varies by state; now from 5 to 48 cents a kilowatt hour. Breed adds, “When you consider solar, ask yourself, ‘Is this a business in which I will be able to operate effectively, or should I outsource to solar experts?’”

Darien Crimmon, Vice President, Energy & Sustain-ability for Boston-based WinnCompanies, which has been utilizing solar power since 2007, also emphasizes the importance of a state-by-state approach. “The Federal Energy Policy Act of 2005,” he says,  “requires that states adopt ‘net metering,’ which basically means if you have a solar facility and  produce more electricity than you can use, then the electric utility has to buy that electricity and must give you credit for it on your electric bill. That’s the concept, but states differ significantly in how they interpret and implement the law.  Massachusetts, for example, requires the utility to buy your excess solar power at full retail value; Massachusetts also allows you to sell the credit so someone else can apply it to their electric bill. Some other states make net metering much less attractive to the solar power producer.”

“If you think seriously about solar,” says Breed, “remember that the 30 percent Federal Solar Investment Tax Credit for solar in commercial buildings, enacted in 2006, is scheduled to decrease to 10 percent at the end of 2016.” Unless an extension is enacted by the federal government, the 30 percent credit can be applied to eligible properties “placed in service” by December 31, 2016, which means, “all permits to be in place and energy production is tested and ready to go.”

Much also depends on the pace at which technological innovations improve the economics of solar technologies. But whatever happens, everyone working with solar seems to reach the same conclusion: It is too important to ignore and too complicated to embrace hastily.