In the early 2010s, the “build-to-sell” model dominated the commercial and industrial (C&I) real estate solar market. Building owners, especially REITs (real estate investment trusts), with an understanding and comfortableness in investing in long-term assets, would pay solar developers to build arrays on their roof or parking lot. Owners reaped the benefits associated with solar, including cheap, clean energy and tax benefits, but were also on the hook for maintaining the solar system and ensuring it ran optimally for as long as 20-plus years.
Since then, the market has matured. Third-party financing is plentiful and reasonably priced, while community solar (roof rents) has become an attractive option for landlords. The evolved market dynamics have created an opportunity for landlords to sell their solar assets to third party, independent power producers (IPPs) and other investors, who can provide the building owner with an immediate cash infusion, while maintaining and improving operations of the energy asset. Building owners are not abandoning clean energy initiatives but instead realizing an opportunity to recover capital and re-deploy it into core operations or higher-return projects.
How Did We Get Here—The Rise of Community Solar
Community solar opened opportunities for landlords: owners of industrial rooftops in particular that had limited on-site power usage could now export excess power to the community. Strong, predictable state incentives, along with high electricity rates, resulted in attractive markets like New Jersey, New York, Massachusetts, Maryland and Washington, D.C., as well as Illinois and Connecticut (to a lesser extent).
Since its rise, community solar has started to meet its threshold. Markets aren’t quite emerging as fast as the industry once hoped, while initial popularity has resulted in grid constraints and long interconnection queues. Offtake aggregation costs for community solar are also increasing, and higher than anticipated offtake churn has resulted in higher investor return expectations and lower roof rents i.e., revenue for building owners.
Shift Toward PPAs
As the industry heavily focused on community solar, Power Purchase Agreements (PPAs) have become underserved, but are regaining prominence due to the challenges faced by community solar. In a community solar structure, building owners lease building roofs to the system owner. The electricity produced by the solar system is not used on site, though hybrid set ups are possible, but sold to the local residential community at a discount. Why this is attractive is twofold: the size of the solar system is no longer constrained by onsite consumption i.e., the available roof is maximized and therefore economies of scale achieved, and the electricity is monetized at a higher rate i.e., the higher residential rate. With this upside, however, comes some costs/challenges. Typically, a third-party firm specializing in aggregating the required residential subscribers is retained, adding system cost. And since all the electricity produced is exported, utility interconnection can take longer, cost more, or is just not possible.
A PPA differs from community solar in that electricity produced is used onsite by either the landlord, if they’re an owner/user, or a building tenant, if the property has a master meter set up. Excess electricity is net metered at the retail rate, though with limits and in a decreasing number of markets, or the system is sized to limit or prevent net metering. Instead of rent, the landlord benefits from a negotiated lower electricity rate and a hedge against future rate increases.
PPAs are a good fit for “middle market” C&I owners who have long-term tenants that require 1-5 MW of energy, as they can benefit greatly from the reduced operating costs via a lower electricity rate. Ideally, the building will also feature a central, “master”, meter. A central meter is preferred because it provides a single point of interconnection with significant consumption, and a lower build cost. Multiple meters can work, so long as there’s sufficient consumption but increase costs. Ultimately, a solar developer is looking for a meter with the highest consumption and highest rate, and middle market C&I projects offer optimal value and economies of scale as compared to projects under 1 MW.
Why should landlords sell their arrays? By selling their arrays to firms that specialize in solar operations and energy maintenance, building owners gain liquidity that can be reinvested into core business areas like property improvements, acquisitions, or tenant amenities, while also offloading maintenance and operational (O&M) risk.
Solar O&M is complex and can be costly, especially for those businesses where solar/energy is not a core asset. It requires expertise in performance monitoring, warranty claims, inverter replacements, and regulatory compliance. Selling transfers all system performance and maintenance risks away from the property owner to a specialized solar partner who knows how to optimize the system to perform better. If the system needs to be updated, the solar expert can recondition the system as needed, so the owner can avoid capital expenditure. The solar firm may even look for ways to increase value, like by adding batteries and/or EV charging stations and infrastructure.
If a system is older, it’s likely generating diminishing returns, but a sale would enable the owner to monetize that asset before repair costs increase or production declines further. By removing a depreciating asset, the owner improves their overall balance sheet. Older assets are also likely past their tax incentive period, so there can also be tax efficiency benefits to selling a system. Today, many older systems have reached the tax limits associated with the ITC and other market incentives, making them prime options for a company more specialized on solar financing.
Ultimately, by selling a solar system to a third-party expert, owners can continue to power their properties with abundant, clean energy—benefiting from sustainability credentials and utility savings—but also avoiding the hassle that comes along with asset management.
—John Lind is SVP of C&I Origination at Aspen Power.
