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Adam L. Massaro is a third-year law student at the University of Denver Sturm College of Law.
From winery rooftops in Napa Valley to Wal-Mart rooftops in Texas, solar generation systems that provide on-site power to commercial buildings ("Commercial Solar") are gaining in popularity. In the past, individual owners installed solar generation systems on residential and small-scale commercial properties. Now building owners and tenants install these systems on medium- to large-scale commercial properties with greater frequency. Like residential occupants, the owners and tenants of larger properties can use Commercial Solar to reduce their carbon footprint without sacrificing the bottom line.
Because of the complex and rapidly evolving nature of Commercial Solar, a lawyer must understand many aspects of solar generation and its related markets to assist clients effectively. This article provides an overview of Commercial Solar basics, renewable energy credits (RECs), common methods for obtaining Commercial Solar, net metering, and solar panel installation.
Commercial Solar Basics
The most common type of system installed on commercial buildings is a photovoltaic system. A photovoltaic system's panels convert sunlight into direct current (DC) electricity. An inverter box then converts the DC electricity produced by the photovoltaic system into alternating current (AC), which is the kind of electricity that powers most appliances in the United States. A photovoltaic system is durable, reliable, and often requires little maintenance. Most photovoltaic systems are warranted to last 20 years and to lose efficiency at a rate of less than 1% per year. Typically, the panels should not need to be replaced during the life of the system. In most climates, rainwater is sufficient to keep the panels clean and to ensure maximum efficiency. In dry, dusty climates, the panels may need to be washed occasionally, at intervals ranging from every few months to once a year. The life span of a photovoltaic system is typically 30 years.
Photovoltaic systems are categorized by their capacity in kilowatts (kW) and their forecasted generation of electricity in kilowatt-hours (kWh) per year. System capacity is the measurement of the maximum electricity that the system can produce at any given time. The capacity of a small-scale system is less than 10 kW; a medium-scale system is less than 100 kW; and a large-scale system is less than 2 megawatts (MW). A system's forecasted generation depends on local geographic and environmental conditions. For example, a photovoltaic system in Southern California with a 220 kW capacity produces approximately 329,000 kWh per year because of the number of sunny days per year.
The right system size for a building must be determined on a case-by-case basis. A customer should consider several factors: daily energy consumption, sun hours available per day, and available roof space for the panels. To help with the sizing process, the National Renewable Energy Laboratory provides a web site that estimates the energy production and cost savings for a photovoltaic system installed in the customer's geographic location. See PVWatts Calculator, http://rredc.nrel.gov/solar/calculators/PVWATTS/version1 (last visited Sept. 27, 2009).
Renewable Energy Credits and Why They Are Important
In addition to the physical electricity produced, a renewable energy system also produces RECs. The common definition of a REC is a tradable right to claim all the positive environmental attributes associated with the generation of electricity from the system. See EPA Green Power Partnership, Renewable Energy Certificates (RECs) , www.epa.gov/grnpower/gpmarket/rec.htm (last visited Sept. 27, 2009). In other words, RECs are green bragging rights. For every 1,000 kWh of physical energy produced by the system, one REC is also produced. Id. To illustrate, if a photovoltaic system produced 100,000 kWh annually, the system owner would have 100 RECs to sell each year.
Who would buy "green bragging rights" and why would companies sell them? The market for RECs consists primarily of two types of buyers: environmentally conscious individuals and companies seeking to comply with renewable energy mandates set by state or local governments. Selling a system's RECs provides a way to defray some of the system's capital costs. RECs can be sold with the physical electricity or unbundled and sold separately. Ed Holt & Lori Bird , Emerging Markets for Renewable Energy Certificates: Opportunities and Challenges 1 (Nat'l Renewable Energy Lab. Jan. 2005), available at http://apps3.eere.energy.gov/greenpower/resources/pdfs/37388.pdf. A REC purchaser can support renewable energy generation from anywhere in the country, even if there is no local renewable energy, which demonstrates one of the benefits of selling RECs separate from physical electricity. Id.
The underlying electricity is no longer considered green energy when the physical electricity and associated RECs are sold separately. Id. at 12. To illustrate this concept, if a building owner in Alabama purchases all the RECs generated by a photovoltaic system on a building in Nevada, the owner in Alabama can claim that the Alabama building is partially powered by green energy even though the physical electricity entering the building is not green. At the same time, the Nevada photovoltaic system owner, who sold all the system's RECs, can no longer advertise that solar energy partially powers the Nevada building. Instead, the only claim that the owner could make is that the building hosts a photovoltaic system. Admittedly, if the solar panels are visible on the Nevada building, people will assume the building uses green energy, and the owner still receives some green marketing benefits.
As a related issue, only the system owner has the right to make claims about the photovoltaic system on the building. For example, if a tenant installs a system on the rooftop to power its leased space, then the building owner cannot make any claims about the energy coming from the system. Similarly, if a building owner's photovoltaic system powers the common areas, a tenant cannot advertise that the system powers its space.
Without any federal legislation and only limited state legislation defining RECs, significant ambiguity remains as to an owner's legal rights to RECs and how they may be marketed. The previous examples are based on the common definition of a REC, but the legal and marketing rights associated with a system and its RECs must be defined and negotiated on a case-by-case basis.
Currently, RECs are sold in two different types of markets—a compliance market and a voluntary market. Lori Bird & Elizabeth Lokey, Interaction of Compliance and Voluntary Renewable Energy Markets 1 (Nat'l Renewable Energy Lab. Oct. 2007), available at http://apps3.eere.energy.gov/greenpower/pdfs/42096.pdf. States create a compliance market by establishing a renewable portfolio standard for utilities. Id. A renewable portfolio standard requires utilities to provide a certain amount of their electricity mix from renewable energy sources by a set date. Id. Over half of the states have created a compliance market. Id. For instance, in Colorado, utilities must achieve a 20% renewable energy mix by 2020 from renewable energy sources within the region. Colo. Rev. Stat. Ann. § 40-2-124(1)(c) (2009).
In many cases, it is more cost-effective for a utility to purchase RECs produced by a system owner than for the utility to build its own solar generation system to increase its share of RECs. Often, states' renewable portfolio standards limit the types of energy generators from which a utility can purchase RECs. Cal. Energy Comm'n, Renewables Portfolio Standard Eligibility 21 (Jan. 2008), available at www.energy.ca.gov/2007publications/CEC-300-2007-006/CEC-300-2007-006-ED3-CMF.PDF. For example, in California the utility must purchase RECs produced by an in-state system or if the system is out-of-state, the physical electricity produced by the system must be scheduled to serve end users located within California. Id.
In contrast to a compliance market, customer demand creates a voluntary market. Orrin Cook & Andreas Karelas, Insights in the Renewable Energy Market: A Brief Overview of Procurement Trends, Drivers, and Impacts of Voluntary Commercial Purchasers 10 (Ctr. for Res. Solutions, Sept. 2009), available at http://www.resource-solutions.org/pub_pdfs/Insights%20into%20the%20Renewable%20Energy%20Market.pdf. In a voluntary market, customers ranging from corporations to private individuals choose to buy RECs because the customer has an interest in advancing its sustainability practice. Id. at 6. A REC purchaser in a voluntary market can purchase RECs from any photovoltaic generation system in the country. For example, Intel has purchased enough RECs to claim that 48% of the electricity it consumes is green power. EPA Green Power Partnership, National Top 50, www.epa.gov/grnpower/toplists/top50.htm (last visited Sept. 27, 2009). Typically, REC prices are lower in a voluntary market because there is less demand and more supply than in a compliance market. Cook & Karelas, supra, at 15.
Lawyers should be aware that the American Clean Energy and Security Act of 2009, if enacted, would establish a national renewable energy standard for utilities. H.R. 2454, 111th Cong. (1st Sess. 2009). The legislation would create a minimum renewable energy standard for utilities but would allow states to establish a higher renewable energy mix. Id. Such legislation would likely affect REC prices in both current compliance and voluntary markets.
There are several basic concepts to be thought about in applying RECs in any particular situation. Issues include the following: Are there any state laws defining RECs and how they can be used? Will selling a system's RECs interfere with a system owner's green marketing plans? When buying or selling RECs, is there any contractual language that prevents the system owner from selling the same RECs to two buyers? Also, is the system located in a compliance or voluntary market?
Common Methods for Obtaining Commercial Solar
A lawyer should be aware of the common methods for obtaining Commercial Solar. This section will focus on three methods: a customer enters into a solar power purchase agreement (SPPA) with a third-party developer; a customer purchases the system outright and then receives incentives for installing the system; and a customer enters into a solar lease. The common thread in these methods is that a customer will use the electricity generated from the system to power the building.
Another method that is beyond the scope of this article is a rooftop lease from a building owner to a third party that allows the third party to install a solar system on the roof. With this method, electricity generated from the system goes directly into the grid, and the building owner cannot make any green claims about the property. For instance, ProLogis leases 607,000 square feet of roof space at one of its warehouses in California to a utility, and leases three distribution centers in Portland to another utility. Matt Hudgins, ProLogis Signs Second U.S. Roof Lease for Solar Power , Nat'l Real Est. Investor, Nov. 3, 2008, http://nreionline.com/brokernews/greenbuildingnews/news/prologis_roof_lease_solar_1103.
In an SPPA, the customer purchases power from a third-party developer who finances and owns the photovoltaic system. Under an SPPA, the customer has no up-front capital costs. The Rahus Inst., The Customer's Guide to Solar Power Purchase Agreements 5 (Oct. 2008), available at www.californiasolarcenter.org/sppa.html. A third-party developer pays the up-front costs of acquiring and installing the system and reaps all the government and private incentives available for the system. Id. at 5–6. The third-party developer is the system owner, and the owner of the roof space is the system host. Id. at 8. Typically, the system owner owns all the RECs produced by the system unless the system host specifically contracts for REC ownership. Id. at 12–13.
The third party is responsible for operating and maintaining the equipment throughout the duration of the SPPA. Id. at 7. These agreements are often "take-or-pay" arrangements: the customer purchases all the power produced by the system, even if not all the power is needed. The customer typically pays a fixed rate for electricity generated from the system with a fixed annual escalation rate for the duration of the agreement, often 15 to 20 years. Id. at 5–6. With rising energy costs, the fixed rate of the agreement may provide the customer with lower energy costs in the future. Id. at 6. In many cases, the customer will have the option to purchase the solar system at fair market value during the contract or when the contract ends. Id. at 8.
SPPAs are ideal for buildings that use more than 200,000 kWh of electricity annually. Id. at 6. Often, SPPAs will provide 30% to 60% of a customer's energy consumption. The building must have a minimum of 10,000 unshaded square feet to accommodate the panels. Id. at 6. Malls are ideal candidates because they typically use large amounts of energy at peak times throughout the day. States with pro-solar initiatives, such as Arizona, California, Colorado, Hawaii, Maryland, Nevada, and New Jersey, tend to have the most SPPA projects available for both the public and private sector. Id. at 13.
Solar leasing is a process whereby the customer ("lessee") leases the equipment from a third party ("lessor") for a fixed rate. Typically, the lessee does not pay any up-front expenses, and the lessor takes advantage of any federal and state incentives. See, e.g., Solar Leasing with Jordan Thomas , www.jordanthomas.com/index.php?page=lease-2 (last visited Sept. 27, 2009). Similar to the SPPA scenario, the lessor is the system owner who typically holds the rights to the RECs, and the lessee is the system host. Often, the lessor is responsible for installing and maintaining the system. Once the system is operational, the lessee then owns all electricity generated by the system. The lessee receives a discounted electric rate if the energy savings from the system are greater than the cost of leasing the equipment. Solar leases run the gamut from small- to large-scale systems depending on the energy needs of the lessee.
As an alternative to an SPPA or a solar lease, a customer can opt to purchase a system outright and use public and private incentives to circumvent potential capital costs. After purchasing a system, a customer may begin to see a return on its investment in several years depending on which federal and state incentives are available. Andy Black, What's the Payback? , Solar Today 34–37 (May/June 2006), available at www.ongrid.net/papers/SolarTodayPayback2006.pdf.
Several options exist to defray the initial capital costs of purchasing and installing Commercial Solar. For instance, a solar generation system owner may be able to receive federal and state tax incentives. The current available federal tax credit is 30% of the cost of the system. Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765. Furthermore, in a compliance market, the system owner may enter into an agreement in which the local utility purchases the system's RECs as well as provides the system's owner a rebate based on the system's projected kWh output. See, e.g., Xcel Energy, Solar Rewards SO-REC Purchase Contract, available at www.xcelenergy.com/SiteCollectionDocuments/docs/SR-CO-Medium-SO-REC-Contract-customer.pdf. REC purchasing agreements often last for 20 years, and the utility provider agrees to pay a certain amount per kWh based on the estimated REC production rate for each year of the agreement. Id. If the REC purchasing agreement is silent on what marketing claims the system owner may make after selling the RECs, this issue should be specifically negotiated.
The size of a system purchased outright spans from small- to large-scale. A building owner can opt to install a small system initially and add more panels in the future depending on need, or the building owner can allow tenants to add additional panels onto the building owner's preexisting solar infrastructure.
Under the outright purchase method, the building owner does have some added responsibilities that are not associated with the other methods. These responsibilities include installing and maintaining the system, executing an interconnection agreement with the local utility to connect the system to the grid, obtaining local permits for the system, and having the system inspected before it becomes operational. Cal. Energy Comm'n, Buying a Photovoltaic Solar Electric System: A Consumer Guide 10–13 (Mar. 2003), available at www.energy.ca.gov/reports/2003-03-11_500-03-014F.pdf.
The answers to several questions should be considered in determining the best option for obtaining Commercial Solar in a particular situation. Under the current lease, does the tenant have the right to install equipment on the roof and does the definition of equipment include a photovoltaic system? Will roof rights granted to tenants prevent the landlord itself from installing roof systems? Does the lease's allocation of utility costs provide enough incentives for the building owner or tenant to install a system? Will the roof need to be replaced during the life of the photovoltaic system? Does the tenant plan to lease space in the building for the life of the photovoltaic system? Also, will the photovoltaic system become a landlord-owned fixture or remain a tenant trade fixture and the tenant's property? Answers to these questions may limit the choices and point to a particular option.
A customer may be eligible for net metering under each common method for obtaining Commercial Solar. With net metering, the utility gives the customer credit for surplus electricity generated by the customer's on-site generation system. U.S. Dep't of Energy, PV Systems and Net Metering , www1.eere.senergy.gov/solar/net_metering.html (last visited Sept. 27, 2009). A customer's meter literally spins backward as the surplus electricity goes into the grid. Id. The customer benefits from net metering by receiving the full value of the electricity produced by the photovoltaic system without having to purchase expensive battery banks to store the surplus electricity. Id. For example, if a photovoltaic system on an office building generates surplus electricity on the weekend, the surplus electricity will offset part of the building's utility bill. Often, if the photovoltaic system produces more electricity than consumed in a given month, the credits go toward the customer's bill for the following month. Id. At the end of the year, if the customer still has leftover credits, the utility pays the customer the wholesale rate for the surplus electricity. Id. Each state's utilities, however, handle the transfer and end-of-the-year payment of credits differently.
Currently, more than 40 states have adopted a net metering policy. N.C. Solar Ctr., Database of State Incentives of Renewables & Efficiency , www.dsireusa.org (last visited Sept. 27, 2009). The size of the system eligible for net metering varies by state. For example, in California the system capacity limit is less than 1,000 kW, but in Wisconsin the limit is only a 20 kW system. Cal. Pub. Util. Code § 2827 (2009); Wis. Admin. Code PSCW Order, Doc. No. 05-EP-6 (Sept. 18, 1992). With system size limits, if the customer generates more than a certain amount of electricity, then the customer can be considered a utility and subject to utility regulation.
There are several points to consider when contemplating net metering: Will the utility give the customer retail credit for the surplus electricity or credit at a lower rate? How much electricity will the utility purchase from the system annually? How much electricity can the customer sell to the utility without being subject to regulation as a utility?
The Ins and Outs of Installing a Photovoltaic System
Understanding the solar generation system installation process is crucial for a lawyer engaging in this business sector. In general, panels are installed on an angled track system bolted to the roof. Focus on Energy, Selecting a Solar Electric System for a Commercial Building Rooftop (2008), available at www.focusonenergy.com/files/document_management_system/renewables/commercialsolarrooftops_factsheet.pdf. Weighted ballast systems that do not puncture the roof membrane are also available. Id. Such systems are often certified to handle winds of over 90 miles per hour.
The best orientation for a photovoltaic system is either on a south-facing pitched roof to maximize exposure to the sun or on a flat roof, if the panels are mounted on frames tilted toward the south at an optimum angle. Id. The angle of the panels may need to be adjusted depending on the season to account for changes in the position of the sun. Id. In addition, panels should have at least 6 to 10 inches of clearance between them and the building to allow airflow, and to prevent the panels from getting too hot and losing efficiency.
Key points to consider in installing photovoltaic systems include the following: Will installing a photovoltaic system invalidate any roof warranties? What type of access rights will the system owner have to install and maintain the system? Is the building owner prevented from installing any future roof fixtures that shade the panels? Will the system need to be shielded from street level view and how will this shielding affect the system's productivity? Can the building's roof support the added weight of the photovoltaic system?
Commercial Solar presents an opportunity for building owners and tenants to achieve both sustainability and business goals. Solar is a reliable, homegrown energy source that can provide electricity rates potentially below grid rates. Using a photovoltaic system's electricity also reduces a corporation's carbon footprint.
Despite the potential benefits of installing Commercial Solar, there are several key concerns. The economics of Commercial Solar are improving but are still dependent on federal and state incentives. Only a limited number of states offer enough pro-solar incentives to make installing a system economically feasible. The laws of each state vary on the size of the system that can take advantage of net metering. It is difficult to predict what business and legal issues will arise as the Commercial Solar field continues to evolve.
Still, as the Commercial Solar market grows, more and more building owners and tenants will seek the advice of lawyers before obtaining Commercial Solar. Knowledge is key when advising a client on obtaining and installing a system. Indeed, a lawyer with a strong understanding of Commercial Solar can help clients take advantage of the most abundant form of free energy on the planet.
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