BLOG | SEPTEMBER 4, 2019
How we determine solar lease rates
This blog was originally published while our Development team was still operating under the Borrego business name. We’re now New Leaf Energy, the same team under a new name.
Our rural communities have long been the source of many resources that sustain and helped build our country — crops, timber, dairy, meat, coal and oil — just to name a few. In the past few years, in key states throughout the U.S., rural families have a new opportunity to use their land for a purpose that also sustains our country while making communities cleaner: hosting a solar array. By hosting solar on their land, rural landowners are providing a place for clean energy generation that is fed onto the grid and to their neighboring homeowners, businesses and public entities.
While plenty of roof spaces and parking lots are being used for solar generation in urban areas, there is often not enough available space where the energy is needed to meet the clean electricity demand. Consequently, it’s necessary to build community solar projects in rural areas to supply clean, renewable energy locally and economically.
Solar in rural communities brings many benefits, including:
- Cleaner air
- Tax revenue
- Lower cost energy for the community solar project subscribers
- A more reliable grid during storms and weather events
Factors that determine a solar lease rate
Leasing land to host a solar array provides landowners with a way to generate solid, long-term revenue streams off land that may be unproductive, potentially more than traditional farming or forestry activities. The total lease rate is dependent on a number of factors, but include the type of land (e.g., open fields vs. forested), the cost of energy, the amount of available sunlight, and the distance to three-phase power and the local substation. A good developer is able to explain how these factors impact the offered lease rate. Our approach, which is based on our core principle of building trust and transparency, is to work with the landowner to explain all of these factors and to arrive at a lease rate that achieves the landowner’s goals for the land while allowing us to develop and build a profitable solar project.
While we are considering what lease rate to offer we are fundamentally considering the cost to build and interconnect a solar array against the economic return, or value, of the project. To do that, we consider these main factors when assessing a site’s solar feasibility:
1. Construction costs: Is there a lot of clearing, grading, or grubbing needed to make the site ready for construction? We look for sites that are relatively flat with less than a 15-degree slope. If there is a slope, it should ideally face to the south. The site should be relatively clear of vegetation. Depending on the cost of energy, however, we can clear vegetation in some states and regions . We also need enough space for the array so that the system is not shaded from nearby vegetation.
2. Interconnection costs: Interconnection, which is the process where we hook the solar array into the local electrical distribution system, is a major cost component of solar array construction. When determining a lease rate, we consider whether three-phase power is present at the property, how far the local substation is, and whether there are other solar projects in the area. All of these can determine whether costly distribution line or substation upgrades are required to interconnect the solar project, and will impact the lease rate we can offer.
3. Market factors: Some states or regions are supporting the installation of solar arrays through tax or rate incentives that provide project owners a long-term revenue stream for the project. These incentives are often comparable to the cost of energy in the region where the solar array is located. The lease rates we can offer depend on the size and type of the solar incentive program and the local utility rates.
4. Federal tax incentive: A federal tax incentive, known as the Investment Tax Credit, is available for solar project owners. The level of the tax incentive decreases in 2020, in 2021, and again in 2022. The amount we can offer in a lease rate will be significantly impacted as the value of this tax credit declines over the next few years. Because of that, landowners who are interested in leasing land for a solar project should consider approaching a solar company today rather than waiting a few years. By 2022, the lease rates that will be offered will be a fraction of what they are today.
5. Lease term: What is the length of term that the landowner is willing to sign up for? 20, 30, 40 years. A longer term typically corresponds with a higher lease rate.
6. Solar Resource: What is the available solar resource at your location? A higher yield means that the installation will produce more power and thus return more return for the owner. This higher return is passed on to the landowner through a higher lease rate.
7. Property Taxes: If there are higher taxes associated with using the property for solar energy generation, the additional cost will contribute to a higher overall cost and thus negatively impact the lease rate.
8. Complications: Are there any other constraints that add to the level of difficulty in completing a project? Is it in an area that is zoned properly? Are there endangered species, etc?
How leasing your land works
If a landowner is interested in leasing their land, they’ll start the process with a solar developer, like Borrego. Our process is to analyze the above listed items, run our financial models for what lease rate we believe the project can handle, and issue a proposal to the landowner. If that proposal is accepted we issue a simple, non-binding Letter of Intent to the landowner and begin simultaneously investing in the project to get the key, long-term development items moving. During that phase, we also work with the landowner to negotiate and execute a lease for the solar array. The terms and language in the lease terms are becoming increasingly standardized across the industry and it’s now possible to negotiate a lease in a few weeks.
Many landowners are unfamiliar with solar arrays and are uncertain of how to protect themselves, their property, and their economic interest in the lease arrangement. Because of that, we recommend that landowners hire an attorney to handle this phase of the project.
Projects typically take anywhere from 4-5 months to 24 months to fully develop depending on permitting requirements and the local utility. Once development is complete, projects typically take 5-7 months to construct depending on the project’s size. When the system becomes operational, it will run quietly and requires minimal maintenance. When the lease ends, the site can be restored to its original state and use. Until then, Borrego or another Operations & Maintenance provider will perform all the maintenance to keep things humming.
If you’re interested in knowing what lease rate your land might qualify for, fill out the form on this page and we’ll be in touch.