Rooftop solar on commercial property
What, why, how much?
Rooftop solar on commercial property (Part 1 of 2): what, why, how much?
Landlords, along with managers and agents of commercial property, may have spent the last couple of years scratching their heads over any number of things. Almost certainly within those concerns have been energy costs, environmental responsibility and making premises adaptable to a post-Covid market.
The next 18-24 months are going to be crucial in making sensible, manageable decisions about minimising unnecessary outlay, maximising greenness and balancing the books to ensure commercial assets are viable in light of volatile energy markets, the ongoing Ukrainian situation and tenants who need responsive, practical engagement.
This article, focussing on the UK market, will look at:
- Why consider rooftop solar installation?
- What savings can be made using rooftop solar?
- What government schemes and grants are available for commercial rooftop installation?
- How to (quickly) monetise rooftop solar?
- What does rooftop solar add to ESG credentials?
This is part 1 of 2 in a series of articles on rooftop solar installations on commercial property. Part 2 will look at ways that installations can be negotiated and documented to suit different circumstances.
Why consider rooftop solar installation?
The installation of rooftop solar panels, particularly on commercial premises, has been on the rise over the last decade. This trend has been pushed by a combination of factors, including the commercial and social desires to reduce carbon emissions and energy costs, and the potential increase in value of the asset once installation is complete.
| Benefit | Reasoning |
| Reduced energy costs | By generating their own electricity, businesses are able to significantly reduce their reliance on the national grid, and therefore reduce their energy bills. This is particularly important for businesses that operate during daylight hours, being the time that the solar panels will be generating the most electricity. An optional extra could be storing this energy on-site, but alternatively feeding it back into the grid can reap further financial benefit where certain schemes (see section below on government schemes) provide financial incentives for businesses that generate their own renewable energy, which can help to offset the initial cost of the installation. |
| Reduced carbon emissions | By generating their own renewable energy, businesses can substantially reduce their carbon footprint which will contribute to the UK’s efforts to tackle climate change. This is particularly important for businesses that operate in sectors with high carbon emissions, such as manufacturing and transportation, or where premises are comprised of multiple units that generate additional emissions through intensive use or by the use of vehicles to/from them. |
| Increased property value | Businesses that use rooftop installations to generate their own renewable energy are seen as more environmentally friendly and socially responsible (see section below on ESG) which can be attractive to potential buyers or future tenants. Rooftop solar panels can act as a marketing tool, demonstrating a business’s commitment to sustainability and helping to attract customers or clients who value environmentally friendly practices. |
What savings can be made using rooftop solar?
Various studies have been undertaken in the past five years which point to the substantial savings available to entities that choose to install their own rooftop solar.
A study conducted by the Carbon Trust in 2019 found that rooftop solar panels could offer an average annual saving of around £4,300 for ‘small and medium-sized businesses’ in the UK. This study looked at data collected from over 1,000 businesses across the UK. This study went further, including in its results that the average payback period for rooftop solar installations was between 6 and 8 years.
The Solar Trade Association (STA), which is a leading voice for the solar energy industry in the UK, undertook a study in 2018 which suggested that in the UK market commercial properties can save up to 20% on their energy bills, which looked at data from over 2,500 commercial properties across the country. This study found that the average annual savings for these properties was around £3,000. Note that this survey aimed to gather information on the UK solar industry’s state, trends, and challenges at the time and did not specify a kW threshold for deployments.
More recently, in 2020, the STA undertook another report stating that on average a 50kW rooftop solar installation in the UK can generate savings of around £8,000 to £10,000 per annum. The report suggests that larger installations can save even more, with a 250kW installation potentially generating savings of up to £40,000 per annum.
Evidently, savings will be dependent on a number of factors (like energy consumption, solar panel efficiency, and location of the premises and the panels themselves), but broadly speaking surveys like those referred to above show an upward trend in access to savings for those who install on commercial premises.
What government schemes and grants are available for commercial rooftop installation?
As a part of the international focus on addressing and managing climate change, the UK government offers a number of schemes, many of which are focussed on residential developments but some of which also cover commercial property.
| Scheme | What it offers |
| Smart Export Guarantee (SEG) | Introduced in January 2020, this scheme requires energy suppliers to offer a tariff for the excess energy generated by small-scale, low-carbon generators, including rooftop solar installations. This means that commercial landlords can sell the excess energy generated by their rooftop solar installations to energy suppliers and receive payment for it. |
| Energy Efficiency Financing Scheme | This scheme provides loans to commercial landlords who want to install energy-efficient measures, including rooftop solar installations. The loans are provided by the Carbon Trust and are designed to help businesses reduce their energy bills and carbon emissions. |
| Carbon Trust Green Business Fund | This scheme provides up to £10,000 of capital contribution towards the installation of energy-efficient equipment, including rooftop solar installations. The scheme is open to small and medium-sized businesses in the UK and is designed to help businesses reduce their energy bills and carbon emissions. The Fund also provides free energy assessments, training, and advice to those businesses. |
| Industrial Energy Transformation Fund (IETF): | This scheme provides grants to businesses in the UK to support the development of energy-efficient technologies and processes. The scheme is open to businesses in the industrial sector, including those that install rooftop solar panels, and provides up to 50% of the project costs. To qualify, the premises must be used for an industrial business (such as engineering or manufacturing), must provide a demonstrable commitment to carbon reduction and must meet certain, IETF specific eligibility criteria. |
How to (quickly) monetise rooftop solar?
So far we have looked at the rationale behind rooftop solar installations, and the assistance available to commercial landlords who might be considering an installation. Perhaps most important, though, to many parties will be how to actually extract value from the installation once the installation is complete and once generation has begun.
Firstly, landlords can use net metering to monetise the energy generated, which is a billing arrangement which allows landlords to sell the excess energy generated by their solar panels back to the grid and receive credit for it on their energy bills.Under net metering, the commercial landlord’s electricity meter runs backward when the solar panels generate more electricity than a building’s needs.
Next, commercial landlords can count on the real energy savings, especially during times of energy cost volatility, such as the war in Ukraine and the cost-of-living crisis. The offset costs reflect savings on existing bills by using the energy generated by their rooftop solar installations on-site instead of buying electricity from the grid.
Finally, we come on to the subject of carbon credits, which are a form of tradable permit that allows commercial landlords with rooftop solar installations in the UK to earn money by reducing their carbon emissions. Under the UK’s carbon pricing scheme, businesses that emit more than a certain amount of carbon dioxide are required to purchase carbon credits to offset their emissions. By generating electricity from renewable sources such as solar power, commercial landlords can earn credits for every unit of carbon dioxide equivalent that is avoided.
Leasing, licensing and forms of power purchase will be dealt with in part 2 of this article series, which deals with practical considerations of how a landlord/owner can extract or recoup value for a longer term from rooftop generation.
ESG considerations
Aware of a business community in the UK that must be proactively environmentally conscious, businesses and individuals are looking for ways to reduce their carbon footprint and contribute to a more sustainable future. Rooftop solar can be an excellent way to achieve this in real terms and to offer assurances to third parties that corporate and environmental goals align.
ESG (being the ordinary name for “environmental, social, and governance” regimes) refers to the three key factors that investors consider when evaluating the sustainability and ethical impact of an investment.
Installing rooftop solar panels on commercial premises can provide numerous ESG benefits to landlords, including:
| ESG benefit | Why this factor is important |
| Environmental benefits | The clearest benefit of installing rooftop solar panels is the positive impact on the environment. By generating clean, renewable energy, landlords can significantly reduce their carbon footprint. This is important for businesses that are increasingly looking to reduce their environmental impact, and in particular where an entity has regulatory or constitutional requirements to meet targets. In addition, in providing a sustainable energy source, landlords can attract environmentally conscious tenants who are looking for space that aligns with their corporate values. |
| Improved reputation | As many commercial landlords and owners will have noticed, real estate actors are increasingly judged not only by their financial performance but also by their social and environmental impact. By installing rooftop solar panels, landlords can improve their reputation as responsible, sustainable property owners. Not only does this augment the market perception of an entity to align with certain financing needs, but it makes an entity more competitive and future-facing. Again, the nature of tenants attracted to space that aligns with their values is to be considered, and a rooftop installation might realistically also improve relationships with existing tenants who have sustainability goals. |
| Reduced risk | Installing rooftop solar panels can actively reduce the risk of energy price volatility. By generating their own electricity, landlords are less vulnerable to fluctuations in energy prices (which in the current market is a thorny issue for many) and can to a certain extent protect themselves against future price increases. |
As this article has set out, rooftop solar installations are a relatively accessible and proven way to add value to commercial premises, and to assist in regeneration or future-proofing them, whilst assisting a landlord’s ESG credentials and making their portfolio generally more attractive to mutually aligned tenants.
If you are a commercial landlord, owner or manager of commercial premises and would like to discuss any of the points raised in this article, or would like more information on commercial solar installation, please get in touch with us at Hill Dickinson LLP.
This is part 1 of 2 in a series of articles on rooftop solar installations on commercial property. Part 2 will look at ways that installations can be negotiated and documented to suit different circumstances.
