Careful Planning Can Maximize Benefits of Energy Efficiency and Solar Energy Investments
September 7, 2011
By William C. Sullivan, Jr. and Patrick J. McNamara | Representatives of commercial property owners and public entities throughout New Jersey are increasingly being asked to evaluate the financial risks and rewards of an investment in energy efficiency and solar energy investments
A careful evaluation of such an investment involves many legal and financial issues that must be considered. Specifically, state and federal statutes create a number of financial incentives for such projects. New Jersey’s Solar Energy Advancement and Fair Competition Act requires utilities to ensure that certain percentages of the power they sell comes from renewable energy sources. One way the utility companies can satisfy this requirement is to purchase Solar Renewable Energy Certificates (“SRECs”) from businesses, public entities or individuals that generate energy from their own solar power systems. Each 1000 kilowatt-hours of energy produced generates one SREC for the owner of the system. Currently, SRECs are being traded at more than $600 each.
Federal tax incentives have greatly increased the economic attractiveness of these systems. Owners of systems qualify for a federal grant of 30% of the eligible cost basis of the system and accelerated depreciation.
Interested parties have developed a variety of options to make the investment in solar energy worthwhile. For owner-occupied buildings, the owner can purchase, own and maintain the system. Under a typical scenario, the owner then gets the tax grant, the accelerated depreciation, the revenue from the SRECs, the reduced cost of electricity, and any other applicable incentives. Where the property owner does not want to be responsible for the system and/or where the energy is being used by a third party tenant, the most common device being used is a Power Purchase Agreement (“PPA”). In a PPA, a solar vendor installs and owns the system and sells the energy to the tenant. The vendor gets the federal grant, accelerated depreciation, SREC revenue, and revenue from the energy sold to the tenant. Typically, the owner gets revenue from renting the roof space to the vendor while the tenant gets the benefit of reduced energy costs. Of course, the parties can and often do negotiate variations on these scenarios based on the property conditions and expectations of the parties.
These government programs and financial instruments can make the investment in solar energy attractive. However, any such project must be carefully analyzed in light of building conditions, on-site energy needs, the length of time remaining on current leases and other factors.
It is also critical to recognize how much energy efficiency improvements will contribute to the success of a solar investment. In some cases, federal tax incentives for more efficient lighting, HVAC upgrades and building envelope improvements may cover the cost of roof upgrades needed for a solar installation, for example, especially when combined with New Jersey incentives under the State’s Clean Energy Program like Direct Install and Pay for Performance.
Property owners should carefully review the energy efficiency and solar programs, their criteria and potential benefits with qualified counsel and energy consultants before undertaking a solar or energy efficiency project.
If you would like to discuss this Firm News, please contact Mr. Sullivan or Mr. McNamara:
William C. Sullivan, Counsel:
(201) 623-1228 (201) 623-1228 or
Patrick J. McNamara, Partner:
(201) 896-4100 (201) 896-4100 x 3382
This Scarinci Hollenbeck Legal Update has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel.