Warehouses are still overlooking the potential of rooftop solar

Solar power is a vital element in the clean energy transition – and many warehouses are naturally constructed to offer excellent opportunities for solar installations.

Their potential lies in their rooftops, which are typically flat, large and high enough to harness significant amounts of energy from direct sunlight. 

The U.S. has over 450,000 warehouses and distribution centres, with 16.4 billion square feet of rooftop space ideal for hosting solar panels. If fully utilized, these spaces could produce 176% of the warehouses’ annual electricity use, according to Environment America and Frontier Group. In the UK, some 18.5 million acres of unused warehouse rooftop space could more than double the country’s annual solar energy production in 2021, a report from Delta Energy & Environment found.

Yet many warehouse owners remain unconvinced that the return on investment justifies the upfront cost of rooftop installations. One of the biggest impediments is that traditional warehouse tenants would only use a small portion of the generated power, and if landlords don’t have a way to sell the excess energy – which many regions don’t allow – then the opportunities for revenue generation and asset valuation are limited.

Although solar costs increased in 2022 due primarily to supply chain and tariff issues, longer-term, they’re expected to fall. In the U.S., more state-run community solar programs now provide an outlet for selling excess power. Some states allow net metering, too, so solar installation owners that add electricity to the grid when they produce more power than they consume receive credit on their energy bill. 

The push for cleaner energy

At the same time, energy demand in many industrial properties is rising. A growing number of warehouses rely on automation, robotics and electric fleets, with higher energy requirements that could be more economically met by onsite renewable power.

Furthermore, as businesses increasingly seek to meet their own sustainability targets and prepare for incoming regulations, warehouses that provide clean energy may enjoy a competitive advantage in attracting and retaining tenants.

Warehouse owners have greater reason than ever to monetize their properties by installing rooftop solar. These are three models that could be economically viable:

1. Landlord owns the installed solar
   Property owners willing to supply the upfront capital can install and oversee their rooftop solar to sell the energy to tenants or to the local grid. This system could potentially be integrated with battery storage to create an onsite microgrid that additionally provides sustainable backup power – particularly attractive for warehouses with high energy demands, such as cold storage facilities. However, under this model, landlords need to monetize tax credits themselves and manage the regulatory and administrative aspects of selling energy.

2. Landlord executes a Power Purchase Agreement (PPA) with a third-party solar developer
   Under a PPA, a landlord agrees to purchase solar power from a third-party owner at an agreed price and term, and the landlord sidesteps the upfront cost of solar panels. Landlords can receive a fixed lease payment or participation rent that’s based on the amount of energy generated. In addition to lease payments, landlords can negotiate reduced clean electricity rates for their tenants, in effect sharing the financial and sustainability benefits of a solar project. However, under this model, landlords must manage the selling and billing of power used by tenants.

3. Lease-only to solar developer
   In some cases, warehouse owners might not want to deal with the monetization of tax credits and reselling power. In such cases, landlords can monetize their rooftops simply through a standard lease with solar developers. Although the landlord’s tenants are not consuming solar power and the landlord is limited in making sustainability claims, the landlord is facilitating a cleaner local grid while placing the burden of financing, owning, and operating the solar on the developer.

Selecting the best option

To identify the optimal solution for properties within their portfolio, warehouse owners should consider their appetite for risk as well as the local regulatory and energy landscape.

For example, where can excess energy be sold, and who can do it? Landlords who resell energy, including to their own tenants, will likely face more administrative responsibilities. They should also clarify their tax obligations as many warehouses operate under REITs, with different tax provisions for income sources not directly related to real estate.

As well, in areas where traditional energy is cheap, selling solar power can be a challenge. On the other hand, states like California, where there’s plenty of sunshine and traditional power is expensive, state incentives, community solar programs and an ambitious state-funded clean energy plan make the economics of solar installation attractive. 

Making the most of financial incentives

Government subsidies, grants and tax credits can help to offset the costs of solar installations in many U.S. states.

Many states also have renewable energy standards stipulating that retail energy suppliers must source a certain proportion of power from renewable sources or pay penalties.

To avoid fines, energy suppliers who are under quota can purchase renewable energy certificates (RECs) from clean energy providers, which creates additional revenue opportunities for a solar developer. States with REC markets offer more attractive solar opportunities as this revenue can be passed on to warehouse owners through a higher solar rent or a lower PPA price.

The increasing corporate focus on identifying and accounting for Scope 3 emissions is also contributing to the business case for onsite solar solutions. A warehouse owner’s Scope 3 emissions can be reduced when its tenants’ Scope 2 emissions are lowered with onsite solar. As more businesses prioritize sustainability in their supply chain – such as their logistics providers – it could drive an uptick in tenant demand for green leases with clean energy requirements.

With many warehouse and distribution facilities yet to embrace the opportunities offered by the clean energy transition, there is a first-mover advantage for those that do. The sheer scale of untapped rooftop space and the increasing viability of onsite renewable energy makes it a prime time for owners to future-proof their assets while reaping strong returns.

For more information on how JLL can help your industrial properties select the right solar solutions, contact our sustainability experts.

Bryan Thomas Senior Vice President, Clean Energy and Infrastructure Advisory, JLL