Per California’s Title 24 code, solar and storage are now mandated on all new construction projects. One of the most innovative new trends across the real estate industry is establishing a new revenue stream for property owners by billing tenants for on-site solar generation while still providing tenants a discount to the would-be otherwise utility rates.
In this three-part blog series, we will evaluate 1) the value of solar tenant billing over allocating the same solar generation to owner-paid common area electric utilities (and giving the rest away for free), 2) the value of increasing the system beyond code minimum in order to maximize ROI and solar tenant billing income, and 3) case study analysis of no-capital cost options.
With Tenant Billing, the solar opportunity is simple: “Buy Low, Sell High, Bill Tenants”. Property owners can produce solar onsite and then sell the low-cost solar energy to their tenants at a rate that is lower than what their tenants would have been paying to the utility. Even if you aren’t compelled to do take advantage of tenant billing, please remember that the alternative is giving the solar generation away for free because the new Title 24 code will require more solar than your common area can consume.
While the cost of onsite solar is effectively flat over time, the relative value of solar goes up as the utility rates inevitably increase over time. So even with a 10% discount offered to all tenants, you can see in the table below that the spread is still substantial and grows over time.
The value of electricity for tenant units is ~3x that of the common area electricity as shown in the case study results below, which drives substantial returns and decision-making around tenant billing. While commercial and industrial rates are less, those projects can be installed with a dramatically greater scale, more solar production, and frequently half the Capex of a multi-family property, making it an opportunity absolutely worth exploring.
While the opportunity being highlighted is significant, alternative options are limited to simply giving the power away for free. The new code is based on a 60% building offset but the common area typically accounts for only 10-20% of the usage with tenants making up the remainder. This leaves a substantial amount of electricity unallocated and without tenant billing, unmonetized.The case study below highlights the value of leveraging tenant billing for maximum benefit.
The case study below highlights the increase in solar savings, revenue, NOI per unit, and IRR by taking advantage of solar tenant billing. The developer of this 320-unit multifamily project was required to install solar PV by state and local building code.
The initial comparison below illustrates the costs that the developer would incur in order to meet the code and the return scenarios based on using the energy to offset the common area vs. billing tenants for solar at a discount to utility rates. The cost of the required solar carports is included in this analysis for both scenarios. Tax incentives enabling the recapture of ~60% of project costs are not broken out but are included. NOI per unit includes the cost of tenant billing software in that scenario and both scenarios include the cost of operations and maintenance for the system.
As you can see from the table above, the additional value of residential electricity and billing tenants, even at a 10% discount for tenants and the associated fees for tenant billing still yields double the returns on an IRR basis and 2.5x more NOI. The incentive to offset tenant meters with tenant billing is all in the numbers, and they will continue to increase as utility costs for energy rise over time.
The economics are attractive enough to justify going beyond code to 100% building usage offset in solar size to maximize NOI and property value which we will highlight in the second part of this three-part series. We address monetizing this opportunity without capital cost in the third and final post.
At Cal Solar Inc, we are committed to collaborating with our partners to determine the best fit for every developer. If you are interested in exploring tenant billing for your project, please contact us.