September 22, 2017
As large solar arrays become more popular, more and more landowners have been approached by solar energy companies interested in long-term ground leases. There are many important factors to consider when deciding whether a solar array is the right fit for a piece of land.
Landowners considering a solar land lease must think about their land’s current and future uses and values. Solar energy land leases typically generate more revenue than agricultural uses and provide a steady and predictable stream of revenue for many years, eliminating much of the cyclical uncertainty of agricultural activities. Hosting a solar array also shifts the maintenance burden from the landowner to the solar company for the area being leased, meaning that revenue increases while responsibility decreases, freeing up time and resources for other activities. Finally, an operating solar array produces no pollution, no traffic, no noise, no light and has a very low overall impact. Solar companies typically visit the solar array 2–4 times annually to manage vegetation and conduct routine, scheduled maintenance. After a while, most landowners forget that there’s a solar array operating on their land.
The length of the lease is determined by two factors. First, the solar developer has an obligation to the utility to provide power for a pre-determined amount of time. Second, financial backers often require extension options because solar arrays are built with robust equipment that often has the capability of operating beyond the initial utility term. The landowner should be clear on their lease rate, understanding the difference between payments made in terms of dollars per acre or dollars per megawatt installed. Some companies will offer a royalty based on a percentage of solar revenue production. It is recommended to stick to a flat, predictable rate in a unit the landowner understands, such as dollars per acre per year.
Along with solar panels, landowners should expect an “equipment pad” within the leased area, which will contain associated electrical equipment such as system disconnect switches, inverters, and transformers. New electrical infrastructure may be required to connect the solar array to the existing electrical grid equipment. In these circumstances, additional easements may be necessary for the equipment to cross land not covered in the leased area. Landowners should also be aware that the solar company must provide sufficient access to the solar array for the local fire department, and that typically involves construction of an all-weather gravel road from the nearest public right-of-way to the equipment pad.
The time between signing a lease and the construction of the solar array can vary widely, ranging between a few months and a few years. Solar developers are often required to get land use approval from the local authority having jurisdiction (AHJ) for a given area. Additional site activities include geotechnical investigations, surveys, environmental reviews, interconnect agreements, surface use agreements and other miscellaneous requirements, and these must be completed before a project’s final design can be completed. All of this is in an effort to prove the solar project may legally inhabit the land and operate free of risk for many years.
Typical Timeline for a solar energy lease:
- Site identification and lease negotiation, lease signed (0-3 months)
- Development period (1-3 years)
- Construction period (3-12 months)
- Operations period (20-25 years, plus extensions)
- Decommissioning, removal, and site restoration (3-12 months)
Solar companies must have an agreement with the utility company to connect their solar project into the electrical grid, so landowners should know if the solar developer already has received this permission, or if the developer is leasing the land in hopes of gaining permission at a later date. In either case, the land lease agreement should provide provisions allowing for the termination of the lease without penalty if the developer does not receive this permission by a mutually agreed upon date.
Developers should have a plan to remove the solar array when their agreement with the utility ends. Because solar equipment is designed to operate for many decades, the residual value of the modules combined with the salvage value of some of the aluminum, steel, and electrical wiring components, means that the overall value of the equipment is anticipated to be greater than the cost required for a contractor to remove the equipment. In some cases, a bond or other form of surety to account for equipment removal may be considered.
Finally, all land owners should consider employing legal counsel before entering into any long-term contracts associated with their land. While solar energy land leases are becoming more common, not all lawyers are familiar with their structure, or the need for some of the provisions contained therein. Finding a lawyer with wind or solar energy leasing experience will reduce the learning curve and help both parties to efficiently navigate the negotiations to more quickly come to terms and begin developing the solar energy project.
Subjects to include:
- Length of lease, plus options to extend beyond original term
- Lease basis price: $/MW, $/acre, or flat fee
- Escalation rates: flat % or variable percent tied to other marker
- Size of solar array, fence boundary, other equipment, electrical infrastructure to/from the array
- Maintenance of facility inside and outside of fence/lease area, other landowner responsibilities
- Utility and access easements
- Encumbrances and minerals
- Land use approval process with AHJ, permitting timeline, compatible uses
- Property tax implications and responsibilities
- Does the developer already have an agreement with the utility to build the array, or is the lease speculative? Does the utility have an existing program infrastructure to accept a solar array at that location?
- Decommissioning: bonds, sureties, salvage value vs cost to remove
Credit: Jonathan Fitzpatrick, Project Development Manager at Microgrid Energy