Declare Your Energy Independence:
Integration of Small-Scale Renewable Energy Generation in Real Estate Projects
By: JEFFREY J. SERUM & KATIE L. COLE
August 7, 2009
The current political and socioeconomic climate is drawing more attention to renewable energy than ever before. Large scale wind and solar farms have grown exponentially in recent years. Renewable energy generation, however, is not limited to large scale projects. Owners and operators of properties such as airports, industrial facilities, schools, colleges, hospitals, clinics, shopping centers, office complexes, and residential dwellings are integrating renewable energy into their projects as well. This article explores the integration of small-scale wind and solar energy generation into new and existing real estate projects by addressing several questions commonly raised by property owners.
What federal and state tax incentives are available for small-scale wind and solar energy generation systems?
Federal and state tax incentives enacted in recent years have made small-scale wind and solar energy generation systems increasingly attractive from a financial standpoint.
At the federal level, an investment tax credit (the “ITC”) is available for eligible taxpayers equal to 30% of the cost basis of eligible property used in the construction of a solar or wind energy generation system. Eligible taxpayers may elect to take the ITC in the form of a cash grant in lieu of the ITC. The American Recovery and Reinvestment Act of 2009 (“ARRA”) eliminates caps on the ITC for small-wind systems rated less than 100kW placed in service after 2008. ARRA also eliminates caps on the 30% tax credit for residential systems placed in service after 2008. A portion of the funds appropriated for renewable energy programs through ARRA will be administered at the state level. In Minnesota, the Minnesota Department of Commerce’s Office of Energy Security will administer these funds. The program details are still under development, but may include incentives for small-scale renewable energy generation projects. In addition, commercial wind and solar energy projects benefit from an accelerated depreciation schedule-the systems may be depreciated on a five-year schedule for federal tax purposes, with additional bonus depreciation available for projects placed in service in 2009.
Many states offer additional tax incentives. For example, the value added by solar or wind energy systems rated less than 2 MW in capacity is exempt from property taxation in Minnesota for both commercial and residential property owners. In addition, the wind and solar energy equipment, as well as the materials used to manufacture, install, construct, repair or replace wind and solar energy systems, are exempt from Minnesota state sales tax.
Which type of renewable energy system is the right fit for my property?
Location, existing terrain, vegetation and existing and contemplated improvements should all be considered in selecting a source of renewable energy.
The upper Midwest region of the United States enjoys a strong wind resource, and many commercial-grade wind projects, which generally require wind speeds of Class 4 or higher (with Class 1 being a weak wind resource and Class 5 a strong wind resource), have been installed in the region. A small-scale wind energy system can tolerate lower wind speeds than commercial-grade wind systems, with some systems functioning at wind speeds as low as Class 2. When selecting a site for a small-scale wind energy system, the wind speed at the system site and any obstructions to the free flow of wind to the system site should be considered, in addition to the system site’s proximity to distribution lines if the system will be connected to the grid.
Although best known for its wind resources, the upper Midwest region of the United States has solar capacity comparable to parts of Texas and Florida. As with wind energy generation systems, site selection is critical to maximizing the effectiveness of solar generation systems. Solar energy generation systems are most effective when exposure to direct sunlight is unobstructed. Antennas, neighboring buildings, utility poles, chimneys, and vegetation are just a few of the possible obstructions which may cast shadows and reduce access to direct sunlight. When selecting a solar energy generation site, it is important to consider where shadows may be cast at different times of the year due to the constantly changing angle of sunlight throughout the year.
What equipment is necessary for wind and solar energy systems?
A small-scale wind energy system is generally considered to be a system with capacity up to 100kW. The system consists of a 60-100 foot tower with two to three blades passively aligned to the wind. Smaller roof-mounted systems are also available. The system may have a battery to store excess energy if it is not connected to the grid. The price of a small-scale wind energy system can range from $10,000 to $100,000 depending on the size and installation expenses.
A standard small-scale solar energy system generally consists of photovoltaic cells, which are semiconductor devices that convert sunlight into electricity. Solar panels commonly seen on top of buildings are comprised of these photovoltaic cells. Current technology allows for alternatives to solar panels such as solar shingles. The price of a solar system can vary significantly depending on the size and installation expenses. For example, a solar system serving a single family dwelling may range from $4,000 to $40,000 depending on the size and installation expenses.
How can I protect my right to install and maintain a small-scale renewable energy generating system?
The integration of small-scale wind and solar energy generation into newly-constructed or existing real estate projects often requires wind and solar easements to secure the access to wind and sun that will be required for the systems to operate properly, especially if the system will be installed in a metropolitan area. Such easements ensure adequate exposure of the system to the wind or the sun, as applicable. When drafting such easements, state-specific requirements should be considered. For example, in Minnesota, a wind easement must include a description of the vertical and horizontal angles, expressed in degrees, and distances from the site of the wind power system in which an obstruction to the winds is prohibited or limited. The timing or amount of payments for such rights may also be regulated by statute as in South Dakota, where payments for such rights must be made on an annual basis.
In addition to acquiring any necessary or desired wind and solar easements, a property owner should review all restrictive covenants affecting the property. Restrictive covenants burdening an existing real estate project often restrict, rather than promote, small-scale renewable energy generation. Controls on architectural features and planting and maintaining vegetation are examples of restrictive covenants which may hinder small-scale renewable energy generation. In some instances, restrictive covenants may need to be amended to allow a small-scale renewable energy project to proceed.
Leases and other agreements among property owners may also affect small-scale renewable energy generation on a particular property. For example, some property owners lease portions of their rooftops or ground surface to mobile telephone and internet service providers for the installation and maintenance of antenna and other communication devices. The terms of these leases and devices permitted thereby may restrict the effectiveness of small-scale renewable energy generation systems. A review of all such documents should be made at the outset of any small-scale renewable energy generation project.
Navigating the regulatory framework.
The following is a brief overview of some of the permits that may be necessary to construct and operate a small-scale wind or solar energy project.
At the federal level, permits may be required for a wind or solar project from the Federal Aviation Administration, US Fish & Wildlife Service, and the US Army Corps of Engineers. A small-scale energy generation project would likely be exempt from Federal Energy Regulatory Commission filings.
The Minnesota Public Utility Commission (the “PUC”) regulates the electric utility industry in Minnesota, but most of the regulations and permits (including the certificate of need, site permit and route permit) issued by the PUC are only necessary for larger commercial-grade projects, in excess of 5-50MW of capacity. Other state permits may be required, however, from the Minnesota Department of Natural Resources, the Minnesota Board of Water and Soil Resources, the Minnesota State Historic Preservation Office, the Minnesota Pollution Control Agency, the Minnesota Department of Health, and the Minnesota Department of Transportation.
The final piece to the regulatory puzzle is local government regulation. Property owners should familiarize themselves with a municipality’s comprehensive plan, zoning and subdivision ordinances, and all other regulations which may impact the installation and operation of small-scale renewable energy generation systems. For example, certain small-scale renewable energy generation systems may require a conditional use permit or a site permit. While a comprehensive review of all the possible local government restrictions on small-scale renewable energy generation is beyond the scope of this article, we note several common local regulations which may impact many projects. First, zoning height restrictions may prohibit some wind towers and restrict certain rooftop wind and solar energy generation systems. Second, maximum ground coverage restrictions may restrict use of ground mounted energy generation systems. Third, certain renewable energy generation systems may conflict with exterior appearance regulations. Thus, before investing money in a renewable-energy generation system, it is imperative that a property owner ensure that the desired system is permitted by local regulations.
Regulations and technical issues relating to interconnection to the electric grid for a small-scale wind or solar energy project are often handled by the local utility, rather than by the regional transmission system operators (for example the Midwest Independent Transmission System Operator, more commonly known as “MISO”), and are discussed in the next section below.
Where does the electricity go?
A property owner can use the electricity generated with a small-scale renewable energy system for its own needs, offsetting the amount of electricity that the property owner would otherwise need to purchase from a utility. In addition, if a property owner produces excess electricity at any particular time, it can sell the excess electricity to its utility through the installation of an additional meter that measures the energy generated by the small-scale energy generation system. The sale of the excess electricity would typically be at the wholesale price, which is lower than the retail price paid by consumers to the utility.
An alternative to the sale of the excess electricity to a utility at the wholesale rate is the concept of net metering. Net metering allows a property owner to use any excess electricity to offset electricity used by the property owner at other times during the billing period, therefore crediting the property owner for electricity generated by the small-scale renewable energy system at the retail rate. Net metering is permitted in about 30 states, including Minnesota. In Minnesota, power production facilities with less than 40 kilowatts of capacity may interconnect to the electric grid through net metering, and utilities are obligated to purchase the electricity generated.
Is it time to declare your energy independence?
Interest in small-scale renewable energy generation is as high as it has ever been. Both current government incentives and improving technologies are prompting many property owners to consider the installation of small-scale renewable energy systems. Careful navigation of the issues highlighted in this article will help property owners mitigate the risks and maximize the benefits of declaring their energy independence.