5 Questions for Commercial Solar PV Valuation


The following is a guest blog by Timothy P. Runde, MAI, LEED APsolar_panel

Valuation of solar photovoltaic systems is emerging as a must-have competency for commercial appraisers, but developing a credible opinion of value can be challenging. Whether you’re new to solar valuation or you have a portfolio of valuations under your belt, here are five questions worth considering for your next solar PV assignment.

1. Is the energy production estimate reasonable?

Whether derived from the installer’s contract, an online calculator such as PVWatts, or historical data collected from the online monitoring software for an existing system, production estimates should always be benchmarked against a secondary source to confirm accuracy.

2. Is the price per kWh accurate?

Historical databases maintained by the Energy Information Administration accessed either directly or through on-line calculators like PVWatts, are good places to start. However, isolating the avoidable cost of grid-purchased energy, essential to an accurate income-based valuation, is not always a straight-forward task. Electricity rate schedules, or tariffs, come in a dizzying variety of combinations depending on the end user and how and when the energy is used. How much of the electrical cost is avoidable can differ between property types, even within the same utility territory.

Tip:  Consider the reimbursement rate under the applicable NEM tariff (see below), and exclude fixed charges that will remain post solar PV.

3. What is the cost approach telling me?

It’s tempting to dismiss the cost approach as irrelevant to the contributory value of solar PV. After all, installed cost has declined more than 60 percent since 2010. Yet, a consensus is emerging that the contributory value of solar PV is similar to its current replacement cost new net of any available incentives, including the recently extended 30 percent federal Investment Tax Credit (ITC).

Even though you may see it deducted on the installer’s contract, the market does not appear to view accelerated (five-year MACRS) depreciation in the same way as the ITC. Bottom line: use current replacement cost, not historical, and deduct the 30 percent ITC and any available rebates, grants or other incentives, but no other tax benefits such as accelerated depreciation.

4. Is it real or personal property?

Leased systems and power purchase agreements (PPAs) don’t pass the continuity of ownership test required to be considered real property. Generally, if a system is affixed to, and under the same ownership as, the building or the site, and it is sized to meet the on-site energy needs, it is very likely to be considered real property.

5. How stable is the NEM tariff?

Net energy metering policies available in most states allow solar PV customers to get reimbursed for excess generation during peak production periods, offsetting electricity drawn from the grid at night and other times when on-site demand exceeds generating capacity. These rules are now being revised in many areas to include non-avoidable fixed charges, and in some cases, reducing the reimbursement for excess generation from the retail rate at the time of generation to a lower rate.

In some areas, historical tariffs are grandfathered for 20 years. Careful analysis of applicable NEM tariffs and trends is critical for estimating both the avoided electricity cost and the discount rate.

The Appraisal Institute has numerous resources from which appraisers can learn more about solar valuation. These resources include the Residential and Commercial Valuation of Solar course offered as part of the Valuation of Sustainable Buildings Professional Development Program.

Timothy Runde

Timothy P. Runde, MAI, LEED AP, is president of Runde & Partners, Inc., a full-service real estate appraisal and consultancy based in San Francisco. He is an Appraisal Institute instructor, course developer and co-author of an upcoming AI book, “The Valuation of Green Commercial Real Estate,” scheduled for publication in 2017. Follow Tim on Twitter: @TimRunde.