There are some risks associated with investment in solar PV systems – particularly when there is more than one party involved. The long-term nature of the lease and power-purchase agreements, especially when associated with third-party funding, demand attention to detail by all parties when assessing agreements and responsibilities.
- Operation and maintenance costs
- Tenant default
- Impact of unoccupied periods on ROI
- Lease responsibility changes
- Changes in FIT regime
- Roof maintenance or replacement
- Selling a property with PV installed
- Breaking a lease early
Operation and maintenance costs
Despite having no moving parts, a PV system needs to be inspected annually to ensure continued reliability. Generally
this involves detailed visual inspection, cleaning and electrical testing. Monitoring systems are essential to ensure that the PV array is operating optimally and for regular reporting. Continuous monitoring also informs analysis of the PV system’s output and financial performance.
Insurance is a necessary expense for a PV system, given its capital value and the income it generates. The system’s insurance policy should cover against damage, fire, theft and the loss of income arising from those incidences.
Where revenue from a solar PV system is generated from the sale of electricity to tenants via a power purchase agreement, there is a risk if a tenant defaults. The level of risk relates to the profitability and longevity of the tenant company, and should be taken into consideration when planning a solar PV project. In reality, over the 25-year lifetime of a PV installation, this short- term risk is unlikely to have a serious impact on the viability of the investment.
Impact of unoccupied property
Financial modelling prior to PV system installation determines the return on investment that can be achieved for any site. Within the model a value is assigned to each unit of generated electricity, for use on site or exported to the grid. If the value of on site electricity is set higher than grid-bound electricity, there is a risk that a lower return will be achieved if a property is unoccupied.
During these periods, the worst-case is that all of the electricity is exported to the grid, attracting an export tariff. When planning a PV system project, financial models should be viable if all electricity generated by the system is exported to the grid.
Lease responsibility changes
Full-repairing leases are generally preferred by landlords, wherein tenants are responsible for the maintenance of the roof fabric. If a landlord wishes to install a PV system, it may be necessary to transfer responsibility for the roof fabric away from the tenant.
In this case, an insurance policy can be acquired that aligns the existing lease with a full-repairing and insuring lease, preserving the liquidity of the property asset.
Changes in the Feed-in Tariff (FIT)
The Feed-in Tariff scheme has an in-built ‘degression’ mechanism, under which the rate payable per kilowatt-hour of electricity reduces, over time, for newly connected projects. Once a tariff level is fixed it cannot be altered2 and will be index-linked. However, during the PV project’s planning phase, there is a risk that the FIT rate could be reduced by the government prior to the system’s registration. The reduction is unlikely to be over 3.5% unless there are exceptional circumstances.
Roof maintenance or replacement
Solar PV systems receive FIT payments for 20 years following registration, and have manufacturer’s performance guarantees that last for 25 years. Up to this point, the modules are guaranteed to be 80 per cent efficient, yet they will continue to generate electricity for many more years. During this long period of operation there is a risk that maintenance or even replacement of the roof may be necessary, in which case the modules will need to be removed and stored for the duration of the roof works.
Selling a property with a PV system installed
If the owner of a PV installation wishes to sell the property before the end of the FIT term, the value of the system can be determined in terms of the remaining duration of FIT income
and the value to the purchaser of having on-site generation in place. Accordingly, a PV system may not affect the liquidity of the property asset and could increase the sale value.
Breaking a lease early
Where a roof or land has been leased under a power purchase scheme to a PV system funder, and the tenant or property owner subsequently needs to break the lease agreement, a risk may arise. For example, if a property is sold for redevelopment and the PV system cannot remain in its original location, compensation for the losses will be payable under the terms of the lease. The value will be dependent on the duration of the leases agreement and remaining FIT payments, and should be verified by an independent adviser.
Default by the PV system supplier or third party funder
If either the PV system supplier or financier goes out of business before the end of the lease term, and there has been no transfer of the agreement to their successors, there will be no interruption to the supply of electricity to the property from the PV system.
In either of these circumstances, for cost reasons it would be impractical to remove the system. The most likely outcome would be an eventual transfer of terms to a successor company, with the advantage of possession on the side of the property owner.