Making Solar Accessible: Addressing Split-Incentives in Multi-Unit Buildings

By Kate Daniel and Ben Inskeep

Imagine an American city, and you’re likely to think of large, high rise apartment and office buildings. What you may not think of, however, are solar panels on the top of these buildings.  Multi-unit buildings offer great potential for hosting solar energy systems:  there are lots of them, they often have large, un-shaded rooftop space, and they use a lot of energy. Yet even as solar gets cheaper by the day, multi-unit buildings still face significant challenges to going solar.

One key obstacle to installing solar on multi-unit buildings (as well as making energy efficiency improvements) is the problem of split incentives, which happens when the costs and benefits of a building improvement fall on different parties. In the case of solar energy, a split incentive occurs in sub-metered buildings where occupants pay their own individual electricity bills. Some of these occupants desire the bill-savings and other benefits of going solar, but do not have the capability to install solar on the property. The building owners do have that capability, but may not be motivated to incur the costs of installing the system in order to defray electricity bills paid by tenants.

In the latest factsheet from the NC Clean Energy Technology Center, produced under the Solar Outreach Partnership, we explore policy options for overcoming the split-incentive barrier when it comes to installing solar on multi-unit buildings. Local governments can play a crucial role in tackling this challenge by implementing policies that help align the costs and benefits so that both accrue to the same party.

One way to do this is to change the rules so that multiple customers, who otherwise aren’t able to install solar on their own rooftops, can reap the financial benefits of one solar energy system. Enhanced net metering (ENM) policies expand traditional net metering, where a customer with a solar energy system receives bill credits for any electricity the system produces over what the customer consumes. ENM policies, specifically virtual net metering or community net metering, allow occupants of a multi-unit building to receive a share of bill credits from a single solar energy system.

While ENM aligns the primary financial costs and benefits to fall on the building occupants, a feed-in tariff (FIT) takes the opposite approach. Under a FIT, the building owner receives payments for the electricity produced through a long-term purchase agreement, usually at attractive rates that reflect the cost of the technology.

While ENM and FIT policies are important first steps to removing the split incentive, paying for a solar energy system can still be a significant challenge. Some financing mechanisms not only cover the upfront costs, but also provide ways to recover costs from the parties that realize the benefits. In the case of systems utilizing a FIT, the financing would be the responsibility of the building owner. The building owner could utilize property assessed clean energy (PACE) financing, which allows the owner to pay the costs of the system over time as an assessment on the building’s property tax bill.  On-bill financing allows the owner to pay for the system over time on its electricity bill. Both of these financing tools are attractive because they tend to offer lower interest rates and can be shown as expenses, rather than debt, on a company’s books.

If the system utilizes ENM, both of these financing mechanisms could also allow the building owner to distribute system costs to occupants. Property taxes may be passed through to tenants, so tenants in a building could pay their share of a PACE-financed system through higher rent; with on-bill financing, the costs would simply need to be distributed amongst the occupants’ electricity bills. In the case of an ENM system that is financed with a more traditional method, a Green Lease could allow building owners to include the costs of the solar energy system in a lease that also articulates and protects the benefits to tenants.

The following table from the factsheet, which was inspired by one created on energy efficiency split incentives by Stephen Bird and Diana Hernandez in a 2012 Energy Policy paper, highlights these options and their potential benefits and limitations.

Table 1: A Summary of Policy and Financing Options for Addressing the Split-Incentive Problem with Solar on Multi-Unit Buildings

Policy

Description

Benefits

Limitations

Enhanced Net Metering One rooftop solar energy system offsets electricity use by multiple occupants via separate monthly bill credits – Allows multiple occupants to directly receive the financial benefits of one solar energy system – Policy is set through state legislation or state regulators for customers of investor-owned utilities

– May be difficult for smaller cooperatives or municipal utilities to implement

Feed-In Tariffs Requires utility to buy electricity generated by solar energy systems at a fixed rate ($/kWh) for a specified number of years – All costs and benefits accrue to building owner

– Reduced financial uncertainty by creating secure, stable market
– Hedge against future electricity prices

– Requires funds or increased electricity rates when tariff is higher than the utility’s avoided cost

– Difficult to determine appropriate tariff rate

On-Bill Financing Customers pay for the costs of solar energy systems over time on their utility bills – Addresses split incentive for residential sector by allowing occupant to both bear costs and accrue benefits of solar
– Payment can be tied to electricity account rather than the occupant
– May be administratively difficult to set up with multiple customers
– Utilities must be willing and able to participate
Property-Assessed Clean Energy (PACE) Customers pay for the solar energy systems over time on their property tax bills, and a third-party (e.g., local government) pays the immediate upfront costs of the system – Property tax increase on owner can be passed on to tenants through rent payments
– Payment can be tied to property rather than owner or tenant
– Low-cost financing
– Not available in all jurisdictions
– Residential PACE programs have been limited in the past due to objections from FHFA
– Many programs require consent of a mortgage holder
Green Leases A clause is added to a property lease to pass on the costs of an energy upgrade to tenants, based on expected energy savings – Allows for cost-recovery from tenants
– Can strengthen landlord-tenant relationship
– Traditionally used in commercial settings
– Voluntary, requiring the cooperation of both the landlord and tenant(s)

 

In addition to describing the policies in more detail, this factsheet also guides local governments through the process of identifying which options are feasible and how to implement them. While these are all effective tools for addressing the split incentive problem, not all of them are available in every jurisdiction. For example, cities with a municipal utility will have more freedom to change rates and payments for solar customers than those served by investor-owned utilities, whose rates are controlled by a state public utilities commission. PACE programs are only possible in the 31 states (and DC) that have passed PACE-enabling legislation.

Even when local governments are unable to implement a FIT, ENM, or financing policy, they can still work with building owners to create customized solutions for their properties. Local governments also have the ability to encourage solar adoption through solar-friendly zoning and planning, streamlined permitting and interconnection processes, and targeted outreach and technical assistance. In all cases, local governments are key stakeholders in helping multi-unit buildings go solar, providing much-needed access to clean energy for even more of its residents and businesses.

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