Investing in Solar Farms: A Guide for Accredited Investors
By Charles Schaffer
The renewable energy sector, particularly solar energy, has grown exponentially over the past decade. Solar farms with large-scale utility-connected systems have become attractive investment opportunities for accredited and institutional investors.
For most accredited investors, there are two levels of investment
Capital for purchasing the land
Development capital for the solar project
While institutional investors may also participate in both levels, they more often are the source of capital for the vertical construction and operations of the solar farm.
This article explores the nuances of investing in solar farms to guide investors in making informed decisions.
The Rising Demand for Solar Energy
The United States alone has seen a remarkable increase in solar energy production, with the Solar Energy Industries Association (SEIA) reporting a compound annual growth rate of 49% over the last decade.
The U.S. Energy Information Administration recently announced that it expects solar will supply almost all growth in U.S. electricity generation through 2025.
Solar generation facilities need a lot of land. Many U.S. solar farm projects number in the thousands of acres.
While this form of dual-use solar is still in the early stages, as evidenced by this U.S. Department of Energy Agrivoltaics Sites map, at SDC, we're keeping an eye on long-term investment opportunities focused on low-impact solar development.
Why Invest in Solar Farms?
The reasons for investing partially depend on land investment vs. solar project investment.
1. Stable and Long-Term Returns: Solar farms typically offer stable cash flows over long periods, often backed by institutional-grade power purchase agreements (PPAs) spanning up to 35 years. This is a benefit to land and project investors.
2. Generational Investing: Farmland has traditionally been a generational asset for farmers. Non-farmers can now own part of a solar farm asset that is a generational investment.
3. Government Incentives: In the U.S., the Investment Tax Credit (ITC) offers a 30% tax credit for solar projects, with the possibility of additional ITC bonuses under the latest legislation. Solar farms can choose a Production Tax Credit (PTC) instead of an ITC. These incentives are designed to increase the profitability of the solar farm and, indirectly, ensure the land investors have a stable tenant.
4. Environmental Impact: Investing in solar farms aligns with sustainable and responsible investment strategies, catering to the growing trend of ESG (Environmental, Social, Governance) investing.
Several sources cite the annual income per acre as between $21,250 to $42,500.
Evaluating Investment Opportunities
Accredited investors should ask about several areas when doing due diligence on prospective solar farm investment partnerships.
Location
The efficiency of a solar farm depends on its geographic location. States and areas with high solar irradiance.
A peak sun hour (PSH) is defined as one hour in which the intensity of solar irradiance (sunlight) reaches an average of 1,000 watts (W) of energy per square meter
The states with the highest average peak sun hours are
Arizona (7 – 8)
Nevada (6 – 7.5)
New Mexico (6 – 7.5)
California (5 – 7.5)
California has the highest variability, with its southeastern desert areas highest in PSH.
Topography
While exceptions exist, such as solar arrays on Mount Taihang in China, most solar farms are on flat or moderately sloped valley floors. The latter keeps installation and service costs down.
Proximity to Infrastructure
Close to transmission lines & substations. On this Google map, you can see several solar installations near Southern California Edison's Antelope substation.
A Lack of Encumbrances
There should not be any encumbrances such as long-term leases, deed restrictions, government restrictions, or encroachments.
Local Resident Sentiment
There is local community support for renewable energy projects. Any concerns have been addressed, and there is transparent communication about the land development.
Regulatory Landscape
Understanding the local regulatory environment is crucial, as it can impact the solar farm's operation and the financial incentives available.
Technological Aspects
Advancements in solar technology can affect the long-term viability of the investment. It’s essential to invest in farms that use up-to-date technology.
Financial Health of Off-takers
The creditworthiness of entities buying electricity (off-takers) under power purchase agreements (PPAs) is vital for ensuring consistent revenue.
Financial Considerations
Initial Investment: The cost of investing in a solar farm can vary widely based on the project's scale and location.
Return on Investment (ROI): The ROI for solar farm investments is typically above average, varying with factors like location, incentives, and operational efficiency.
Risk Factors: risks include technological obsolescence, regulatory changes, and natural hazards. Diversifying across different projects and geographical areas can mitigate these risks.
An emerging de-risking approach
Solar farms are often installed on vacant or formerly agricultural land, displacing agricultural production. However, a gradual movement has been toward the shared use of solar and agricultural land.
This combined use is sometimes referred to as agrivoltaics. It’s also called agrisolar, dual-use solar, or low-impact solar. Solar grazing is one such variation where livestock graze in and around solar panels, providing a dual benefit: increased land use by the livestock and reduced vegetation abatement costs for the solar farm.
While this form of dual-use solar is still in the early stages, as evidenced by this U.S. Department of Energy Agrivoltaics Sites map, at SDC, we're keeping an eye on long-term investment opportunities focused on low-impact solar development.
. . .
Investing in solar farms presents an appealing opportunity for accredited investors, offering potential above-market financial returns and positive environmental impact.
However, it requires understanding the market, technological trends, and the regulatory environment.
Accredited investors should consult with financial professionals specializing in renewable energy investments to navigate this attractive, long-term investment.
Please book a meeting to learn more about land or project investment opportunities.
Charles Schaffer
President and Founder, SDC Capital Ventures
Charles has founded and operated several development companies over his 35+ year history to pursue his passion for Alternative Investing where he believes outsized returns can be achieved without a corresponding increase in risk. Under Charles' leadership, SDC has developed and financed over $80 million of commercial real estate and renewable energy projects.
