Introduction

Decarbonizing the built environment plays an increasingly key role in climate change mitigation strategies. The process often includes solar photovoltaic (PV) systems, which are becoming more affordable than ever before.

The U.S. has set a nationwide goal to reach 100% carbon-emission-free electricity by 2035. To reach such an ambitious goal, the U.S. would require significant transformation across multiple pathways, including decarbonizing energy. Solar has an important role to play here¹.  A flat rooftop (common among industrial buildings) lends itself easily to solar panels, helping industrial property owners and tenants to reach decarbonization goals. ¹https://www.whitehouse.gov/wp-content/uploads/2021/10/US-Long-Term-Strategy.pdf

Commercial and Industrial Solar Industry

Solar energy is one of the cleanest and most widely available renewable energy sources, which the U.S. has in abundance. As of mid-2022, the U.S. had approximately 130 GW of total installed solar PV capacity, roughly 10% of which can be attributed to commercial and industrial (C&I) solar. This puts the U.S. second on a global list of countries with the most PV installed, somewhat ahead of the major European countries (Germany, Italy and Spain), though China more than doubles the U.S. installations.

The U.S. C&I solar industry has grown by an average of 7.0% annually over the past decade. The surge has been partly driven because of declining costs for PV panels, supportive government policies like the Investment Tax Credit (ITC), and the rising demand for clean energy from both public and private sectors. Much of the commercial growth comes from industrial buildings, such as warehouses and distribution centers, that have a flat rooftop.

Figure 1: Commercial Solar Installations Since 2011 and Forecast

Source: SEIA, CBRE Econometric Advisors.
Note: MWdc is Megawatt of power with direct current.

Benefits of Commercial and Industrial Solar Rooftops

Solar rooftops benefit both the industrial building owner and the local community. A solar rooftop can reduce greenhouse gas (GHG) emissions and therefore limit a building’s contribution to climate change. However, to achieve such an objective and to ensure a long-lasting impact, a relatively significant long-term upfront investment is required.

• Financial Benefits: Solar systems can reduce a building’s reliance on grid-supplied electricity by as much as 80% and in many cases offset the electric bill by up to 95%, therefore lowering the tenant’s cost of occupancy. Lower energy costs, and access to clean energy, can encourage tenants to sign longer lease agreements and make the building more attractive to potential tenants. The longer the lease terms, the higher the net present value (NPV) and cash flows. Such savings are particularly crucial for triple net lease tenants. In addition, a variety of federal, state and local incentives, rebates and tax credits can benefit landlords and tenants.
• Environmental Benefits: Rooftop PV generates clean energy which offsets grid-supplied electricity, the majority of which is produced by fossil fuel-burning power plants. The implementation of rooftop solar PV will result in reduced carbon emissions due to a cleaner energy supply.
• Marketing Benefits: More companies have set net-zero targets in recent years, putting pressure on other companies to adopt similar approaches. Solar PV can help to achieve these objectives and, thereby, avoid regulatory risk and promote a sustainable environment.
• Social Benefits: Community solar is becoming popular in the U.S. and can add access to solar energy sources for multiple local community members such as small businesses, residential homeowners, renters and low and moderate income (LMI) customers. Under a community solar program, members receive credits from the electricity that is generated by the system without the need for any ownership. The newly-enacted federal Inflation Reduction Act (IRA) has significant tax incentives if the power is sold to LMI households.
• Other Benefits: Solar panels prolong the lifespan of roofs by providing protection against natural elements such as rain, snow, debris and direct ultraviolet (UV) light. Moreover, if a building owner is seeking to obtain Energy Star or LEED certification, a solar rooftop counts toward several of the credit categories.

Electricity prices held steady from 2012 to 2020 when the COVID-19 pandemic hit. At first, electricity prices for commercial and industrial sectors declined slightly, as most of the population was isolated in their homes due to pandemic-related lockdowns. But as inflation accelerated rapidly in early 2021, energy prices rose. During that time, natural gas prices reached their highest levels in decades.

Natural gas fuels approximately 38% of U.S. electricity generation in 2022, up from 37% in 2021, according to the U.S. Energy Information Administration (EIA). To recoup higher costs, utility companies passed on the costs to consumers, causing the electricity costs to rise by 20.8% and 22.2% between 2012 and 2022 for commercial and industrial sectors, respectively. Over the same time, the cost to install solar PV across the U.S. has dropped by almost 62%, creating an opportunity for solar investment against increasing electricity prices.

For 2023, EIA expects electricity prices to rise by 4.4% and 2.8% to 12.53 and 15.32 cents per kilowatt hour, respectively, for commercial and residential sectors. Inflation and international demand for U.S. natural gas are two drivers behind the increases, making conventional energy more expensive to produce.

Figure 2: Average Price of Electricity by Sector vs. U.S. Solar PV Pricing

Source: SEIA/Wood Mackenzie, EIA, CBRE Econometric Advisors.

Get More Green out of Your Building

Rooftop solar can generate significant value for investors and tenants. Property owners and tenants can develop solar projects on their own or choose to work with third parties. There are pros and cons to consider with each execution strategy. Specifically, executing a solar project can be complex and involve complicated negotiations with utilities and supply chain partners. A partnership may help speed up the implementation process and facilitate better control of the system lifecycle. Moreover, the capital investment required may be better invested in the property owner’s or tenant’s core business. A partner can provide more certainty in execution and assume responsibility for on-going maintenance.

To ensure installation costs are low enough to provide all stakeholders with optimal financial benefits, a roof should be at least 100,000 sq. ft. and located near highly populated areas. The latter enables the excess energy generated by a solar PV system to be sold to a public utility power grid. For example, in the Southwestern U.S., the region with the most solar generation potential due to solar irradiance, a typical 800-kilowatt (kW) system can produce up to 1.6 GW hours of electricity per year and the excess electricity can be sold at some of the highest electricity rates in the country. The same system in some parts of the Pacific Northwest, a region with the least solar generation potential, can produce up to 0.9 GW hours of electricity per year and excess capacity can be sold back to the grid at decidedly lower rates.

After analyzing 68 U.S. industrial markets, CBRE EA has identified the top 15 markets for potential solar growth opportunities:

Note: Numbers indicate the potential number of properties Markets ranked by total square footage.

The top 15 markets represent approximately 58% of the 2.1 billion sq. ft. of warehouse space (100,000 sq. ft. or greater) built since 2010. Assuming solar PVs are installed on the rooftops of these sites, and considering that on average, 1.2 GW hours annually can be produced from a 100,000-sq.-ft. rooftop, each of these markets has a potential to produce between 350 and 1,700 GW of energy. Combined, all 3,139 buildings, totaling more than 1.2 billion sq. ft., have potential to produce approximately 11.7 terawatts (TW) of electricity, which is enough energy to replace 0.3% of the country’s 2021 total energy usage, which totaled about 3,930 TW (source: Statista). All markets are located near population centers and are major regional distribution hubs. Furthermore, five markets have the largest industrial development pipeline in the U.S., including:

Combined, these markets have more than 232 million sq. ft. (MSF) of industrial space under construction, most of which is designed to accommodate solar PV installation. Aging warehouse inventory and increased demand for highly functional facilities that can process a high volume of goods and/or can support the integration of automated technology and robotics are driving construction activity. Given the need to reduce the carbon footprint of the industrial sector, it is likely that industrial owners will join forces with solar partners to build projects that can do just that.