Imagine you own a piece of land, but you’re not using it for anything specific at the moment. A solar energy company approaches you with an offer to rent your land for the purpose of building a solar farm. This is what is known as a solar farm lease.
Usually, solar companies will want to use your land because it’s suitable for housing solar projects due to its location, access to sunlight, and other factors. In return for using your land, the solar company will offer you a lease agreement. The lease agreement outlines the terms, duration, and compensation you’ll receive for allowing the solar farm to be built on your property.
But how should you evaluate this offer? What factors should you consider when examining lease rates?
While there are many factors that can influence the value of your potential solar farm lease, we will focus on the big ones: land, the existing market environment, and grid connectivity.
What Factors Influence Solar Farm Lease Rates?
Generally speaking, most solar farm lease rates generally fall between $250 to $2,000 per acre per year. However, like anything, these lease rates can vary from lease to lease, depending on several factors. Here are the most important aspects to consider when evaluating the rates for any solar farm lease offer:
Land
It may go without saying, but one of the largest factors to consider when evaluating lease rates is your land. Numerous aspects of your land play a big role when determining solar farm lease rates.
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Amount of Land: The size of your property or plot plays a major role in determining lease rates and values, as this will determine the size of the potential solar project on your land. For context, solar farms generally need between 3 to 6 acres of solar panels to produce 1 mW of solar energy. For developers of large utility scale solar projects, landowners with larger tracts give more flexibility. However, smaller solar project sites between 30 and 50 acres could potentially provide higher lease rate values, as complications associated with grid infrastructure and risk can drive up costs for large-scale projects.
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Sunlight: The amount and quality of sunlight your land receives is also factored in when determining lease rates. Your land must receive an amount of sunlight that is sufficient for solar energy generation and should have as few obstructions to sunlight as possible. Sites with abundant sunshine tend to have higher lease rates because they can generate more electricity and, subsequently, more revenue for the solar project developer.
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Alternative Land Uses: Solar farm lease rates can also be impacted by the value of your land derived from other uses or operations. If a landowner is already generating revenue from alternative uses of their land, like farming, solar developers will often have to issue offers that meet or exceed this amount in order for landowners to even consider their offer.
Market & Demand
Another factor that plays a significant role in determining the value of a solar farm lease is demand and the market environment. Solar Farm lease rates can vary widely depending on the regulatory environment and supply of solar energy in the areas where they are located.
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Site Availability: Solar projects in states and regions where land is scarce will be more valuable than land in regions where there is more available land, due to the lack of alternative options. Site availability can be determined by geographical and topographical characteristics, as well as real estate market conditions.
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Supply & Demand: The existing regional supply of renewable energy often affects the demand for new solar energy projects, which in turn affects potential lease rates. Land in areas with a high number of existing solar projects is likely to have lower lease rates than areas with relatively few renewable energy projects, due to increased competition and available alternatives.
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Regulatory Environment: Regulatory policies and factors can also impact potential lease rates. For example, tax incentives can reduce the cost of operating a solar project, thus making solar projects less expensive for developers & land more valuable for landowners. Additionally, Renewable Portfolio Standards (RPS) can help bolster demand for renewable energy projects and increase the value of solar farm leases. Alternatively, interconnection delays among the various Independent System Operators (ISOs) could make development less desirable.
Connection to Grid Infrastructure
Often overlooked, the ability to connect a potential solar project site to existing grid infrastructure can also play a critical role in determining the value of a lease. Several aspects of the existing grid infrastructure near your land must be considered.
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Proximity to the Grid: The distance from your land to transmission or distribution lines can have a sizeable impact on solar farm lease rates, as this infrastructure is expensive to build if it does not already exist. If a potential solar project location is too far from existing grid infrastructure, like a substation, most solar developers will not pursue the project as it will be too costly to connect to the grid.
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Voltage of the Line: Generally speaking, the cost of connecting solar projects to the energy grid increases with project size. The larger the project, the more voltage will be needed to connect to the grid, which in turn makes it more expensive and time consuming to connect than a smaller project requiring lower amounts of voltage.
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Grid Capacity & Condition: The state of the existing electrical grid also comes into consideration when evaluating the value of solar farm leases. It’s not possible to add more energy to a grid than it can handle, so aging and overburdened electrical grids are often less able to support new solar energy projects than modernized grid infrastructure.
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Interconnection Delays: On smaller projects, the energy is generated at or near where it will be used. This technology is referred to as Distributed Generation (DG). For DG projects, the developer doesn’t have to worry about the interconnection backlog and faces fewer permitting hurdles. For larger utility scale projects, development could be delayed while the project works its way through the interconnection.