How Will California’s Latest Solar Mandate Apply to CRE Investors? 

California is determined to reach the point where it draws 100 percent of its electricity from renewable sources. As part of the plan to achieve this goal, Assembly Bill 178 was passed, making solar panels compulsory on new buildings up to three stories high as of January 2020. In August 2021, further legislation was approved to mandate solar power and battery storage for all new commercial buildings and high-rise residential projects from 2023 on. Specifically, this includes commercial buildings such as hotels, office blocks, medical facilities, retail stores, restaurants, campuses, and community spaces.

So what do commercial real estate (CRE) investors need to know? Well, the California Building Standards Commission will now consider the proposal, and it’s expected to include it in an overall revision of the building code toward the end of 2021. In the meantime, the existing requirements for residential buildings may provide some insight.

Solar Requirements for Residential Developments

Beginning in 2020, all new single-family residences and multi-family residences up to three stories high are required to have rooftop solar panels. The requirement also applies to any new additional dwelling units, such as carriage houses or granny flats. The panels should have the capacity to cover the building’s annual electricity consumption, which can vary depending on the use of the space, the shape of the building, and the tenants. The amount of solar needed is based on an energy design ratio, but an average rule of thumb for residential buildings is 2 watts of solar power per square foot. State-approved software can be used to test schematic designs as well.

Reducing the Cost of Your Photovoltaic (PV) System Installation

The New York Times estimated that California’s original solar mandate would add $8,000 to $12,000 to the cost of building an average residence. However, there are several ways to reduce the cost implications of solar building mandates, including the following:

  • Add Storage Capacity. Batteries were not mandated for residential buildings previously as they are in the new rulings for high rises. But where storage is included in a building’s photovoltaic (PV) system, it can be up to 40 percent smaller due to its increased energy efficiency. This is of help where roof space is limited. It also has the added advantage of making the building independent of the power grid—a big plus in areas prone to wildfires, hurricanes, or flooding, events that can leave residents without power for days in some cases.
  • Install Other Energy Efficiencies. As the requirement is to cover the total energy consumption of the building, other onsite energy-saving precautions can help cut down the size of the PV system needed. For example, energy-friendly building materials, certified energy-efficient appliances, and other initiatives will all count toward reducing the energy requirements of a structure.
  • Take Advantage of Tax Credits. There are not currently any state reimbursements for mandatory solar expenses. However, building owners and business owners are still eligible for the federal solar investment tax credit for mandated PV requirements. Until 2022, 26 percent of the total system cost will be eligible for a tax credit, but this will drop to 22 percent in 2023. Beginning in 2024, a 10 percent credit will be available on commercial systems only.

To manage cash flow and avoid upfront costs, building owners can consider leasing their solar systems from one of the numerous companies in California that offer solar equipment leases. On the other hand, a PV system will generate a better ROI over its lifetime when it is owned rather than leased.

Exempt Properties

As with most laws, the California solar mandate lists some exceptions:

Rebuilding After Natural Disasters. In 2019, an exemption to the new state solar requirements was added for buildings being rebuilt due to wildfires, floods, and other natural disasters.

Community Solar Project Participants. Housing developments can avoid rooftop solar requirements in some cases if there is an associated community solar initiative available. If a local utility and the California Clean Energy Commission (CEC) approve a shared community “solar garden,” residents can draw their electricity from it instead of installing solar roof panels. Solar gardens are large arrays of solar panels installed off-site that residents of nearby communities can purchase power from. These purchases are credited toward the property’s power bill.

Poor Solar Access. Local boards can approve a departure from the state’s PV requirements in areas that don’t get enough direct sunlight to be conducive to solar energy.

Low Electricity Rates.An exemption from solar capacity can be sought in exceptional areas that do not incur normal, daily electricity usage. However, this usually is only applicable for temporary structures and remote job sites.

Off-Grid Buildings. If there is no intention to ever connect a building to the utility grid, it does not need to have solar panels. However, most off-grid buildings will utilize solar energy regardless.

Correctional Facilities. Correctional facilities are specifically exempt from California solar requirements.