Earth Notes: UK Solar PV Incentives for Rented Commercial Properties (2022)

If you are a lucky tenant, your landlord will want to do the right thing to save the planet, help keep tenants solvent and happy and loyal, and improve the long-term value of their property, all with out any prompting! Your biggest problem will be competing for an installer's attention and PV panel stock as the hike in energy prices has made people pay attention...

My motivation is to try to help one business local to me get PV, on their light-industrial unit with an unshaded south-facing roof capable of hosting maybe ~10kWp. The business will soak up lots of energy whenever it is generated I think. But in any case what works for them may well work for other commercial renters, all over my local town (and beyond).

For the rest, there is a package of measures in place in the UK running until 31st March 2023.

To quote Joju Solar:

On 31 March 2021, The Chancellor of the Exchequer, Rishi Sunak, announced two new tax relief measures: The 130% Super-Deduction and the 50% First Year Allowance (FYA).

The measures are intended to kick-start the UK Economy and help British businesses build back better in the wake of the COVID-19 pandemic. It is the biggest two-year tax cut in British history.

To claim their tax break, Businesses must invest in qualifying plant and machinery by 31 March 2023. Solar Panels are qualifying assets under the 50% First Year Allowance.

This means that by investing in solar, you will only pay corporation tax on your operating profits minus 50% of the value of your solar investment.

A worked example provided by Joju shows that you save the corporation tax on 50% of the solar investment, eg for a solar PV system costing £240k, earning a 50% capital allowance of £120k on which the corporation tax would otherwise have been 19%, saves £22,800!

Thus, free money worth nearly 10% of the capital paid off by HMRC with a little paperwork!

Beyond the Tax Breaks

According to the UKWA: Rooftop solar PV is a good investment opportunity in its own right, providing an internal rate of return of 10-15% on self financed projects.

Also: By 2030, non-domestic minimum expected energy standards (MEES) is planned to be EPC B, with EPC C rating required by 2027. Solar PV can help meet this obligation while providing good financial return.

Another observation is that: Smaller installations with high self-consumption provide low risk returns, while larger systems can provide higher overall payback. The small business that I have in mind is in the former category!

Bridging the Gap

If a tenant could be sure of being in the same location for many years, for example not growing, and have cash to hand, then maybe the tenant could put the CapEx down.

Under 10 years for a PV system to pay for itself is financially plausible, the UKWA report suggesting 4 to 6 years (IRR ~15%). Payback is likely even faster during an energy crisis.

But if we are to get those rented roofs covered in PV — and we should be putting up a lot more UK PV, faster — then we have to somehow bridge the gap left by the Feed in Tariff (FiT) where the landlord could know that they would get their money back over time from an energy company, government backed.

In some cases excess PV generation exported to the grid will be paid for by an energy company, and this revenue could go to the the landlord or be shared.

Another possibility is to share some of the bill savings with the landlord, maybe in or after the summer months when generation is high so the tenant genuinely should have paid lower bills and have a balance to hand. Shared-savings schemes are common. Whether such a scheme should be stand-alone or tied to rent may depend on circumstances. In any case, the landlord then gets their capital repaid with a known cashflow stream. And at a decent rate of return compared to other opportunities.

This this can be a net financial gain for both landlord and tenant. Oh, and we help fix the planet faster, which may also be rather important for the future financial prospects of both...

Alternative Justification

It's not always going to be a finely-balanced tortured PVing of future cash flows that supports the decision.

A sports club nearby has:

... not attempted a financial justification in terms of NVP, pay-back time, or anything like that. Both our treasurer and accountant have said "it is bleeding obvious, get on with it, such calculations are meaningless in this context" ...

Indeed, the main motivation in this case is climate change and reducing the club's carbon footprint.

The club will be getting further value from the PV, and further helping the climate:

... we will [upgrade] all our [internal combustion] engines to battery operated as they come up for replacement. Same for our gardening equipment. We will put an automatic selector switch on the inverter which will drive the electric immersion heater when the panels are generating (in preference to the gas boiler). And we will add a car charging point. ...

In other words, "electrify everything", partly PV powered!

Gotchas

A significant downside is the 'punitive' (h/t Dan Gray) business rates charged, circa £54/MWh.

One way or another this reduces the savings available from installing PV.

If the landlord is paying business rates, then that would need to be covered by any "shared savings" or other payment from tenant to landlord to maintain the landlord's rate of return on the PV investment.

VAT at 20% still appears to be chargeable on non-domestic installations (currently down from 5% to 0% for domestic). Being VAT registered would allow that to be reclaimed by whoever paid for the PV.