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Funded solar PV in social housing may be viable again - but landlords need to move quickly

2nd October 2017

Opportunity and interest in solar PV for social housing is growing again. Several funded offers are again on the market and there is growing confidence with reducing install costs for big schemes. We are working with several housing organisations to assess funded offers against self-financed schemes and I thought it would be useful to provide a quick summary.

Substantial cuts to Feed-in Tariffs (FITs) in 2016 meant many organisations put solar investment plans on hold. 2017 is a good time to reassess this decision, with several moves in the market and an outlook of relative stability likely over the next 18 months (notwithstanding a BEIS review in December 2017). The industry needs to move quickly this time to take advantage before Feed-in Tariffs (FITs) end in 2019.

With current FIT levels, solar PV, though not highly profitable, can still be a very cost effective means for social landlords to increase SAP ratings, reduce tenant energy bills, address fuel poverty and reduce CO2 emissions.

Funded solar offers the potential to improve SAP ratings and reduce tenant energy bills with no capital cost. In their current form funded schemes will usually include some form of tenant contribution to the installation, either through fixed monthly payments using a Green Deal mechanism, or through an energy supply contract.

Mortgage approval issues have largely been overcome since 2012 with most lenders recognising rooftop leases that comply with Council of Mortgage Lender guidance.

What are the returns?
Under the current FIT regime, a social landlord investing in solar at scale might expect to recoup in the region of 60-80% of the capital investment over the lifetime of the 20 year FIT subsidy. While clearly this remains a cost, it means solar can be a very cost effective measure for increasing SAP points and reducing energy bills. Add in the potential for cheap loan finance, for example through the upcoming Mayor’s Energy Efficiency Fund (MEEF) and this could be an attractive investment.

Funded solar of course removes the need for finance all together. While these offers were thin on the ground in 2016, in today’s market they have re-emerged, usually going beyond simply a PV installation. Combined solar and energy supply offers may provide a modest payment to the landlord, either through profit share, fixed rental payments or an agreed lump sum. The size, cashflow and risk sharing of such payments are subject to some variation between providers and will be negotiated depending on the business model, the type and size of scheme, the degree of solar potential across a stock and the landlord’s own needs.

Third party payments are likely to be substantially lower than under previous iterations of the FIT regime. With FIT subsidies reducing further and ending in 2019, these payments are unlikely to increase.

What can tenants save?
The major difference for tenants between third party and self-financed schemes is likely to be the billing arrangements. Under self-financed schemes tenants are likely to have free access to solar generation, whereas funded schemes offers now available usually include an energy supply offer to the tenant (though there are exceptions to this in both cases).

Funded solar + supply offers come in a variety of forms, from a fixed monthly payment to a supply contract with an energy provider attached to the solar offer. Depending on the rates tenants are paying it is possible that tenant savings could be comparable under either scenario as funded solar may provide lower costs at peak times (though savings may also be compared with simply switching energy providers).

Whether self-financed or 3rd party funded, specialist procurement advice should be sought and a clear and transparent evaluation and appointment process should be followed in accordance with regulatory requirements.

Concession Contracts Regulations 2016 require concessions with a total contractual value above £4.1m to be advertised via OJEU. This would likely catch all funded solar offers as the valuation includes all revenue driven by the concession including FITs for 20 years, as well as potentially a supply contract with the tenants.

Lender Consent
Many landlords are adverse to funded schemes because of perceived opposition from lenders. In most cases this issue should now have been resolved.

The Council of Mortgage Lenders has standardised requirements for solar roof top leases. These are available for download on the CML Website. Most mortgage lenders should now accept a compliant lease and experienced solar developers should be able to provide compliant wording.

The process of gaining lender consent may still be lengthy and expensive. Third party providers will be well versed in this process and may be willing to support landlords and pay costs.

Landlords should approach their lenders at an early stage for further guidance on their process for review and approval of solar installations and any particular conditions they may have.

Contractual negotiations
The principle of 3rd party solar should present a fairly attractive proposition – increased SAP ratings, reduced tenant bills, cash income for a landlord. But the devil is in the detail. Beyond the headline proposition landlords need to consider the delivery experience and financial standing of 3rd party operators. Financial modelling will need to be scrutinised and arrangements will need to be put in place to account for cyclical housing maintenance programmes, access and liability insurance.

Risk and reward
Risks span technical, financial and management issues and require detailed attention across departments. With funded schemes, key issues include right to buy, potential damage to roofs, repair bills, installation management and penalties for times when roofs need to be replaced, homes redeveloped or electricity disconnected.

A self-funded scheme is less complex contractually, reducing legal costs and allowing a social landlord more control over assets. However, landlords do need to be aware of the administrative risks and burdens of maintaining solar performance across a large solar portfolio.

Technical Considerations 
The degree to which solar panels can vary from due south will depend on the business model and this may mean quite significant differences in the number of homes that are able to benefit from solar.

A good knowledge of the solar potential of a housing stock can be helpful in understanding how solar options compare. A desktop study should be undertaken in the first instance, using satellite imagery, to give an estimate of solar potential. This would then need to be confirmed through more detailed on-site surveys by the appointed contractor to identify any further technical considerations such as access points, detailed shading calculations and structural strength of roofs.

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