Can I Buy Into A Solar Farm?
A solar farm, also known as a solar photovoltaic (PV) power station, is a large-scale installation that generates electricity by converting sunlight into direct current electricity using photovoltaic solar panels. The direct current is converted into alternating current and fed into the electricity grid for distribution.
Solar farms can range in size from a couple of hectares to hundreds or even thousands of hectares. They consist of numerous rows of solar panels mounted on supports and wired together. Inverters and transformers are used to change the electric current from DC to AC and step up the voltage so it can be exported to the grid.
Interest and investment in solar farms has grown rapidly in recent years, driven by the falling costs of solar panels as well as government incentives. According to SEIA, solar has grown at an average annual rate of 24% over the past decade. Solar energy is expected to account for over 10% of total U.S. electricity generation in 2025, up from under 4% in 2020 (SEIA).
Benefits of Investing in a Solar Farm
Investing in a solar farm can provide stable long-term returns. Solar farms lock in power purchase agreements, typically 20-25 years, which provides predictable cash flow for decades (https://coldwellsolar.com/commercial-solar-blog/how-much-investment-do-you-need-for-a-solar-farm/). This makes solar farms an attractive option for investors looking for consistent, reliable returns.
Solar farms also allow investors to support clean, renewable energy. Generating solar power creates no carbon emissions, reducing the environmental impact compared to fossil fuel-based energy. With global climate change a rising concern, investing in solar aligns with environmental stewardship.
There are also tax incentives available to solar farm investors. The federal Solar Investment Tax Credit (ITC) offers a 26% tax credit on solar investments through 2022, which helps improve returns (https://8billiontrees.com/solar-panels/investing-in-solar-farms/). Accelerated depreciation on solar investments provides another tax advantage.
Risks and Drawbacks
Investing in solar farms does come with some risks and drawbacks that should be considered. Three major risks and drawbacks are:
Large Upfront Costs
Constructing a solar farm requires major upfront capital expenditure. According to Solar Power Financial Models Report https://www.eiagroup.com/confidential-report/, a 5MW solar farm can cost anywhere from $3-5 million just for construction and equipment costs. This high initial investment means longer payback periods.
Dependence on Weather and Climate
Solar farm output depends on sufficient sunlight and clear skies. Production can be impacted by seasonal changes, storms, and other weather events. According to Allianz https://www.allianz.co.uk/news-and-insight/insight-and-expertise/top-5-risks-of-solar-energy.html, climate change leading to more extreme weather is also a risk factor.
Land Requirements
Solar farms require large areas of land, usually at least 5 acres. Suitable properties must have excellent solar irradiation and proximity to electrical infrastructure. Land costs and permitting can be challenges in finding viable sites.
Investment Options
There are a few ways to invest directly into solar farms:
Direct ownership stakes – Investing directly by purchasing an ownership stake in a specific solar farm project. This involves higher upfront costs but can provide higher returns. According to SmartAsset, investing $25,000-$50,000 is often required to buy a share of a large solar farm. You would then receive regular income distributions from the sale of electricity generated.
Solar crowdfunding platforms – These online platforms allow individuals to invest smaller amounts into solar projects. For example, Ecoplexus Inc operates a crowdfunding platform where the minimum investment is $1000. Investors earn money through quarterly distributions based on the solar project’s revenues. The platforms handle identifying and vetting solar farm projects.1
Publicly traded solar companies – Investors can buy stock in public solar energy companies like First Solar and SunPower. While you don’t invest in a specific solar farm, your investment helps finance the company’s overall solar projects. Stock prices fluctuate based on the company’s financial performance.
Returns on Investment
The average annual return on investment (ROI) for a utility-scale solar farm ranges from 10-20%, according to estimates from Solar Farm ROI: How Soon Can You Get It? – ProEsSolar and Solar Farm Return on Investment: How Much Can You Make? – LEV. Solar farms generally take 5-10 years to pay off the initial investment and start generating positive returns.
There are several factors that affect the ROI for a solar farm investment:
- Cost of land acquisition and preparation
- Solar equipment costs like panels, inverters, and mounting systems
- Installation and labor costs
- Interconnection and permitting fees
- Ongoing operations and maintenance costs
- Electricity purchase agreement rates and terms
- Solar irradiance and weather conditions in the area
- Tax incentives and renewable energy subsidies
Investors can maximize returns by minimizing initial capital costs, securing favorable power purchase agreements, choosing sites with ideal solar resources, and taking advantage of available tax credits and incentives.
Steps to Invest
If you decide investing in a solar farm is right for you, here are the typical steps to get started:
First, you’ll need to research and select an investment option that matches your goals. This could be investing in a solar company’s stock, buying into a solar energy fund, or directly investing in a solar farm project. Compare factors like minimum investment, risks, expected returns, and investment time horizon (Source 1).
Next, you’ll complete any required paperwork and applications for your chosen investment. This may include signing contracts, disclosing financial information, or supplying a minimum capital contribution (Source 2). Requirements vary based on the investment.
Finally, you’ll provide your initial capital contribution to the investment entity, whether it’s purchasing stock shares, investing in a fund, or buying part of a solar farm. The process differs by investment type.
Ownership and Management
When investing in a solar farm, there are two main options for ownership involvement – passive or active.
With passive ownership, the investor provides capital to own a portion of the solar farm but leaves the day-to-day management and operations to the solar development company or a third-party operator. This allows the investor to earn returns without hands-on responsibilities. Passive investors typically have limited control or decision-making ability.
For example, SolRiver Capital operates solar farms on behalf of passive investors who own a stake in the projects.
Active ownership involves direct oversight and involvement in the solar farm’s management and operations. Active owners take responsibility for maintenance, equipment, permitting, taxes, insurance, etc. This requires relevant expertise but provides greater control and potentially higher returns.
When buying into an existing solar farm as an investor, ownership rights and responsibilities are outlined in the investment agreement and operating contract. Passive investors typically receive scheduled dividend payments based on energy production. Active investors take on more liability but can influence operations and strategy.
Before investing, it’s important to consult professionals to fully understand the rights, obligations and risks involved with owning part of a solar energy project.
Reselling or Divesting
If you decide to sell your stake in a solar farm, there are a few options for liquidating your investment. One possibility is to sell your ownership share back to the original developer or operator of the solar farm. According to Paradise Solar Energy, many solar farm ownership agreements include a buyback clause that allows the developer to repurchase your stake if you decide to sell. This provides a convenient exit option.
You can also try to find an outside buyer interested in purchasing your share of the solar farm ownership. However, this may be more difficult than selling back to the original developer, as there is a smaller market of buyers for existing solar farm stakes. Working with a business broker or advisor can help connect you to potential buyers if going this route.
There are also tax implications to consider when selling a stake in a solar farm. According to the LEV Blog, any profits earned from selling your ownership share would likely be taxed as a capital gain. The capital gains tax rate you pay depends on your income level and how long you held the investment. Consulting a tax professional can help you minimize taxes when selling.
Future Outlook
The solar energy industry is projected to see massive growth in the coming years. According to the International Energy Agency (IEA), global solar PV installations are expected to reach 630GW by 2024, more than double the capacity in 2019 (IEA). This rapid expansion is driven by declining costs and supportive government policies.
Many governments worldwide are implementing policies and incentives to accelerate solar adoption. For example, the U.S. recently passed the Inflation Reduction Act which includes $370 billion in funding for clean energy, with significant investments aimed at expanding solar energy (MIT Energy). Tax credits, rebates, and net metering programs also make solar more affordable.
The declining cost of solar energy, coupled with supportive policies and incentives, points to a bright future for the solar industry. This bodes well for investing in solar farms, which are poised to deliver stable returns as solar continues its growth trajectory.
Conclusion
In summary, investing in a solar farm can provide attractive returns and benefits, but also comes with risks to consider. The key points to weigh are:
- Solar farms can generate stable cash flow from selling electricity, as well as tax credits and other incentives.
- Returns of 4-8% are common for solar farm investments through buying shares or investing in a fund.
- There are options to invest small amounts through crowdfunding platforms or larger amounts by directly buying into an existing solar farm.
- The main risks are weather and grid stability affecting electricity production, as well as dependence on government policy.
- It’s important to evaluate the business model, partners, and underlying assets before investing.
In conclusion, solar farms can be a solid component of a diversified investment portfolio for suitable investors willing to take on some risk. The long-term energy transition towards renewable power seems likely to continue, creating a favorable outlook for solar farm investments.
However, returns are not guaranteed, so conduct thorough due diligence and consult a financial advisor before making major investment decisions in this complex asset class.
