North Carolina Renewable Energy Efficiency Portfolio Standards

In 2007, the North Carolina General Assembly established the Renewable Energy Portfolio Efficiency Standards (the “Standards”), which require all investor-owned utilities in the state to source 12.5% ​​of their energy needs from qualified renewable energy sources (the requirement is 10% for rural electric cooperatives and municipal electric suppliers).

One way a utility can meet these demands is to use energy generated by solar energy sources.

The effect of the standards is visible in North Carolina: instead of acres of corn, tobacco or soybeans, the landscape is now covered in fields of solar panels.

A 2022 report by the Environment America Research and Policy Center found that between 2012 and 2021, North Carolina’s solar capacity increased from 185 gigawatt-hours to 10,373 gigawatt-hours, making it the fourth-largest city in the nation for solar energy expansion.

A 2022 report from the North Carolina Department of Environmental Quality (NCDEQ) found that 661 solar installations larger than 1 megawatt were put online between 2007 and 2020, and that number has increased significantly since then.

Families that have farmed their land for generations are driving this growth by choosing not to replant their fields and instead leasing them to solar developers for annual rents of $1,000 an acre or more. For some new solar owners, this may be a purely financial calculation (an acre that could be rented for $1,000 for solar panels may yield only $50 to $100 a crop), while for others, it may be a desire to “go green.”

Regardless of the reasons landowners decide to enter into a lease agreement with a solar energy provider, there are several issues to consider before signing a land lease agreement, often lasting 40 years or more.

Leasing of solar installations and long due diligence periods

A common provision in solar leases is a due diligence period, which can last three to four years, during which the solar provider has the unilateral right to conduct certain inspections and studies to decide whether it is desirable or feasible to use your land as a “solar farm.”

While early solar farm leases involved little or no due diligence fees paid to landowners, solar providers, realizing the impact that a 3-4 year “property freeze” could have, began offering reasonable due diligence fees to compensate the owner for the period the provider needed to inspect the property and enter into a power purchase agreement with the utility.

This means two things for you: first and foremost, your potential tenant will not be obligated to pay you rent for up to four years, if at all. If the solar provider decides, in their “sole discretion” or “sole judgment” (meaning for any reason or no reason), that your property is not meeting their needs, they can terminate your lease, paying you only the due diligence fees.

The reason for transferring your property may have nothing to do with the property itself: the supplier may have failed to reach an agreement with the end user of the solar energy, or they may have concluded that the transaction is simply not profitable.

Second, it also means that your solar provider’s agents will be hanging around your property for an extended period of time, which raises issues such as liability (what if one of them has an accident on your property?) and damages (what if one of them damages your property?).

Lease period for solar installation

How long will your property be occupied for use as a solar farm? Like all leases, the term is negotiable.

In the case of a solar farm, the solar provider will make a significant investment in the equipment they will install on your property, and they will also negotiate a long-term power purchase agreement with the utility, so they will expect a long-term commitment from you.

Leases lasting 20 to 30 years are common, with two or more renewal periods every five or ten years.

Adjustments to the rent for the lease of solar installations

That $1,000 per acre may seem like a fair rent now, but what about 20 years down the road? The parties to a proposed solar lease could agree to flat rent increases up front for the life of the lease (a 2% increase each year, for example) or to increase the rent using a formula where the rent increases with maintenance costs or other financial metrics on specific dates.

Taxes on leased properties

This can hit your wallet fast and hard.

Many landowners take advantage of state and local land use assessment programs that tax a property according to its actual use as a farm, rather than its highest and best use (e.g., a shopping center or new housing development).

Land use valuation programs often save landowners thousands of dollars per year in taxes.

When determining the amount of rent, it is necessary to take into account not only the possible changes in the tax burden in each year of the lease, but also to remember that in the event of a change of purpose of the property as an agricultural holding, the three years of previous tax savings plus interest will become immediately due.

Despite the common use of the term “solar farm”, a solar farm does not meet the statutory requirements for the valuation of agricultural holding useso the lease of the photovoltaic installation will result in the county charging deferred taxes on “former” agricultural land.

A well-drafted lease agreement will specify which party bears the burden of paying these immediately recaptured deferred taxes. The lease agreement will also need to specify which party is responsible for paying the taxes annually during the lease term.

Changing the purpose of land and its use for solar farms

A solar energy provider’s tenant may not be able to use your property for a solar farm if it is not zoned for that use. Your lease may provide that the tenant has the right to seek a change of zoning for your property, and you will cooperate in the process by executing any required documents and taking any additional steps, including attending zoning hearings.

It is important to note that if the lease is not carefully drafted, the property may be rezoned during the due diligence period before the tenant is required to pay rent. If the tenant decides not to sign the lease, the property may be rezoned for a solar farm, which could restrict your use of the property until you can rezone it, if possible.

And the resonating process itself can be heated. Despite the growth in the number of solar farms over the years, local governments and neighbors tend to hesitate to adopt proposed solar projects.

In theory, local commissioners must remain neutral when applying local ordinances to a proposed solar project’s special-use permit application, and even recuse themselves from the process if, for example, they oppose all solar farm projects.

Such land-use proceedings typically require the testimony of the solar producer’s experts, engineers, appraisers and attorneys, and in the most controversial cases, experts hired by nearby property owners, to oppose the development.

Pender County recently voted against a special use permit for a $1 million, large-scale solar project, even after court-ordered mediation. The bright side of such solar cases is that North Carolina courts are increasingly examining the limits of what local governments can and cannot do when evaluating a proposed solar farm.

Maintaining access to the neighbouring property

It is important that the landowner has a say in the location of the solar farm. If you do not lease your entire property, you will obviously need access to the unleased portion.

The development plan for the solar farm area should take this into account, ensuring safe access to the rest of the property for vehicles and utilities regardless of weather conditions.

Ensure that any measurements obtained by the tenant clearly show all access routes, both inside and outside the solar farm.

Removal of solar farm facilities

What will your property look like in fifty years when your lease expires?

Does this look like a farm again?

Is it cleaned and ready for immediate use?

If so, that’s great, but how did this happen?

A good lease agreement should specify who is responsible for removing the solar installations (here’s a hint – it shouldn’t be yours) and what portion of the installations will be removed (another hint – all of them, including underground structures) and the land will be restored to its pre-lease condition.

Recent action by the General Assembly has increased the burden on solar facility owners, including requiring them to register their facilities with the NCDEQ, submit a decommissioning plan and provide financial assurances that they will cover decommissioning costs.

Local governments have also adopted ordinances governing the decommissioning of solar installations. These ordinances can be even more stringent for operators than state law.

Regardless, landowners should not rely on legislative or local authorities to ensure that the site is decommissioned properly, nor should they be exposed to the risk of the law changing before the end of the lease – the rights and obligations of the parties with respect to decommissioning should be set out in the lease.

Application

There is no doubt that the environmental movement is here to stay, and government agencies, businesses, and individuals have responded. Look no further than North Carolina’s renewable energy industry.

With specific statutory requirements mandating the use of solar energy, landowners will continue to be faced with solar providers looking for the best locations to install their facilities. A well-drafted solar farm lease agreement will help ensure that your new relationship is as profitable for you as it is for the solar providers.