Shining a Light on Solar Projects

Shining a Lighton Solar Projects

Considerations from a Ranch Perspective

By Jason Sawyer

In the last decade, there has been a substantial increase in the development of solar energy projects in the US, and much of the surge in development has occurred in areas that have a history of ranching as a primary land use. Land managers often seek additional income streams and enterprises supported by their land assets, it is important to have a thorough decision-making process to ensure long-term value of the asset is sustained. While the decision to seek or secure a solar energy project ultimately depends on the speci c needs, goals, and objectives of an individual entity, there are some important considerations common to a due diligence process. ese include temporal, physical, nancial, and liability components. As with many decisions facing ranch owners and managers, elements of each consideration may a ect the others, and the overall decision should be considered from a systems perspective.

Temporal considerations

Surface use agreements and energy (oil and gas) leases are familiar to many landowners. Renewable energy leases have similarities to more traditional surface agreements, but di er in some material ways. One di erence is duration. A solar lease project typically has a minimum term of 20 years, and often these terms extend to 50 years. e duration of these agreements makes careful advance consideration very important – landowners will live with the decision for a long time after it is made. Solar lease agreement terms are often divided into phases. e ‘development’ phase is the period from the initial lease through site development, construction, and installation of the solar equipment. e ‘operations’ phase commences when the installation comes online and begins power production. Because the operator is not generating power (nor income) during the development phase, a lower annual lease payment is o ered, which increases during the operation phase. Unlike oil and gas development, which typically occurs relatively quickly, the development phase for a solar project can extend for long periods. Land managers should carefully consider the terms of the lease and the maximum duration of the development phase, as this can substantially alter the true value of the agreement. Additionally, the operations phase may exist as a set term (e.g., 20 years) from the end of the development phase, and so the total length of the lease can be extended beyond expectation if the development phase is lengthy.

Physical Considerations

e acreage required for solar installations varies with the speci c type of installation and location. Use of 8 to 10 acres per 1 megawatt (MW) of generation capacity had been a ‘rule of thumb’ estimator, but improvements in solar technology have reduced the footprint, and current estimates are 2 to 5 acres per MW constructed. e cost of solar generation capacity has also decreased, with current estimates of $1 to $1.50 per Watt; or $1 million per MW. Solar installations

may include fewer total acres than oil and gas or wind leases, but there is an important di erence in these projects. In a typical oil and gas lease, the operating sites (drilling, production wells, and storage sites) occupy a small percentage of the total acreage. e same is true for wind installations. is typically allows concurrent use of the surface with modest restrictions. For example, it is common for grazing to continue on most of the leased acreage, excluding only the footprint of the operating equipment. With solar installations; however, e ectively 100% of the leased site will be utilized, and little or no opportunity for concurrent use exists. is key di erence in the use of the leased surface means that income from a solar lease ‘instead of’ rather than ‘in addition to’ other land use, and access to and through the site will be restricted. It is important for land managers to consider the placement of the site so that it minimizes the interference with other operating activities, such as livestock movement, vehicular access, and the placement of easements and roads for site access. Easements may also be required for installation of substations and transmission lines that support the solar installation; proximity to existing infrastructure is often a determinant of site suitability. While it is obvious that hunting and other access-based activities will be curtailed on the solar site itself, landowners must also consider possible restrictions on activities adjacent to the site. e solar developer may place restrictions in the lease directly, or, due to liabilities resulting from damage caused by adjacent activities, the landowner may be required or elect to limit those activities for some distance around the site. Hunting is an example where the activities of the landowner’s adjacent tenants (the hunters) may cause damage to the solar equipment (a bullet can do irreparable damage to solar panels). Solar leases often also contain ‘negative easements’ to prevent actions that limit or interfere with solar intercept – shading or blocking sunlight from reaching any portion of the site. is can limit adjacent timber production, construction of buildings, or even activities that may generate signi cant dust, like materials extraction. is potential loss of use from the adjacent areas may also be an important consideration, and at least should be an element of lease negotiation. Aesthetic value may also be an important consideration, especially regarding e ects on adjacent acreage. While vegetation bu ers can be maintained around solar installations, there may still be some e ect on the value of adjacent real estate. is should be considered in the total cost and bene t of the project to landowners. e concentrated surface use by solar installations may also generate con ict with other interested parties. For example, mineral interests are often superior to surface interest, and the potential for con ict between a mineral interest with a right to produce from the site where solar equipment is to be installed must be considered. While this can likely be reasonably accommodated, it may be important to seek agreement on potential future mineral development sites and hold those out of the footprint of the solar installation.

Financial Considerations

Due to the physical reality of ‘instead of’ rather than ‘in addition to’ alternate land uses, the value of the solar lease should be considered net of losses in other income streams. While the direct reductions due to grazing removal can be readily estimated, managers should consider how a reduced livestock inventory –assuming that some inventory reduction occurs to maintain acceptable stocking rates on the reduced available acreage – might a ect the distribution of xed costs of the operation. When the acreage represented by the solar lease is a small proportion of the total grazing acres, this e ect may be negligible; however, if the solar lease represents a more substantial portion of the available acreage, the reduction in inventory and resultant escalation of xed costs per animal remaining can make the livestock operation unsustainable. e ‘uncovered’ xed costs can be assigned to the solar project, representing an additional o set to the lease income. Similarly, if hunting activity is a ected beyond the boundaries of the installation, then the total reduction in hunting revenues must be considered against lease income, not just the direct reduction in acreage at a prevailing lease rate. As with most surface use agreements, the landowner will likely require inclusion of a ‘restoration’ provision in the lease, where the solar operator is required to return the site

to its prior condition at termination of the lease agreement. Landowners should consider the likelihood of achieving this objective, and the resultant impact of future land value as a part of the nancial consideration. In Texas, some material property taxation issues must also be considered. Land used for agriculture in Texas quali es for a special valuation based on the land’s productive value rather than its market value, and this di erence in valuation and assessment can be substantial. Once the property is no longer used primarily for the purpose that quali ed it for the special use valuation, the landowner may be liable for a 3-year rollback tax (the di erence between the market value and the special use value assessment) plus interest. e land will be taxed at market value going forward for the duration of the solar project life. Even if the project is terminated and the land reclaimed, it will take at least 5 years for the landowner to regain the special valuation, during which the property is taxed at market value. It is important for landowners to be aware of this liability and to include mitigating provisions in the lease agreement. Overall, the present value of the land considering the current income stream and projected appreciation should be compared to a present valuation under the solar lease over a realistic life, considering the duration of the development and operations periods and payments, future land value, and tax liabilities to generate an objective comparison of the total net value of the project.

Conclusion

Entering into a solar lease agreement is a generational decision. It is important that a framework for decision making that considers multiple impacts be developed, and that the physical and nancial elements be jointly considered. It is useful to use a comparison of present values under a realistic ‘business as usual’ scenario and the solar lease scenario, to best illustrate the relative value of the solar lease over its long lifetime. Due to the complexity of lease agreements and the importance of terms in shaping the key considerations, landowners should engage appropriate counsel to aid in developing the speci cs of the decision framework. is framework allows landowners to consider e ects of this change in land use on the entire system, and to make the best decision for their speci c conditions and circumstances.

DeLaney Joins KRIRM Faculty, continued...

In addition to Dave’s experience at King Ranch, he worked at the third largest cattle feeding entity in the United States, Friona Industries, L.P. from 1992-2003, serving as General Manager between 1996 and 2003. Prior to that role, he was the Operations and Procurement Manager of Corsino Cattle Company of Amarillo, Texas. Dave DeLaney earned a B.S in Biology from the University of Richmond and a M.S. in Animal Nutrition from Texas A&M University. In 2021, Dave was awarded an Honorary Doctorate from Texas A&M UniversityKingsville. DeLaney has served on the Board of Directors for the Texas Cattle Feeders Association (TCFA), the National Cattleman’s Beef Association, and the Texas Southwestern Cattle Raisers Association (TSCRA). Beyond that, he has served on the Executive Committee of Texas Wildlife Association, TSCRA, and TCFA. Dave DeLaney is among the most recognized international experts in ranching.

Our team is proud to welcome Dave DeLaney. In our mission to sustain our ranching heritage, we know that DeLaney’s experience and passion will positively impact all aspects of our teaching, innovation, and outreach. David S. Delaney - KRIRM Practitioner in Ranch Management