An Investment-Driven Solution to Green Development Problems: The S-REIT (Part 1 in a Series)

This post is Part 1 in a series and is excerpted from a recent thesis on the applicability of the REIT tax structure to large-scale solar development. Parts 2 through 5 may be found at the following links: Part 2, Part 3, Part 4, Part 5.

Though the environmental movement has undoubtedly gained steam over the past few decades, both in the US and abroad, the world’s natural resources are still being depleted, with projections suggesting that supply will struggle to keep pace with demand as the developing world catches up to the West. 1 Oil, coal and natural gas, resources that account for more than 85% of energy consumed in the US 2, are becoming more difficult and dangerous to find and extract and many sources of these minerals are controlled by dictators and unfriendly states. 3

Because of these factors and others, many experts see the future of energy lying not in fossil fuels, but in so-called new renewable resources such as wind, thermal and solar power. The latter holds particular promise. Indeed, according to some projections, the supply of solar energy is so great that the power of the sun could be used to meet the entire global demand for energy in the future. For example, Amory Lovins has observed,

‘The sunlight falling on the Earth every ~70 minutes equals humankind’s entire annual energy use. An average square meter of land receives each year as much solar energy as a barrel of oil contains, and that solar energy is evenly distributed across the world within about twofold. The U.S., “an intense user of energy, has about 4,000 times more solar energy than its annual electricity use. This same number is about 10,000 worldwide [, so] …if only 1% of land area were used for PV, more than ten times the global energy could be produced….”’ 4

A scenario where solar energy exclusively provides the world’s energy supply may seem closer to science fiction than current reality. However, the potential alone of the numbers above should provide a strong incentive to maximize solar research and the deployment of solar technology. In addition to the future of solar and the aforementioned concerns surrounding fossil fuels there are a number of other short-term benefits to shifting energy demand toward solar energy. Economic benefits include job creation 5, and the potential economic growth frontrunner nations could gain as leaders in providing solutions meeting the globe’s growing demand for solar products. 6 Economies maximizing the use of solar technology could also benefit short-term from the evening out of supply curves, providing more certainty and less price fluctuation than those which are fossil fuel dependent.

However, despite great potential and inherent benefits both in the short- and long run solar power remains an underdeveloped resource. In fact, all new renewables, a list including wind and some other minor sources in addition to solar, met only 2% of global energy demand as of 2007. 7 There are many reasons for this. For one, fossil fuels are still heavily subsidized, leading to price advantages over renewables in many cases. 8 Additionally, traditional forms of regulation at both the transmission and distribution levels ‘tend to favor continuously supplied centralized fossil fuel generation over renewable generation, that is often more distributed and intermittent…’ 9 Other factors hindering the development of solar as a leading resource include political opposition from utilities due to distribution management issues and producers of fossil fuels who are concerned that future supply from renewable resources could cut into profits. 10


Because of these hurdles, and despite the current schemes used in the US and elsewhere to incentivize solar and renewable development, there is room for innovative ideas and structures that will stimulate the rate and breadth of solar development globally. One potential solution would be to use tax structures which already exist and benefit the commercial real estate market to stimulate large-scale solar development. Similar to the benefits that real estate investment trusts (REITs) have brought to both commercial real estate owners and investors, solar investment trusts (SITs) could bring solar development to the masses, increase capital flows to the space and incentivize lawmakers give the solar industry the same treatment as fossil fuel counterparts.

Changes and/or additions to existing laws would be required to make this vision of a solar investment a reality. However, the timing and environment seem right. REITs and solar companies have already formed alliances as real estate companies look to reduce costs and appeal to potential tenants. This has lead to familiarity with solar development among the type of investors who might find SITs attractive. The Reinvestment and Recovery Act of 2009 included several provisions for the stimulation of green growth, with a potentially updated and more efficient grid making large-scale solar more feasible. In addition, pioneers are already developing other investment structures to stimulate green development, indicating that there is a market for innovative solutions. However, none of the solutions currently in the marketplace are geared toward the wider investing public, and that is where a REIT-like solar investment trust model could find its niche.

1. US Energy Information Administration, see long term energy supply projections available at http://www.eia.doe.gov/oiaf/forecasting.html compared to demand projections available at http://www.eia.doe.gov/oiaf/ieo/ieohecon.html
2. US Department of Energy, available at http://www.energy.gov/energysources/fossilfuels.htm
3. CIA World Factbook, available at https://www.cia.gov/library/publications/the-world-factbook/rankorder/2178rank.html
4. Amory Lovins, Four Nuclear Myths, available at http://www.rmi.org/rmi/Library/2009-09_FourNuclearMyths (citing World Energy Council, www.worldenergy.org/publications/survey_of_energy_resources_2007/solar/720.asp. and USDOE and Electric Power Research Institute, Renewable Energy Technology Characterizations, TR-109496,1997, www.nrel.gov/docs/gen/fy98/24496.pdf, at p. 4-19.)
5. US Energy Information Administration, see Employment in the Photovoltaic Manufacturing Industry, 1999 – 2008, available at http://www.eia.doe.gov/cneaf/solar.renewables/page/solarreport/table3_16.pdf
6. US Energy Information Administration, see Export Shipments of Photovoltaic Cells and Modules by Type, 1999 – 2008, available at http://www.eia.doe.gov/cneaf/solar.renewables/page/solarreport/table3_13.pdf
7. Katherine Kennedy, The Importance of Renewable Energy, pg. 106, UNEP Handbook for Drafting Laws on Energy Efficiency and Renewable Energy
Resources, United Nations Environmental Program (2007)
8. Id. 106.
9. Id. 106
10. Id. 107