Photovoltaic (PV) systems may meet many of the important criteria to be considered real property — a status that could make them eligible for easier financing — a new report by the U.S. Department of Energy's National Renewable Energy Laboratory, contends.

The NREL report, "The Technical Qualifications for Treating Photovoltaic Assets as Real Property by Real Estate Investment Trusts (REITs)," points out that PV systems aren't meant to be moved — thus arguably achieving the threshold of "permanence;" and don't involve mechanical energy — thus possibly meeting the criteria for "passiveness." Those are two of the criteria that could gain PV status as "real property," similar to houses or railroad tracks, as opposed to personal property, such as bulldozers or trains.

Currently, PV systems are not eligible for a major source of public funding: Real Estate Investment Trusts (REITs) which are popular among those seeking investments in real assets. Such investors hope to see stable, long-term returns typical of real assets.

The stakes are potentially huge. The U.S. REIT market is comprised of more than 100 funds with more than $450 billion in assets. Raised as a possible vehicle for public financing in recent roundtable discussions (see Mobilizing Public Markets to Finance Renewable Energy Projects:  Insights from Expert Stakeholders),  REITs are of broad interest to developers, bankers and fund managers.

"The roundtable discussions identified REITs as strong potential near-term opportunities to expand financing to the broader public markets," according to Douglas Arent, Executive Director of the Joint Institute for Strategic Energy Analysis at NREL, and lead convener of the roundtables.

That ineligibility leaves PV contending for loans in the private market where lack of supply and access allow investors to demand rates of return that can be three times higher than seen in public markets, said David Feldman, an NREL analyst and co-author of the report.

REITs have many benefits, including spreading risk over a large number of projects, and providing access to a wider range of investor classes such as pension funds and foreign and retail investors. REITs also own a large amount of commercial real estate that could host PV systems.

The chance to borrow money at much lower costs would mean reduced costs for PV power and could prompt a boom in rooftop solar installations and utility-scale PV projects.

"We're not trying to make the decision — the Internal Revenue Service will do that," Feldman noted. "We're giving them the technical information they need to make the decisions."

The report notes that power generating systems traditionally haven't been eligible for the "real property" moniker. But PV could be considered a special case. They're "passive" in that they don't require a conversion to mechanical energy in order to supply electricity to a home or office.

Other forms of energy — such as coal, natural gas, wind and concentrating solar power — use the power source to turn turbines which then send electricity to customers. The "passivity test" is meant to distinguish between real property such as land or factories and other property such as factory equipment and vehicles.

PV systems always have been designed to be "permanent," lasting 25 years or more. It doesn't make economic sense to move them, particularly now with the recent slide in the costs of solar modules.  Now, with the installed cost at about $4 a watt, and the cost of the solar module at about $1 a watt, the so-called "balance of systems" is the lion's share of the expense. For that reason, it makes little economic sense to move a PV system from one rooftop to another. And solar-leasing companies are saying as much — opting to renegotiate with the homeowner when the lease is up, rather than taking the system off the roof and putting it somewhere else.

One part of a PV system that arguably is "impassive" is the inverter that changes direct current from photons to alternating current that can be used in the home or office. But inverters operate very similarly to a transformer within a transmission system, and the IRS has deemed that transmission systems can be considered real property. The report also noted that inverters may use fans for cooling, but their primary functions are performed without using mechanical energy.

PV also can be considered an "integrated" system because its performance would deteriorate dramatically without its mounting structure, and it wouldn't perform at all without modules, inverters, wires and other components that integrate the system into a whole, the report said.  For that reason, there is an argument for all the equipment to be treated the same – either as real property or personal property.

"Whether these similarities to 'real property' are the only factors the IRS will consider when making its decision — we don't know," Feldman said. "There are similarities and differences to other real property assets."

A reclassification of PV as realty "has the potential to disrupt current financing practices in the solar market today," the report concludes.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.