3 New Laws Will Impact the Greening of Colorado Real Estate

The Colorado State General Assembly’s 2021 session passed three laws impacting the greening of Colorado real estate – Electric Utility Promote Beneficial Electrification Act (SB21-246), Adopt Programs Reduce Greenhouse Gas Emissions Utilities Act (2B21-264), and the Public Utilities Commission Encourage Renewable Energy Generation Act (SB21- 261), all of which aim to help achieve Colorado’s greenhouse gas emission reduction goals.

SB21-246: Promoting beneficial electrification through incentives. The Electric Utility Promote Beneficial Electrification Act incentivizes electric equipment in buildings by directing utilities to make plans to help consumers replace gas and propane appliances with efficient electric appliances (electric heat pumps, heat pump water heaters and induction stoves). The goal is to reduce indoor greenhouse gases and improve indoor air quality.

SB21-264 – Clean heat plans. The Adopt Programs Reduce Greenhouse Gas Emissions Utilities Act aims to reduce the greenhouse gas emissions associated with providing fuel to homes and businesses. There is an overarching goal to reduce indoor greenhouse gasses and improve indoor air quality.

The effect of both laws will be that utilities will play a key role in supporting the private marketplace to accelerate the adoption of high-efficiency electric equipment by ramping up their incentive programs. In June, utilities will submit plans for increased customer incentives to the Public Utilities Commission, which then will be subject to stakeholder engagement. The goal for a commercial building using gas heating is to switch to a high-efficiency electric heat pump system at the same cost as a gas system. The utility incentives will cover the extra cost of switching systems. Similar programs would exist for newly constructed buildings and the hope is that the incentives would cover the difference between a gas system and a high efficiency heat pump system and high-efficiency electric heat pump water heater.

According to Howard Geller, a senior policy adviser to the Southwest Energy Efficiency Project, “Taken together, the beneficial electrification and clean heat bills passed by the Legislature last year should motivate gas and electric utilities in Colorado to greatly expand their support for electric heat pumps and other energy-efficient electric appliances. This, in turn, will cut natural gas use, cut climate pollution, improve indoor air quality, and save consumers money.”

SB21-261 – Encouraging on-site renewable energy generation. The Public Utilities Commission Encourage Renewable Energy Generation Act removes limitations on rooftop solar, raising the allowable capacity of customer-sited renewable energy generation facilities, modernizes net metering, reduces the cost of solar installation and advances the adoption of battery storage technology. The act removes former limitations on the size of behind-the-meter solar (i.e., rooftop solar), which currently cannot exceed 120% of a customer’s historical annual usage. The limit for a solar-battery system is now twice the customer’s projected future use. This is important, as it considers increased electricity use due to electric vehicle charging and electric heat pumps, water heaters, etc.

Additionally, the law allows a company to have its solar panels located elsewhere on noncontiguous property (for example, on the edge of town where land is more available, rather than limited to only on the property it serves, as long as such land is the service territory of the qualifying retail utility). Thus, owners or lessors of multiple properties can now offset one property’s energy bills with on-site generation from another property.

The act expands the exemption from regulation as a public utility to those who sell power produced on site or in a master meter operation. State regulations currently provide that MMOs (such as an apartment building) may not charge end users any amount above what they are billed for electricity supplied by the utility. The act grants an exemption for MMOs that sell power from distributed generation. In short, the law is now clear – a commercial property owner can sell electricity to its tenants without being regulated as a utility.

How will this change the way your lease looks? In a triplenet commercial lease for a multitenant building with one meter, utilities usually are charged in proportion to the tenant’s percentage of ownership as a pass-through cost. In an NNN lease with submetered spaces, each tenant can pay the utility provider directly (and common area utility costs are billed as part of common area maintenance charges). This traditional way of billing for utilities creates the “split incentive” issue, where one party pays and the other party benefits (i.e., the landlord pays for the solar panels, but the tenant benefits by way of reduced energy costs). Another challenge was that until SB-261, it was not clear that landlords could charge tenants for the electricity produced on-site via a solar installation. Thus, green-minded landlords with solar installations have adopted creative leasing structures. For example, the landlord could set an energy budget for each tenant, the cost of which is included in the tenant’s rent (which would be higher than in an NNN situation), and then the tenant pays for any excess energy that must be purchased from the utility (a modified gross lease structure). Alternatively, a landlord could require its tenants to enter into a power purchase agreement, selling electricity to tenants for a fixed rate at or below the rate offered by the utility.

The question before the PUC is what leasing structures are possible now that it is clear that landlords can supply on-site (or off-site) generated solar power to tenants. Must the landlord charge the rate charged by the utility? What costs can be included? The PUC wil adopt regulations by Dec. 31 that will give more detail about how SB21-261 will go into effect, including how landlords of multiunit buildings and tenants in multiunit buildings will be able to utilize production from a netmetered retail, distributed generation installation.

This article was originally published by the Colorado Real Estate Journal.