Grazing in the Grass? Making Sense of the New BLM Rate Structure for Solar Projects

Michael Mendelsohn's picture

There’s one thing about large-scale solar projects - they take up a lot of land. And if you need an undeveloped, sunny spot in the western part of the country, there’s a good chance you will want to chat with the Bureau of Land Management (BLM). Buffalos grazing on BLM land In fact, with 245 million acres under management, BLM is very popular with the solar developer set.

On June 10, 2010, the BLM issued an important policy setting for the first time - the annual land rental rate applicable to solar projects. The rental rate comprises two components: a base rental rate and a megawatt (MW) capacity fee.

The base rental rate ranges from a low of $15.70 per acre per year to a high of $313.88 per acre per year based on the estimated market value of the land as calculated via the National Agricultural Statistical Service. So, whether you propose to put your solar project in Pima County, Arizona (cheap), or Riverside County, California (expensive), the location could have an impact on your bottom line. The rates specified by the BLM are 2010 values; the fees will escalate with inflation. The first annual base rent payment is due on the date of issuance of the right-of-way grant and is prorated for the number of days to the end of the calendar year The MW capacity fee comes in three sizes depending on the technology deployed and based on an assumed capacity factor ranging from 20%–30% and a contract price at $0.06/kWh ($60/MWh). The MW capacity fee is calculated as a 5% federal bond yield and is phased in over a 5-year period upon a project’s commercial operation date.

Table 1. BLM's MW Capacity Fee for Solar Technologies

Technology Assumed Contract Price Assumed Capacity Factor MW Capacity Fee ($/acre-year)
Photovoltaic (PV) $0.06/kWh 20% $5,256
Concentrating PV & Concentrating Solar Power (CSP) $0.06/kWh 25% $6,570
CSP w/ Storage >= 3 Hours Output $0.06/kWh 30% $7,884

According to Ray Brady of the BLM, the fees are designed to represent roughly a 2.5% royalty payment. Based on rough estimates for land use and value of energy produced, it looks like BLM got pretty close (see Table 2). BLM doesn’t have the congressional authority to administer a royalty payment on actual solar project revenues (it does have such authority for geothermal projects and fossil fuel extraction), so it had to design the fees to approximate a royalty level it felt was reasonable given the profitability of the activity. Fossil fuel extraction, for example, requires a 12.5% royalty payment because of the higher value of the product.

The solar rental values are based on an “encumbrance” value of 100%; that is, the land is fully utilized (or at least fenced) so no other activities can take place. BLM’s Brady indicated the agency is currently updating the rental fee for wind projects. Wind projects currently only pay $4,150/MW and $1/acre. The revised wind rental rate will follow the solar structure but be based on a far lower encumbrance value, as wind projects take up only a fraction of the land actually leased and don’t need to be fenced off (allowing grazing or other activities to occur simultaneously).

So, how will the new solar rental rate impact your project? Let’s take a look. Table 2 examines a 20 MW PV project and a 200 MW CSP project, each in a low- and high-cost county. For purposes of the exercise, a few gross assumptions were made:

  • • Land requirement of 8 acres/MW for PV and 7 acres/MW for CSP
  • • Installed cost of $5.00/W for PV and $4.50/W for CSP
  • • PPA energy prices of $0.12/kWh for Arizona and $0.15/kWh for California

Table 2. Projection of BLM Solar Land Fees

Project 20 MW PV 200 MW CSP
Location Pima City, AZ Riverside City, CA Pima City, AZ Riverside City, CA
Assumed Land Use (acres/MW) 8 8 7 7
Base Rental Rate ($/acre) $15.70 $313.88 $15.70 $313.88
MW Capcity Rate ($/MW) $5,256 $5,256 $6,570 $6,570
MW Capacity Fee ($) $105,120 $105,120 $1,314,000 $1,314,000
Total Fees ($) $107,632 $155,341 $1,335,980 $1,753,432
Total Fees per MW ($/MW) $5,382 $7,767 $6,680 $8,767
Assumed Installed Cost ($/W) $5.00 $5.00 $4.50 $4.50
Fees as % of Intalled Costs 0.11% 0.16% 0.15% 0.19%
Assumed Value of Energy ($/kWh) $0.12 $0.15 $0.12 $0.15
Annual Energy Revenues ($) $4,205 $5,256 $52,560 $65,700
Fees as % of Energy Revenues 2.6% 3.0% 2.5% 2.7%

Fees ranged for the two technologies from $5,382 - $7,767/MW for PV and $6,680 - $8,767/MW for CSP. When compared to the assumed energy revenues, fees ranged from 2.5% - 3.0%, which is slightly higher than the BLM target, but other revenues for capacity, environmental benefits, or other products may be available. As a percent of installed cost, PV projects appear to have a modest rental fee cost advantage. As a percent of energy revenues, the advantage appears to go to CSP. Rather than a definitive analysis, the table is meant as a guidepost. In reality, as they say, your mileage may vary.

Happy grazing.