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The development of utility-scale, grid-connected renewable energy projects is a complex venture encompassing multiple workstreams which must advance in parallel, each with their own subject matter experts and competency requirements. While any one individual rarely has specialized knowledge across all workstreams, it’s valuable for a project team to have a working understanding of the process as a whole.
In LevelTen’s experience, renewable project development has six foundational pillars teams must navigate in order to bring their projects to market:
1) Land and Site Control
4) Design and Engineering
5) Power Purchase Agreement (PPA)
6) Project Finance
Each of these six pillars exhibit their own binary risk which, if not properly understood and managed, can derail a project that might have otherwise succeeded. It’s our goal to ensure developers have the tools and knowledge they need to bring more renewable energy projects online in an efficient and gainful manner.
An intentional and coordinated process across all workstreams with a full appreciation of the complexities each of the first five pillars bring will result in a fully “de-risked” project, ready to be funded (the sixth pillar) and constructed to bring more carbon-free electricity onto the grid. Below, we provide perspective on managing the risks developers should bear in mind as they progress through each phase of project development.
Pillar 1: Land and Site Control - “Focus on the little things early”
Site control involves securing the rights to use property to develop, construct, and operate a project for the term of the project’s expected life. The governing document for site control is typically an option or lease agreement, which gives the developer the right to lease or purchase a property at some point in the future. Option or lease agreements typically provide for a low- or zero-cost period for early-stage development (3-5 years), thereby aligning cash cost for the site lease to when the project will begin to generate revenue. Property taxes, tax abatement agreements, and clarity on who pays which taxes, must also be addressed.
Fatal flaws in this stage can arise in the form of easements, mineral rights, pipelines and railways, drainage tile, and other issues the property owner may not have prior knowledge of. A title report and an ALTA (American Land Title Association) survey can provide significant comfort that site control is de-risked. What’s more, a positive relationship with the landowner early on, and preliminary diligence into possible problems, can mitigate risks later on when significantly more development capital is on the line. Real estate and title aspects can be extremely nuanced, and experts should be engaged during this process.
Pillar 2: Interconnection - “The jump ball”
With site control handled, the next crucial step is ensuring that once built, your renewable project can be connected to the larger grid. In order to do so, an interconnection agreement from your region’s ISO/RTO will be needed.
The process of attaining an interconnection agreement has several steps which vary slightly depending on the regional authority. In general, it can be summarized as: 1) application submission, 2) feasibility study, 3) system impact study, 4) facilities study, and 5) interconnection agreement.
Value for a project is created out of the gate with an application to the ISO/RTO, and acceptance of the application provides the awarded developer with a monopoly on the ISO/RTO’s queue position for some time. However, once the project has been accepted in the queue, attention turns to system impact costs, which can take time and requires regular premium payments to the ISO throughout various stages of study.
Some degree of pre-application due diligence and analysis can be conducted by knowledgeable transmission experts, but ultimately, the formal interconnection study conducted by the local ISO/RTO will always get the final say. Project risk management requires avoiding significant expenditure on other workstreams until the system impact costs have been verified.
Pillar 3: Permits and Environmental Considerations - “Not in my backyard”
Federal, state, and local jurisdictions require a host of environmental and construction permits before project construction begins, including permits for various species of concern, and habitats such as wetlands and forests. Permits may also be required from historical, cultural, or archeological authorities, the FAA, and federal and state departments of transportation. Property tax agreements can also be included as a permitting workstream, and other jurisdictional taxes also need to be considered and managed.
Studies and surveys require significant lead time, and hearings followed by permit issuance and statutory appeals processes can be lengthy and expensive. Early and active engagement with the local community and permitting authorities will not only build regional support, but will also make your project more attractive to corporate offtakers who are increasingly scrutinizing how developers work with local communities. Best practices include using local workforces, implementing organizational diversity measures, going above and beyond with project siting to ensure minimal wildlife impact, and ensuring supply chains are free from human rights violations. Such efforts will help build positive local relationships, will make a project more attractive to potential buyers, and above all, creates many positive impacts beyond the carbon-free electricity a project brings online.
Know where you are going from day one with a comprehensive permitting matrix, and identify environmental studies with long lead times early. Planning proactively and identifying potential friction points can dramatically expedite the permitting process.
Pillar 4: Design and Engineering - “That dog don’t hunt”
A negative deviation of 5-10% in construction cost can vaporize a developer fee. Fortunately, staging design and engineering is under the control of the developer. Timing and cost can be staged strategically to decrease uncertainty around cost of construction, and increase certainty with site optimization and energy production.
A feasibility study should be conducted early on in order to rationalize additional expenditures across workstreams. An experienced engineering firm — ideally one with a local presence and familiarity with the AHJ’s (authority having jurisdiction) requirements — will be required for 100% design, Issued for Construction (IFC) documents. Early identification and engagement of the design team will minimize unforeseen expenses as the project advances to construction. Onsite wind and solar resource assessments are also needed to accurately estimate the project’s likely net capacity factor, and to secure financing.
Financeability requires a high degree of certainty on the construction costs and project performance. Balance of plant and equipment contracts, whether provided by the owner’s engineering firm or bid out to third parties, are highly complex. Include experienced partners in both contract structuring and construction management to manage these complexities.
Pillar 5: Power Purchase Agreement (PPA) - “Know your node”
Discussion of PPA contracting presupposes that the developer has assessed and reassessed the intrinsic power economics of their project throughout the project development period, including nodal energy, basis risk, project generation capacity (i.e., REC creation), and potential ancillary services revenue that might accrue to the project. In addition, it assumes that the production resource has been technically and probabilistically assessed along the way. The revenue a PPA brings will support the project cost (as well as a reasonable development fee), and the intrinsic value of this revenue underpins the profitability of the project. A PPA, or another form of price hedge, is merely a risk transfer mechanism which mitigates cash flow volatility for the project finance market.
Financing markets still demand a 10- to 15-year PPA, largely a product of tax equity requirements for hedge coverage beyond the tax equity clawback period and/or flip date. For more information on PPA structures, visit Acceleration, the LevelTen Blog.
Pillar 6: Project Finance - “Your project is a financial instrument”
Essentially, the fully mature development project is a structured financial instrument for the project finance market. Whether financed directly or sold to an infrastructure fund or a large IPP, each party is held to capital market dynamics and discipline. The project finance market is a wicked taskmaster requiring a battery of third party reports and confirmatory analysis, such as a market study, basis study, resource study, independent engineers report, and more.
Delivering a project without the requisite boxes checked is akin to delivering no project at all (as in, no financing and no construction). In the present environment, projects delivered to the financing market correctly have an essentially infinite amount of low-cost capital available to them for construction. The developer fee, value add, or profitability to the project developer accrues at financial close, depending on project economics and capital markets demand versus alternative investments in the market. Project finance requirements should be understood from the early stages of the project, and we recommend engaging market-savvy experts who are in regular dialogue with institutional investors in cash equity, tax equity, and debt financing.
Developing renewable energy projects takes a great deal of foresight, strategic planning and prioritization, and thoughtful considerations regarding the many stakeholders involved. With renewable energy demand rising rapidly, the project development landscape is only poised to become more competitive, and proactive management of these six pillars will be essential in ensuring your organization’s continued success in this exciting industry. AtLevelTen, we know the success of renewable developers is essential in creating a sustainable future, and our project development experts are here to support you and your team as you continue the important work you do.
For a deeper dive into project development fundamentals, please download our free PDF guide, “The Six Pillars of Project Development,” by filling out the form below. If you have any questions about participating in the LevelTen Platform, you can reach us at email@example.com.