Financing Of Renewable Energy Projects – Developing grid-connected renewable energy projects is a complex task involving multiple work streams running in parallel, each with its own subject matter experts and skill requirements. While it is rare for one person to have specialized knowledge of all work processes, it is useful for the project team to have a general understanding of the process.
In LevelTen’s experience, renewable project development teams have six fundamental pillars to bring their projects to market.
Each of these six pillars presents its own binary risk that, if not properly understood and managed, can derail an otherwise successful project. Our goal is to ensure developers have the tools and expertise they need to bring more renewable energy projects online efficiently and profitably.
A deliberate and coordinated process across all work streams, fully understanding the intricacies involved in each of the first five pillars, creates a fully “de-risked” project for funding (Pillar Six) and builds to deliver more carbon-free. Electricity to the grid. Below we provide a look at risk management that developers should consider as they move through each phase of project development.
Site control involves securing the rights to use the property to develop, construct and operate the project for the expected life of the project. The deed for site control is usually an option or lease, which gives the developer the right to rent or buy the property at some point in the future. Option or lease agreements provide a period of low or zero costs for development in the first stages (3-5 years), thereby aligning the land lease cash with the time when the project begins to generate income. Property taxes, tax abatement agreements and transparency on who pays what taxes need to be addressed.
Fatal defects at this level can occur in easements, mineral rights, pipelines and railroads, among other issues that the property owner may not be aware of. An ALTA (American Title Association) title report and survey can provide great comfort that control of the land will not be compromised. In addition, early positive communication with the landlord and anticipation of potential problems can reduce risk when deploying large amounts of development capital. The aspects of property and ownership can be overwhelming and professionals should be involved in this process.
With site control, the next important step is to ensure your renewable project is connected to the larger grid once it’s built. A liaison agreement from your regional ISO/RTO is required to do this.
The process of obtaining a liaison agreement has a number of steps that vary slightly depending on the regional authority. Generally: 1) Application Submission, 2) Feasibility Study, 3) System Impact Study, 4) Facility Inspection and 5) Communication Agreement.
A project fee is generated out of the gate for an ISO/RTO application and acceptance of the application gives the estimated developer a monopoly on the ISO/RTO queue space for a limited period of time. However, after the project is accepted into the queue, the focus changes to the system impact costs, which takes time and requires regular premium payment to the ISO at different stages of the study.
Due diligence and pre-application due diligence can be done by knowledgeable broadcasters, but ultimately the formal communication study conducted by the local ISO/RTO will always have the final say. Project risk management requires avoiding significant costs in other work streams until system impact costs can be determined.
Federal, state, and local jurisdictions require a variety of environmental and building permits before project construction begins, including for a variety of critical species and habitats such as wetlands and forests. Permits may be requested by historical, cultural or archaeological authorities, the FAA, and federal and state departments of transportation. Property tax agreements may be included as part of the licensing process, and other legal taxes must also be assessed and managed.
Studies and investigations take a long time, and the hearings that follow through the permitting and legal 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 also increase how developers work with communities and make your project more attractive to corporate authors. . Best practices include using local labor, implementing organizational diversity initiatives, going beyond project sites to ensure minimal impact on wildlife, and ensuring supply chains are free from human rights abuses. Such efforts help build positive relationships, make a project more attractive to potential buyers, and most importantly, create many positive impacts from the carbon-free electricity a project brings to the grid.
Know where to go from day one with a comprehensive permit matrix and identify long-term environmental studies in advance. Advance planning and identifying potential conflict points can dramatically speed up the permitting process.
A negative 5-10% difference in construction cost can affect a builder’s fee. Fortunately, the design and engineering of the site is under the control of the developer. Time and costs can be strategically placed to reduce uncertainty around construction costs and increase safety by optimizing the environment and energy production.
A feasibility study should be done early to rationalize additional costs on all work streams. An experienced engineering firm – ideally with local presence and familiarity with AHJ (Having Jurisdiction) requirements – is required for 100% design of construction documents (IFC). Early identification and involvement of the design team as the project moves through the construction process minimizes unexpected costs. An on-site assessment of wind and solar resources is also required to accurately estimate the project’s potential and reliable funding.
Financing requires greater certainty in construction costs and project performance. The balance sheet for plant and equipment contracts offered by the owner’s engineering firm or auctioned to third parties is very complex. Engaging partners with experience in both contract structuring and construction management to deal with these complexities.
Discussion of PPA contracts states that the developer has assessed and re-evaluated the project’s internal energy economics during project development, including cross-sectional energy, baseline risk, project generation capacity (generation of RECs) and potential revenue from ancillary services. Adding to the project. He also thinks that the production resource is technically and possibly evaluated on the way. The revenues generated by the PPA will support the cost of the project (as well as a reasonable development fee), and the intrinsic value of these revenues will support the profitability of the project. A PPA, or other hedging mechanism, is simply a risk transfer mechanism that reduces cash flow volatility for the project finance market.
Financial markets still require 10-15 year PPAs, mainly to cover tax capital requirements yield protection beyond the tax return period and/or return date. For more information about APP frameworks, visit LevelTen’s Accelerate blog.
Basically, the fully matured development project is a structured financing instrument for the project finance market. Whether financed directly or sold to an infrastructure fund or a large IPP, each entity is subject to capital market dynamics and discipline. The project finance market is a vicious leader that requires a battery of third-party reports and corroborating analyses. Market research, feasibility studies, resource studies, independent engineering reports and more.
Submitting a project without the required boxes checked is the same as not submitting a project at all (such as finance and construction). In today’s environment, there is an unlimited amount of low-cost capital available for construction of projects offered to the financial markets. The developer’s payoff, the project developer’s value creation or benefit increases with financial proximity, which is related to the economics of the project and the capital markets’ demand for alternative investments in the market. Project financing requirements should be understood from the initial stages of the project and we recommend the involvement of knowledgeable market professionals who regularly communicate with institutional investors in cash equity, tax equity and equity financing.
Developing renewable energy projects requires a lot of foresight, strategic planning and prioritization, and careful consideration of multiple stakeholders. As demand for renewable energy rapidly increases, the project development landscape is set to become more competitive, and proactively managing these six pillars will be critical to ensuring an organization’s continued success in this exciting industry. At LevelTen, we know the success of renewable developers is critical to creating a sustainable future, and our project development experts are here to help you and your team continue the important work you do.
For a deeper understanding of the basics of project development, download our PDF guide, The Six Pillars of Project Development, by filling out the form below. If you have any questions about participating in the LevelTen Forum, please contact us at [email protected]
Patrick is an experienced leader in business development and energy finance with extensive experience in strategy, capital markets and transaction execution. His professional background includes project and procurement finance;
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