TODAY’S STUDY: HOW TO DEVELOP A SOLAR OR WIND PROJECT

A Framework for Project Development in the Renewable Energy Sector

Robert Springer, February 2013 (National Renewable Energy Laboratory)

Executive Summary

The development of renewable energy generation projects has become attractive to a variety of energy consumers, installations and large institutions, land and real estate owners, and others (collectively referred to herein as the project "sponsor" or "host") who recognize the economic, environmental, and/orsecurity potential of renewable energy. Whether the aspiration is for projects large or small, and regardless of whether the host will ultimately finance and build the project themselves, each will find it necessary to take on the role of project developer during the early stages of project development.

The size and diversity of potential project sponsors is significant, including but not limited to, the federal government and the military (including all its agencies and departments, facilities and installations); public and private universities and colleges; local and state governments; tribal nations; private and public companies from sole proprietorships to Fortune 500 companies; real estate investment trusts to private individuals; nonprofits and nongovernment organizations. It is rare to have resident professional energy project development experience within the vast majority of these new market participants—many of whom have largely dealt with electrical energy by simply "paying the bill," and now are motivated to consider the relatively radical change of "producing their own," or at least participating in a project in some meaningful way.

The concepts, descriptions, diagrams, and acronyms developed and described herein are meant to provide a contextual framework as well as a systematic, repeatable process to assist a potential project sponsor in understanding and navigating early-stage project development. Professional project developers will recognize these concepts and hold them as intuitive and even obvious, though the fundamentals of this specialized field are rarely written down and defined as they are here.

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Project development is primarily viewed as an entrepreneurial activity, subject to significant risks and unknowns while requiring ongoing investment of time, financial, and even political resources toward output that consists of completed projects.

Prior to embarking on the specifics of any particular project, it is essential to gauge the fundamental market characteristics that create the conditions for success and provide sufficient support to generate what we call "project motivation." A motivated project is one that has a clear pathway to success and enough opportunity that it simply cannot be ignored. It is driven by some baseline need or interest in completing the project, the fundamental economics of energy in the area, existing policy environment (both internal and external to the project sponsor), and available commercial technologies and renewable resource. This assessment and communication of fundamental project motivation is referred to using the acronym "BEPTCTM" for Baseline, Economics, Policy, Technology, and Consensus. Consensus with project stakeholders is ideally built around the four previous characteristics.

With project motivation clearly established and communicated using the BEPTC framework, one can seriously approach a specific project with purpose and confidence that the first incremental investment in the project (in time, financial or political capital, etc.) is worthwhile. It is immediately clear that all expenditures are subject to the risk of complete loss, and this risk must be recognized and managed. In response, a key tenet of early-stage development is fatal flaw analysis. To manage development risk, fatal flaws absolutely need to be identified and analyzed quickly and accurately to avoid investment of scarce risk capital into "bad projects" and to conserve these resources. This concept shapes the process of moving a development project forward.

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Project development now begins in earnest; it is essential to have a clear understanding of the overall context and operating environment, a framework with which to organize and interpret information, an iterative process and fatal flaw analysis that mitigates risk while incrementally moving the project forward, and tools that support and inform decisions, monitor project motivation, and do so in a regular, repeatable, disciplined manner.

NREL has defined the seven core subject areas of renewable projects to be: Site, Resource, Offtake, Permits, Technology, Team, and Capital—and describe each in more depth in the sections that follow. These core areas form the informational framework, and are the source of the acronym "SROPTTCTM," which has come to represent collectively all of the environment, framework, processes, and tools of project development.

The principles and concepts represented by BEPTC and SROPTTC in their entirety are universal to the project development process and essential in successfully managing development risk…

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…Baseline. First, state the fundamental reason(s) the project is necessary or desired. An objective analysis of energy supply reality and/or clear statement of specific goals are typically where this baseline can be found. The simpler the statement is the more powerful and useful it is. A colorful example for the state of Hawaii might be, “For energy and economic security, we can no longer rely on burning tankers of foreign sourced petroleum on a month to month basis.” In this single statement, the motivation is clearly articulated and very hard to get away from—this type of clarity captured in one sentence provides a grounded, fundamental statement of purpose. A general rule of thumb would be to define the baseline within one or two sentences.

Economics. A reasonable and objective analysis of fundamental energy economics must be established both in terms of the total costs of acquiring energy from existing sources (selfgenerated or utility based) and from the proposed sources as comparison. If there are negative economic differences between the existing and proposed sources, even just in the initial years of operation—and those differences are not acknowledged and dealt with upfront—the project will suffer later in the process. Relying on the project development process and/or a financing miracle to overcome the economics will rarely, if ever, result in success. As a rule of thumb, if a project does not have 20% to 30% of margin above general cost estimates to accommodate profit and uncertainty at the concept stage it very well may not have supportive economics. Should this be the case, mitigation steps or a strategy to alleviate this must be stablished.

Policy. Federal, state, local, and regulatory policy environments must be examined for barriers and addressed prior to expending significant resources pursuing a project. The project and steps taken to mitigate, remove, or deal with these policies to create the conditions for success are imperative. Without identifying policy issues and, at a minimum, forming strategies and tactics to overcome these challenges, investing resources in a project is at best risky and needs to be acknowledged as such, and at worst, ill-advised and likely will be lost altogether.

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Technology. Fundamental technology assessments and analysis may be the most straightforward part of establishing project motivation. Resource assessments that characterize the renewable resource for a specific site might be available from a simple desktop study. Assessing commercial technologies, reliability, and bankability may require more, but still relatively minimal, effort. Once a portfolio of available resources and commercial conversion technologies has been established, it is necessary to defend against nonbankable or unrealistic early-stage technologies from confusing or distracting the project leadership or stakeholders from making decisions and taking action.

Consensus. Building off of the final point of the Technology section above, communication and consensus-building among stakeholders of a project is vital. To generate buy-in, a common understanding of the project fundamentals, and a unification of purpose is essential; the project development process will involve many parties’ input, investment, and possibly compromise. Without consensus and communication efforts, precious resources will not be made available, and stakeholders can become adversaries to the project before it even begins—the stage when a project is most vulnerable…

…Site. Without a physical location for the physical assets of a renewable power plant, a project will not happen. Beyond this simplistic idea comes the technical aspect of what financeable site control entails including, but not limited to, conveyed property rights, legal definition (through legal descriptions and/or accredited surveys), assignability (relating to financing requirements), length of tenure, terms and conditions, default and cure clauses, and other fundamental contracting issues. Furthermore, there are the obvious physical constraints of a site, which include but are not limited to: slope, vegetation, soil conditions, infrastructure, access, associated resource impacts, etc. All of these items must be considered in the context of site planning, highest and best use, and conflicting or competitive uses for the land that may relate to the mission of the facility itself. The level of detail necessary in all of these areas is on a sliding scale over time—starting at a broad level and ending with highly detailed information.

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Resource. The renewable resource being considered for the project needs to be characterized and understood at a level of detail and confidence appropriate to the stage of development the project has progressed to. For early feasibility assessments, a general assessment of resource availability is used, whereas for investment grade studies, highly detailed hourly or subhourly data and analysis may be used to establish and support resource availability, quality, and characteristics within a tight range of certainty. Developers may use maps generated by NREL for early-stage resource assessment, moving to technical correlation using 12 months of on-site data with long-term computer modeling of satellite-based datasets.

Off-take. The buyer of both the energy and any other characteristics of output (like renewable energy credits) must be established and ultimately secured by contract, often a power purchase agreement (PPA) or other similar contracting method. Because of the complexities of financing and building renewable projects, we use the general term “offtake.” This term impliesthat there is an economic and executable agreement by the project parties, and that it is ultimately confirmed by written contract. If the project is in a regulated market, approval by a public utilities commission or other body may also be required. There are many details to off-take, many pathways to follow to a PPA agreement, and many financing implications along the way to generating a fully executed off-take contract. Embedded in this subject area is also the issues of transmission and interconnection, relating to the direct and ancillary infrastructure and agreements required to “get to market.” Confirming and ultimately consummating the financial relationships contemplated by the original project motivation and concept in a PPA and related documentsis a critical milestone in the process of project development.

Permits. This encompasses all permits necessary for project construction and operation, including all federal requirements related to environmental regulations in the National Environmental Policy Act’s (NEPA) Environmental Assessment or Environmental Impact Study requirements; and state and local jurisdictional permits, including local entitlements, electrical contracting permits, and building permits. Generally, without strong development of the Site, Resource, and Off-take elements, significant investment is not made in permits. That said, it is an important element to understand from both a feasibility and risk standpoint—if a project has a high hurdle for permitting, and therefore includes significant permit or policy risks, it needs to be understood and executed with that knowledge in mind. NEPA risk, in the case of a federal project in particular, is generally unacceptable for renewable energy developers who may turn instead to the nonfederal market opportunities. A strategy to mitigate NEPA risk for the development community may therefore be essential for renewable energy project successes in the federal sector.

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Technology. The technology area inherits the going-in assumption of technology developed in the BEPTC framework (i.e., this will be a photovoltaic, wind, or biomass project) and migrates to the investment in and engineering design, equipment selection, and procurement activities. Common stages of engineering design include conceptual and design development, and construction documents with full specifications for bid and contract procurement. All of this activity requires investment into the design process and evolves incrementally as further investment is deemed warranted for the project.

Team. Assembly of a fully qualified team that address all business, technical, financial, legal, and operational aspects of a renewable energy project is an essential final step prior to raising debt, equity, and incentive/grant program capital. Proven experience and capability are key elements to most investment decisions by qualified investors.

Capital. With all other elements in place, Site, Resource, Off-take, Permits, Technology, and Team, the project will attract the financial resources necessary for final development, construction, commissioning, and initial operations (through stabilized cash flows after the commercial operation date [COD]).. This is the final step as described in this framework, but it is important to reiterate that capital requirements do not begin at construction but are engaged at incremental points along the development process. Here, capital refers to both the predevelopment and development stages, and then in a financial closing that includes the financing required through construction and initial operations…

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