Mon. May 20th, 2019

How one can Worth a Photo voltaic Improvement Pipeline, Half 2

Not too long ago, in a quiet second between vitality transactions, I contemplated: When does a photo voltaic undertaking turn into a photo voltaic undertaking?

It’s a philosophical query maybe. Fortunately (and never surprisingly) my colleagues in engineering had a number of opinions. Whereas no two opinions had been the identical (additionally not stunning), every opinion did tie to 1 idea — interconnection.

On this second installment of How one can Worth a Photo voltaic Improvement Pipeline (learn half one right here), we’ll discover the second pillar of undertaking success: interconnection. 

It’s estimated that there are about 150 gigawatts of photo voltaic initiatives in interconnection queues throughout the US. Examine that to the 12.1 gigawatts anticipated to be put in on this yr. Clearly a queue place isn’t, by itself, an indicator of undertaking success. Interconnection offers the bodily path to ship energy and imposes the bodily constraints of such supply. Interconnection additionally represents one of many essential fastened prices of a undertaking.

These options naturally lend themselves to old school wild-cat hypothesis. Whereas some builders chase energy buy agreements in quest of demand for his or her energy, different builders search out splendid localities (or nodes) from which to produce their energy. Expert builders can do each.

With a view to decide a pull-through price for a undertaking and to correctly worth a pipeline, we’ll discover strategic issues associated to interconnection improvement and consider the assorted phases of the interconnection course of. Lastly, we’ll take into account developments that will issue into the interconnection course of within the years forward. 

Interconnection as a method

As a result of interconnection prices do not need a one-to-one correlation to system dimension and are even much less tied to income, initiatives with low interconnection prices present distinct benefits. Builders with web site management and low-cost interconnection could speculate on these queue positions and look ahead to initiatives to seek out them, in a type of “if-you-interconnect-it,-they-will-come” technique.

There are many causes to be optimistic. Module costs and construct prices continues to fall. Company offtakers are shopping for at document charges and changing into more and more extra snug with contracts for variations (see Half 1, Pillar 1 – Income Streams). Political will on the municipal and state stage continues its regular push to incentivize renewable improvement.

The technique could also be sound.  Nonetheless, web site management and interconnection are however two of 4 pillars of undertaking success.

The worth of property with out offtake and allowing must mirror the excellent binary dangers and related pull-through charges. For traders with the endurance and urge for food to warehouse or maintain property, this type of improvement could present long-term, outsized returns. For traders searching for a quarterly or annual returns on capital and/or traders with excessive carrying prices, then again, this technique could also be too dangerous. 

Alternatively, traders searching for a platform that does each (recycles capital with near-term beneficial properties and locations a number of long-term strategic bets) could take into account pipelines that mix various ranges of interconnection hypothesis.

Phases of interconnection

Inside a single improvement pipeline, you might encounter initiatives of assorted phases of interconnection improvement: 

Software Submitted

Feasibility Examine

System Impression Examine

Services Examine

Interconnection Settlement Executed

Graduation of Building of Interconnection Services

Every of those phases range from utility territory to utility territory.  Nonetheless, there are some technical and financial commonalities.  A typical development for territories within the Pacific North West, South West, North East, Mid-Atlantic and South East could appear to be this:

Software Submitted: With a fundamental stage of design and engineering, a developer could submit an utility to the utility to interconnect a system. At this stage, the undertaking is assigned a queue place. For congested feeders, this queue place is efficacious, however it’s just the start. You will need to acknowledge that, whereas utilities are ruled by public service commissions and whereas interconnecting to the grid could also be a matter of proper the place technically possible, the utility maintains broad discretion to find out what’s and isn’t technically possible. The utility’s major operate as an interconnecting authority is to make sure the security and reliability of the grid. That focus will form its responses (and response instances).  Upon its evaluation of the applying, a utility will both recommend a examine or (for fortunate behind-the-meter initiatives) transfer straight to the interconnection settlement.    

Feasibility Examine: At this stage, the utility will do a high-level evaluation as as to whether the undertaking might interconnect to the grid. The utility’s engineering staff will analyze the affect of the era on present grid infrastructure and should decide the place thermal, voltage, or brief circuit contributions would form the way by which the undertaking is to be interconnected. This examine will inform the scope and contours of a system affect examine, if crucial.   

System Impression Examine: This examine will decide if any upgrades to the grid (on the utility’s facet of the meter) are crucial with the intention to interconnect the undertaking. If upgrades are crucial, the utility will present a value and schedule estimate for any work associated to such upgrades. This offers perception into the earliest date by which the system could obtain business operation. With a schedule and prices now in-hand, builders could seek advice from interconnection at this stage as “de-risked.”

Services Examine: Sure utilities could carry out a separate examine generally known as a “services examine.” This examine could also be required or non-obligatory and could also be carried out concurrently or following a system affect examine.  The aim of this examine is to plan tools lists, technical specs, an in depth schedule of prices, and a granular development schedule, which might be integrated into the interconnection settlement.

Interconnection Settlement Executed: The undertaking should execute the interconnection settlement inside a sure time period from receipt of the system affect examine and/or services examine, with the intention to keep its queue place.  And, typically, execution of the interconnection settlement requires a deposit, or down fee, on the mandatory upgrades. For a lot of builders, this stage offers an inflection level for monetization of the asset.

Graduation of Building of Interconnection Services: If utility upgrades are required, the utility will possible begin its work upon receipt of the complete estimated interconnection prices (plus a characteristically conservative contingency). For bigger utility scale initiatives, interconnection prices could also be paid on milestones agreed to by the utility and undertaking.

Time and Cash

Cash – Earlier than System Impression Examine, Excessive Danger

Earlier than the system affect examine is accomplished a developer could have a view on interconnection prices and the utility could have a view, as nicely. A developer could enter its view into the monetary mannequin and a utility could specific its view on paper. Nonetheless, till a utility has carried out a full system affect examine, interconnection prices are unknown. The essential options of the system affect examine are that (a) the undertaking pays for the examine, (b) the examine’s outcomes are the work-product of an engineer (usually a third-party engineer), and (c) the utility units a greenback worth for the anticipated prices. If the developer’s monetary mannequin displays a price for interconnection prices earlier than the system affect examine has been accomplished, take into account it a hopeful placeholder. 

Time – Earlier than the Interconnection Settlement is Executed, Excessive Danger

When reviewing any timelines or Gantt charts of a improvement pipeline, you will need to ask from the place the dates come. These dates could have their foundation in regulation or tariff. A utility or the general public service fee could set timelines inside which the utility is to evaluation and/or present responses. Given this statutory patina, these dates really feel reassuringly agency. They aren’t; they’re aspirational. A utility could absolutely adjust to the timelines, however the course of is iterative at almost each stage.

A response from a utility could name for a brand new submission or clarification and you’ll all of a sudden discover that the clock has began over once more. Different instances, a utility could miss a deadline by a number of days (or weeks). These slips hardly rise to the extent of a public service fee listening to and there’s typically no sensible recourse for these slips that doesn’t have the perverse impact of delaying the undertaking additional.

Subsequently, it’s essential to know what improvement milestones are tied to utility motion. Inquiries to ask embody (a) whether or not utility motion is a gating merchandise for one more improvement activity on the undertaking schedule (e.g. the execution of interconnection settlement is a situation precedent to utility for an incentive), (b) whether or not utility delay might current a binary threat (e.g. tax fairness deadlines), or (c) whether or not utility delay might current a value adder (e.g. liquidated damages within the offtake settlement).

As soon as an interconnection settlement is executed, the utility could also be contractually certain to behave inside set timelines. Most usually, utilities take these contractual obligations significantly. Subsequently, dates based mostly on an executed interconnection settlement are extra actually agency. Earlier than the executed interconnection settlement is in hand, nonetheless, time might not be in your facet. 

Developments: Congestion, Storage, and Extra Income Streams

Congestion is of specific concern for distributed era initiatives. Sure regional markets which have fostered renewable improvement for a few years have excessive concentrations of programs web metered to the grid. In these areas, utilities could impose export restrictions. Even roof prime programs now face such restrictions. In such circumstances, a storage resolution could protect undertaking worth. If storage is just too costly, builders have to weigh the economics of downsizing capability towards constructing past the export restriction, utilizing a mixture of reverse energy relays and/or inverters which can be programmed to self-curtail vitality. 

Builders who select the latter path might want to persuade the utility of the effectiveness of such an answer. (This is only one space by which in-house engineering is a essential value-add.) Even when a utility greenlights the bigger capability, the utility nonetheless could require that a utility-owned reclosure system be put in to make sure that the system is curtailed when it reaches the export restrict. You will need to mannequin out such curtailment when financing such a system. 

The race is on to pair storage with photo voltaic at scale. You will need to take into account what data was submitted within the interconnection utility and what programs had been studied, if the undertaking has been studied, to find out if including any specific sort of storage would require a revised utility or examine. Both case could end in a lack of queue place.

Photo voltaic property are anticipated to supply income for many years.  It could be relatively short-sighted to imagine that the grids to which they join will stay static.  As extra renewable property come on-line, grid operators will want era that may be versatile and reply in a second (or cut up second) to indicators from the RTO.  Most grids have already monetized such providers.  Traditionally, this has been assumed to be the place “base load” (e.g. pure gasoline or nuclear) steps in.  Nonetheless, a photo voltaic undertaking (particularly the place paired with storage), will be extremely versatile and attentive to the intermittency of different turbines on the grid.  It’s a clear get cleaner type of world.  Subsequently, early engineering ought to ponder flexibility with respect to the grid and interconnection functions ought to construct in as a lot optionality as is commercially cheap.

Bonus: Be aware on Interconnection Agreements

Interconnection agreements, by and enormous, are kind agreements. Their authorized phrases are concise at finest, missing at worst. Nonetheless, with sure exceptions, there’s typically no alternative to barter. For traders seeking to cover-over any and all dangers related to the interconnection settlement, you will need to notice that looking for an executed estoppel from a utility generally is a prolonged and fruitless course of. If an estoppel isn’t forthcoming, the enterprise staff ought to seek out other ways to substantiate that the utility is able to work with the undertaking firm. 

So, if the authorized phrases are sparse, there isn’t any room to barter, and an estoppel is out of the query, ought to your lawyer skip over the “interconnection” folder within the dataroom? No. 

Authorized diligence is important to find out the mechanics and ramifications of milestone dates and cliff dates, significantly with regard to deposit funds and placed-in-service dates. Your authorized staff must also learn the interconnection settlement within the context of the relevant utility tariff. 

Lastly, interconnection agreements are peppered with numerous obligations throughout development and operations, which ought to be thought of when drafting the assorted development contracts and operation and upkeep agreements for the undertaking. Hold your lawyer out of this dataroom at your individual peril. 

***

Leslie Hodge is an affiliate at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. Her follow focuses on vitality undertaking finance, common business transactions, startup and company issues and contract disputes.

Joe Tune, vice chairman of undertaking operations at Sol Methods, additionally contributed to this piece. 

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