This article will explore how site permitting affects project success. This is the fourth and final installment in our series on how to value a solar development pipeline. Read the first, second, and third.
Table of contents
The importance of permits in renewable energy projects
This year will break records. More gigawatts of solar will be installed than in any year before.
Behind the scenes, financiers and investors are fueling growth by lowering the cost of capital, entering the development cycle earlier, and providing a dynamic liquidity that many in the development community could not have imagined even a few years ago. Acquisitions of and investment in solar development platforms and pipelines will likely surge again this year.
The time value of money, an important consideration for any investment, takes on even greater meaning in the context of a solar pipeline. As an asset class, solar’s development cycle is attractive. Conventional energy assets may take close to a decade to reach operation. And even solar’s renewable peers, hydro and wind, have development cycles of between four to seven years.
A solar project, on the other hand, is typically operational between six months and two years from the execution of an offtake agreement. Nevertheless, industry vets refer to the “solar coaster” because that difference between six months and two years can be significant and, in the case of some projects, may pose an existential threat. In order to properly value a solar development pipeline, one must understand the anticipated development cycle and the potential impacts of delays. For an individual project, delay may cause a diminution of value. For a pipeline, the delay could mean megawatts’ worth of attrition.
In this final installment of our series, we will explore the fourth and final pillar of project success: permitting.
Project permitting – the greatest unknown
Permitting often poses the greatest unknown in the development timeline. Developers must navigate interconnection timing with about 5,000 utilities and over 100,000 “authorities having jurisdiction” (AHJs) across the country. These include federal, state, and local agencies with unique and overlapping responsibilities. This regulatory patchwork disproportionately impacts residential and sub-utility-scale project developers.
Permitting costs are the biggest factor in the lag of residential solar adoption in the United States compared to other OECD nations, despite America’s technological advances. Recently, the Solar Energy Industries Association and the Solar Foundation created a framework for standardized solar permitting. If adopted by select jurisdictions, these efforts could be transformative. However, current projects must navigate the complex existing system.
This article will explore the stages of permitting development and the most significant risks. Before outlining potential challenges, it’s important to set the tone for new investors.
Depending on the jurisdiction, solar permits are issued “by right” or require a special exception. Even when a project needs a special exception, permitting usually adds cost or time, but outright rejection is uncommon. Solar permitting does not carry the same political risks as other infrastructure investments. Political support for renewable energy is growing at state and local levels, with backing from voters.
In areas with high incentives, the risks of feeder congestion or market saturation outweigh the risk of permit denial. Exceptions exist, such as municipalities with permit application surges that may impose moratoriums and agricultural regions where depressed farm economics coincide with solar achieving grid parity.
In these cases, policies may prevent solar leases from taking agricultural land out of production.
Stages of permitting development
The location, size, and nature of the land or building determine the specific permits needed for a solar project. For ground-mounted projects, federal, state, and local agencies require various environmental permits. Sites with wetlands, forests, and habitats for threatened or endangered species face additional scrutiny and permitting requirements. Beyond environmental permits, historical, cultural, or archaeological authorities, federal and state departments of transportation, and the Federal Aviation Administration may also require permits.
Depending on the project size, a lead agency may take charge. For example, projects under 2 MW often fall under county jurisdiction, with the county coordinating final site plan approval or a special-use permit. Larger projects typically involve the State Department of the Environment (or its equivalent) as the lead environmental agency, with the Public Utilities Commission also issuing a permit. Projects on federal lands or larger projects must comply with the National Environmental Policy Act and secure approval from the Bureau of Land Management.
The stages of permitting development in a typical pipeline include:
Surveys and site studies from third-party civil engineers and environmental consults are typically required for initial submissions for permits. Additionally, a project may need to produce a set of plans, such as a stormwater pollution prevention plan, a reforestation mitigation plan and a decommissioning plan.
An application for a permit generally kicks off a statutory timeline for review and decision by the AHJ. However, as with the statutory timelines established for utilities discussed in Part 2, consider these timelines soft and remember that the process may be iterative.
Depending on the nature of the permit, a public hearing or other form of public presentation may be required. Generally, if there are any community or NIMBY risks, they emerge at this stage.
Permits are issued specifically for the site plan that was originally submitted and include a set of conditions, which require compliant action during development, construction, operation and decommissioning. Timelines for the issuance of these permits range from 30 days to two years.
Often, and especially in the case of federal and state permits, there is an appeals period, during which time stakeholders may appeal the issuance of a permit.
In addition to the lead discretionary permits, these permits are specific to ground-mounted projects that disturb the land, as in the case of a project that requires grading. Additional plans, such as an erosion and sediment control plan, may be required, along with bonding and other cost adders.
These permits are not discretionary and ought to be issued as a matter of right. Generally, these include building and electrical permits that are obtained during construction. However, it is important to note that particularly in urban and suburban jurisdictions, ministerial permits may include additional requirements related to zoning and roadways. Timelines for the issuance of these permits range from two days to two years.
Key risks
Costs
Obtaining all necessary permits can significantly add to a project’s expenses. Permits may require costly mitigation measures (e.g., reforestation or stormwater management) and expensive design features (e.g., screens or buffers). Some of the more extreme cost adders include discretionary approvals or permits necessitating extensive road improvements, such as widening commercial roadways, constructing sidewalks, and installing stoplights.
Diminution of value
Generally, as development progresses, megawatts decrease. Permitting often forces a reduction in system layout size to accommodate stormwater management features or meet setback requirements. For rooftop systems, redesigns can be relevant to incorporate vents, bringing the roof up to code. Such examples are common, while there are virtually no permitting outcomes that increase system size.
Delay
Delays pose the greatest threat from permits. Since permits are required before construction begins, they serve as the ultimate gating item. Depending on the project’s economics or the development platform, delays can pose an existential threat. Delays have the potential to cause a number of things, including:
Generally, development capital is the most expensive piece of the capital stack. Developer carrying costs are typically high. Therefore, permitting delays has the potential knock-on effect of making interconnection, customer acquisition, and all other activities more expensive
In markets where incentives are traded (e.g., SREC markets), depending on the curve for such incentives, a project could lose out on the most valuable incentives if it is delayed even by a quarter.
Offtake agreements, particularly those with sophisticated corporate counterparties, typically have liquidated damages payable to the off-taker for delays.
Site control agreements, offtake agreements, and interconnection agreements often have cliff dates after which the counterparty may terminate. If permitting delays trigger any of these, the best-case scenario is that more development capital will need to be spent in consideration of extending a cliff. The worst-case scenario is that the project dies
The pipeline remains illiquid longer and monetization is delayed.
Ultimately, permitting is critical to project finance success. It varies greatly by jurisdiction and generally requires a team of outside consultants. No one ever said commercial solar is easy.
This concludes the How to Value a Solar Development Pipeline series. We hope you have enjoyed our look at the four pillars of project finance success: revenue streams, interconnection, site control, and permitting. Whether you are an investor, developer, off-taker, or represent any other link in the solar value chain, may 2019 bring you success. **
The series is written by Leslie Hodge is an associate at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. It was first published by Greentech Media. Hodge’s practice focuses on energy project finance, general commercial transactions, startup and corporate matters, contract disputes, and litigation.
