The Growing Impact of Delays on Solar Development Costs across Different Regions
In an industry filled with uncertainty, utility-scale solar developers must constantly attempt to predict development timelines in order to plan for sufficient financing.
In January, grid operator PJM Interconnection caused an uproar in the solar industry when it proposed a two-year pause of interconnection request reviews for its regional transmission network in order to address more than 1,200 projects in its backlog – the majority of which are solar projects. This kind of delay is unprecedented, and industry stakeholders worry that it will seriously hamper solar capacity growth and push the country’s short-term renewable energy goals out of reach.
The consequences of prolonged development timelines can be dire, sending developers scrambling for more cash; or worse, the projects can simply become dead in the water. In particular, interconnection approval delays can be unpredictable and costly for developers to bear. Smart financing options can help reduce the burden or risk for developers in the face of cost increases, delays, and other uncertainties.
RTO Differences Create Distinct Development Risks
The cost burden and risk profile of a single project can vary significantly by RTO, due the lack of consistency among market processes and dynamics. The graph below shows how standard interconnection fees alone can vary, based on different months in each RTO’s interconnection application timeline.
Some challenges vary by state or county, such as permitting hoops that developers must jump through or stringent environmental regulations for new projects.
Development Costs Grow with Project Timeline
Utility-scale solar energy project development can take several years from project conception to construction, during which developers need project and working capital to cover costs and pay employees during the long runway to revenue. Throughout development, developers must carry costs to pay landowners, complete interconnection studies for the local utility, and secure necessary permits without a clear path to revenue until the project is de-risked at notice-to-proceed (NTP) for construction.
While some factors, like permitting and application fees, tend to be fixed, other costs increase as the project time horizon expands. Most notably, site control costs and working capital for line items – like staff, advisory services like legal and technical consulting, and corporate general and administrative costs – can create increasing drag with every added month. Simply put, any delay puts added pressure on capital to provide enough return down the road for the investment to be worthwhile.
The chart below shows how both working capital and site-control costs can increasingly burden developers as the project development timeline expands. The example assumes a 50 megawatt (MW) or greater capacity and excludes highly variable RTO interconnection costs. With a 15-month timeline, working capital costs can account for less than 35 percent of the total development cost, but as the duration increases, working capital can balloon to 50 percent or more.
Market Dynamics and Conditions Impact Project Costs
The variability of solar development costs can be attributed in part to the lack of interconnection process standardization. For example, standard application fees for a 10 MW project in PJM can reach almost to $170,000, compared to a meager $6,500 for a system of the same size in ERCOT.
But while application steps and associated fees can be found in RTO documentation, developers must contend with opaque approval timelines that have proven to be constantly moving targets. This makes it difficult for developers to decide where to make investments and how to account for future costs.
As a general trend, interconnection wait times have increased drastically, due to an increasing number of requests and antiquated approval processes originally meant for centralized generation. A Lawrence Berkeley National Lab study found that the median number of months between interconnection request and commercial operations date (COD) in NYISO increased by roughly 500 days from 2010 to 2020. According to the Federal Energy Regulatory Commission (FERC), the average wait time for U.S. projects now exceeds three years. In June, FERC released a notice of proposed rulemaking that aims to improve current interconnection processes to address growing interconnection queue backlogs, citing more than 1,400 gigawatts (GW) of generation and storage stranded in queues at the end of 2021.
At the same time, queue conditions and processes vary drastically between markets. Recent analysis by Leyline found that on average, projects in PJM took three times as long to reach NTP as comparative ones in ERCOT. This stark contrast has real implications for solar development in these markets: While PJM’s infamously backed-up queue has stalled nearly 300 GW of renewables and storage capacity, ERCOT reportedly processed 14 GW of solar capacity last year.
These market differences are summarized in the table below. While ERCOT may be more favorable from a development standpoint, it’s important to note that the overall value may be lower, due to the nature of the wholesale market, versus similar projects in PJM or NYISO.
Development Cost Comparison by RTO.
|Project Size||100 MW||100 MW||100 MW|
|Estimated Timeline||25 months||29 months||33 months|
|Environmental & Permitting||222,200||103,100||6,800|
|Interconnection Study Costs||650,000||640,000||6,500|
|Engineering & Surveys||222,200||86,800||13,900|
|Other Fixed Costs||274,500||261,500||15,500|
Minimize Risk with Smart Financing
How can solar developers navigate increasingly murky development waters? First, minimize risk by using realistic burn rate assumptions to determine how long your project can feasibly wait until NTP. Secondly, evaluate differences between RTOs to understand where your firm can find the best opportunity and create the most value. Lastly, leverage smart financing options that keep equity in your parent company.
Leyline’s financial products can inject financing into projects at various stages of development to help ensure that developers can get projects off the ground, while maximizing value. Leyline Growth Capital provides seasoned developers that lack a development track record, assets, or cash flow with short-term financing that helps them foster growth, fund acquisitions, or pay for unexpected costs. Leyline Development Capital helps developers with demonstrated success get already-started projects shovel-ready with capital that can be used for both development costs and working capital.
To learn more about Leyline Development Capital Solutions, please contact us at: https://leylinecapital.com/contact.