Significant effort goes into energy project development, including navigating numerous barriers and obstacles such as time and capital investment requirements. From start to finish, your development could cost upward of $20 million, and it could take years (in some cases over a decade) from your project’s inception to completion of construction. Without a solid plan—including the right location and parcel(s) of land—your project won’t make it beyond pen and paper.
How can you increase the odds for a given project to be among the facilities that one day break ground? You’ll need a sound commercial strategy and stage-gate development approach, as well as a solid understanding of market drivers and development keystones. But you’ll also need to locate the right project site.
Location, location, location
Site evaluation and selection are often the first tasks to complete after developing the development project’s commercial strategy, conceptualizing technology selections, and establishing a working pro forma. Your project cannot succeed if energy cannot be delivered to the customer. Nor will it succeed if the site cannot appropriately accommodate what is intended to be built.
Consider the targeted offtake, the project’s technology, and required off-site interfaces (electric, gas, water/sewer, and any others required). This will drive the requirements, shape, size, and location of your project site.
For example, a modern combined-cycle natural gas project requires roughly 50 acres for 600 or more megawatts (MW). A solar facility requires five to 10 acres per MW. On the flip side, a natural gas project requires access to interstate or regional gas pipelines, oil storage capacity (for dual fuel units), and access to water and wastewater connections, in addition to electrical transmission or distribution infrastructure. A solar facility generally only requires access to the latter. Therefore, a site that suits one technology may not be the best choice for a different technology.
For any project, you must consider:
- Existing topography and subsurface conditions (blasting and extensive cut/fill can be very expensive).
- Protected water resources (wetlands and jurisdictional streams).
- Proximity to airports.
- Visual impacts to the community.
- Subsurface rights (e.g., mineral).
- Archaeological and wildlife considerations.
- Access to transportation infrastructure for heavy hauling equipment.
For these reasons, it could take up to a year to find the perfect project site.
Oftentimes, savvy landowners will be aware of the value of their property to energy developers and will want a premium for control of their land. Commonly used options (as opposed to outright purchase agreements) can give developers the right to purchase a landowner’s property at a later time for a nominal ongoing fee. If the project does not pan out, the option agreement will expire and the landowners keep their property.
Connections to other utilities
Your energy project does not exist in a vacuum and will not function without access to the proper external interfaces. These interfaces require due consideration (i.e., electric, communications, gas, water, and sewer and transportation) for how they can help or hurt the site plans.
If possible, choose a site with access to nearby extension to these resources to increase ease and decrease costs. Permitting for new transmission, gas, or other types of utility extensions can be incredibly difficult and expensive to permit and construct.
There are many publicly available resources that allow for desktop review (via satellite imagery) of the location where these interfaces may exist. Of particular interest are parcels of land where these interfaces may intersect (e.g., electric and gas). Additionally, consider:
- Where and how water will be sourced (the availability of water, whether it’s municipal, gray water, or well water) and treatment requirements for the source under consideration.
- How and where wastewater will be discharged and treated.
- The capacity of various system interfaces, including electric, water, wastewater, and gas.
- Whether the developer funds require system upgrades (e.g., transmission line upgrade) or if they can be rate-based.
Any potential required infrastructure upgrades will be subject to environmental and permitting requirements (e.g., line extensions), regardless of which entity is applying.
Securing the right permits
Permitting varies considerably on a state-by-state basis. For example, an energy development in rural Texas is much less likely to encounter stringent permitting requirements than one attempting a development in the vicinity of New York City. In many instances, “state siting boards” permit large development projects, taking much of the decision making out of the purview of local town governments. In these circumstances, local governments do have a voice, but the state boards make the determinations. And—ultimately—local officials must comply.
In general, permits examine:
- Conceptual design, buffers, footprint, grading, and stormwater pollution prevention.
- External interface arrangements and impacts to resources (e.g., wetlands, stormwater).
- Visual impact and noise pollution during construction and operations.
- Traffic impact during construction and operations.
- Impact to local infrastructure (e.g., roads).
- Wildlife and existing habitat impact and mitigation.
- Air emissions for thermal projects (with full permitting through state EPA divisions).
- The perceived commercial “need” for the project.
Additionally, you will need federal permits for different impacts (such as wetlands) and ancillary permits beyond state siting certificates for issues like wastewater discharge and FAA clearance. In many areas, the permitting process is often subject to interference from outside parties, regardless of project technology. Due to the land and space requirements associated with renewable energy, your project may face headwinds from local neighborhood groups concerned with property values, tree removal, or visual/noise impact during construction. Thermal projects face the same concerns with the additional potential opposition from environmental groups.
Most permitting procedures are designed to allow affected parties to have a voice—which is a good thing—but savvy opposition can use many levers during this process to cause schedule delays (on the order of years) at an absolute minimum. Depending on your project’s location, you must anticipate and plan for these factors, both from a schedule and capital requirement standpoint.
Strategies for financing
If you’ve reached the financing stage of your energy development project, congratulations. Not many projects reach this phase, which means you’ve met the following conditions:
- Commercial offtake agreements are in place.
- Control of required real estate is secured.
- Contracts for all required external interfaces are executed.
- Key permits have been received or are in progress.
- Technology has been selected, conceptual designs completed and contracts to engineer, procure, construct, and operate secured.
Perhaps most importantly, the financial pro forma you established at the beginning of the development has survived all of the required adjustments made to it during the development process. It continues to demonstrate that the project as proposed is economical and provides an adequate return on investment for equity, debt, or other investors.
Energy project financing can take various forms depending on the exact scenario. For example, large developers or energy conglomerates with adequate capital can “balance sheet” projects—in other words, build them on their own dime. In these circumstances, the importance of return on investment may be minimized as there may be other motivations (e.g., R&D, pilot projects, marketing) for building such projects.
For many smaller developers, with construction costs for larger projects regularly exceeding $100 million, this is not an option. Investment is required either in the form of equity (where investors provide capital in exchange for permanent ownership stake in the project and its forward returns) or debt (where money is loaned and paid back over a number of years at an agreed-upon interest rate), or a combination of both.
Any pro forma should have a “development fee,” which is the profit you pay to the developer at the financial close and the start of construction. After all, the developer did all the heavy lifting to bring to fruition the project, which had a 15% chance of success (at most), so it only makes logical sense you should reward them for that perseverance.
Revisit and re-verify your vision
While certain aspects of the energy industry are susceptible to change, other aspects of a successful energy development project site remain constant:
- A targeted commercial and financing strategy.
- A strong understanding of a technology’s off-site and on-site requirements that reduce disruption to the environment and minimize capital cost.
- A sound understanding of local, state, or federal permitting requirements for a particular technology or region.
- The ability to negotiate advantageous contracts or agreements with project stakeholders.
As the development of your energy project progresses through each successive step in its process, periodically revisit and re-verify the initial vision for your project to ensure its continued economic viability.
Significant stranded cost can (and frequently does) result from turning a blind eye to obvious deficiencies and impassable hurdles. Developers with an urgency to push a project to the finish line may overlook them.