By Patty Wright and K Kaufmann
For Patty Wright, Director of Legal Operations at FLS Energy, a solar developer in North Carolina, the complex process of getting a utility-scale solar project permitted, financed, designed, constructed and in operation is a “riveting topic” -- no pun intended. In her job, Wright is responsible for completing the due diligence -- the painstaking environmental, engineering and economic studies -- that is a standard part of developing these projects and getting them connected to the grid.
The Smart Electric Power Alliance recently sponsored a webinar on utility-scale solar asset management, during which Wright shared the nuts-and-bolts details of what that process entails and why it can take months or years to get a project completed.
FLS Energy is what Wright calls a “vertically integrated” utility-scale solar developer, which means it develops, finances and builds projects of about 5 megawatts (MW) and larger -- and then performs operations and maintenance (O&M) for the life of the installations.
Innovative Solar 43, image courtesy of FLS Energy.
“We’re there from the beginning to the end, so we have a broad and deep perspective on how the whole process works,” she said.
What follows is an edited version of her presentation, and answers to some of the questions participants sent in for her to answer.
Projects usually start off one of two ways for us. In greenfield development, we actually go out, find sites and then develop them in-house. The other alternative is acquiring early-stage projects from other developers and completing the development process in-house. The projects that we develop include both “standard-offer” projects -- 5 MW and under in North Carolina -- as well as larger transmission projects of up to 80 MW.
In North Carolina, projects that are 5 MW and below – also called distribution projects -- qualify for a “standard-offer” power purchase agreement (PPA), the terms and rates for which are set by the state’s Utilities Commission. Transmission projects of up to 80 MW are interconnected by the utility into the transmission system, as opposed to a utility distribution system. For these projects, PPA terms and rates are negotiated with the utility.
Regardless of size, one of the first things we do on a project is file an interconnection application with the utility, which in North Carolina is Duke Energy. We find it can take 18 to 24 months for a 5-MW distribution project to make its way through the interconnection queue, particularly with the new study criteria Duke recently introduced. The larger transmission projects have taken nine to 12 months to get through the queue; however, that time frame is widening with the recent increase in the number of these projects in the state.
While the project is in the queue, we do the standard development due diligence. The list includes the following:
• Ensuring compliance with federal and state regulatory notices and approvals
• Completing environmental studies, including but not limited to Phase 1 Environmental • Site Assessments required by the U.S. Environmental Protection Agency, as well as wetland and endangered species reviews.
• Performing real property title and survey evaluations, and zoning and permitting on the site.
• Preparing the civil engineering in-house
• Undertaking a U.S. Army Corps of Engineers permitting process or any jurisdictional determinations that are needed.
• Designing the electrical engineering
• Obtaining any state and local permits
In any of these areas, issues may come up that could require some outside-the-box thinking to resolve. Some problems could actually make a project nonviable, which we never want to happen but it does.
One such challenge we see quite often in the development process in North Carolina -- and will literally stop us -- is lack of insurable access. Financing and investing partners will usually require us to have title insurance, which is insurance against the risk that title to the real property is not clear. The insurance must also cover the access road to the site.
Oftentimes, railroad tracks will block access to a project. It’s been extremely difficult to get permission from the railroad involved to cross those tracks with our construction equipment. If we can’t get that permission – that is, if the railroad will not grant us an easement or access agreement that is permanent and non-revocable -- the access point becomes virtually uninsurable by the title insurance company. If we don’t have insurable access, we can’t build the projects.
Interconnections costs can make or break a project
Once we get through all of this due diligence, we look at the project to make sure no lingering issues or concerns could come back to keep us from building it. Then we move on to actually getting the project to move forward in the utility’s interconnection queue. At this point the project has gone through a system impact study with the utility, which is the first study that the utility does, and then we receive estimates for what it’s going to cost to interconnect the project. Those estimates usually include the interconnection facility plus any possible system upgrades.
At that point, we look at these costs, and we make a decision, based on the financials of the project, as to whether we’re going to move forward with final development and construction. The costs can vary on those upfront charges, ranging anywhere from $80,000 to $2 million on a 5-MW site, and we’ve even seen them up to $6 million on larger transmission-scale projects. Clearly, the lower the cost the better, and depending on the financials of the project, there’s a level where we will sometimes have to say, “It’s not viable.”
But, presuming the project is approved, the next step is the final facilities study done by the utility; it does the study and then the engineering for the project interconnection. On occasion, we’ve approved a project and gotten the final interconnection costs in the facilities study, only to find a dramatic increase from the initial estimates. We understand that sometimes this happens based on site-specific matters, such as tree removal or rights-of-way. It’s definitely a consideration, and we deal with those issues as they come along.
We’ve also had the interconnection cost estimates go down, which is a rarer occurrence but it has happened.
Floyd Solar, image courtesy of FLS Energy.
When all that diligence is complete, along with the utility facilities study and project engineering, we deem the project ready to be financed and make commitments to our financing partners -- our investors and construction lenders. They also will give us requirements, for example, to have the projects placed in service by a certain time period, and review all the project’s due diligence one more time to be sure it has very little risk for them.
On distribution projects, when the facilities study is complete, we move forward with our financing and the contracting phase, and finalizing the interconnection agreement. At that point, our construction team and the project manager will begin working with the Duke Energy field engineers to move the project along for construction. This stage includes coordinating the rights-of-way, determining where the lines and poles will go at the point of interconnection, coordinating with the landowners and working toward our agreed-upon commercial operation date.
At this stage we have a series of steps to complete, which can pose significant challenges. The to-do list includes getting the system upgrades and the point of interconnection construction done, coordinating the audits on the new equipment and the anti-islanding testing by the utility, and getting the project placed in service on time based on our investors’ needs. Particularly now, as we approach the end of the year, project completion is a big consideration. This year has been particularly difficult with the devastation in eastern North Carolina due to Hurricane Matthew and the resulting flooding. Duke’s teams have been sorely taxed with repairing equipment and outages.
New industry, new standards
On a transmission project that is much larger than 5 MW projects -- up to 60 or 80 MW -- we begin the process of coordinating with the utility much earlier. We also work much more closely with utility staff as we are usually building a substation and prepping the site for them to build their switching station. Distribution projects are more cookie-cutter, and the point of interconnection is mostly the same on each one, although it can vary a little bit, with potential upgrades having the biggest impact.
On the other hand, transmission projects will include the design, engineering and construction of a substation, which requires consistent and constant communication with the utility to meet their needs and specifications. The logistics alone on a 60-MW project are quite daunting; feeding, housing and transporting crews across a mile-wide field takes significant planning. In addition, the lead times needed for ordering equipment can be almost a year, even for basic transformers.
Construction on a 5-MW project takes about three months, weather and supply chain willing, while a larger project can take upward of 10 months to complete, constantly coordinating with the utility. Our quality control (QC) and best practices are implemented as we move into this construction, planning and engineering phase.
The solar industry is relatively new, and we lack specific solar construction standards and protocols beyond the general industry ones, such as IEEE, the Institute of Electrical and Electronics Engineers. In order to refine our own QC and best practices, we recently contracted with an independent engineering firm to perform an audit of the projects we have in operation.
We gleaned great amounts of information and feedback from that exercise and have put in place a working QC plan. Our best practices include proper staffing; preparatory meetings between the QC manager and the crew members at each stage of construction; initial inspections, and ongoing, follow-up and final inspections of the system; and specific equipment testing and reporting. After a project goes into operation, we also monitor the system and maintain a properly staffed O&M team stationed around the state for quick response.
At the same time, recognizing the need for specific and more universal standards, we have formed a working group within the North Carolina solar industry to take steps to formulate a solar-specific set of standards that will provide across-the-board best practices. The group will pull from our independent engineer results as well as incorporate the new construction standards that Duke Energy has recently released.
This effort will go a long way toward setting up common standards for all the developers and the engineering, procurement and construction firms -- the EPCs -- and make the industry better as a whole.
Follow-up questions from webinar:
How can a potential owner tell if enough due diligence is done on a project? How do you evaluate between “thorough” and “just enough”?
We make the determination of how much due diligence to perform based on what our investing and lending partners will require as well as using best practices for the environment and to protect our natural resources. Our partners invest very large sums into these projects and have veritable troops of attorneys and paralegals who review and pick apart the due diligence before they sign off to close. Part of our job is to be sure that this diligence will meet their approval before they begin chewing through it. My advice after closing 12 transactions comprising over 50 projects -- be conservative. If you’re questioning if you’ve done enough, you haven’t
When financing a project, how many potential purchasers do you typically want to have if tax credits are available?
Typically we will have one tax equity investor, a construction lender and a permanent lender that will either be a part of the construction loan and then convert it to perm debt, or will be the take-out lender at the time the project is placed in service.
What are some of the biggest hurdles for a project to find a purchaser?
For us, it has been getting the projects through the interconnection queue and having them ready to close with the investors. Finding investing partners has not been that difficult.