The development steps of a renewable energy project
Written by Thomas Brière
Government and international policies are pushing to develop renewable capacity as shown by the fact that the European Commission has raised its initial target of renewable energy capacity generation in its REPowerEU Plan from 1067 GW to 1236 GW by 2030 (European Commission, 2022). In the US, the $65bn power infrastructures section of the Bipartisan Infrastructure Law aims to upgrade and build transmission lines in order to expand renewable energy facilities (The White House, 2021). Although there is a real willingness to develop renewable energies at high speed throughout the world, the pre-operational process can take years and hinder the creation of new renewable facilities. The project’s location must be selected with high precision and fulfill the optimal conditions for power generation, and therefore requires deep preliminary studies and measures. Moreover, the acceptance of a renewable project can sometimes bump into the reluctance of certain opponents and lead to litigation that goes through the courts. Those actions increase the time preceding the construction.
There are several steps in the process before leading to the operations and production of energy. We will address them in detail.
The potential project
When the project is still an idea, the team involved needs to do some research in order to size the future project. Current energy generation needed, current electricity tariff and potential clients are factors that the team must consider before embarking on the in-depth development of the project. Some preliminary measures, such as the time of sunlight per day for a solar farm or the wind shear profile for a wind farm, are essential elements to check the potential viability of the project. To do that, maps representing annual solar and wind resource values are available. A due diligence must also be conducted to make sure that the project’s impact on the environment is limited. Furthermore, the team must take into account some local considerations such as potential obstacles (e.g.: river) or the site accessibility (e.g.: road presence). Windmills must be located in an area where no obstruction can reduce their power capacity, so in open or elevated spaces, while solar panels must be situated on the roof of existing building and parking, as well as on brownfields and landfills.
The elaboration of the project’s preliminary contracts
Building a renewable energy project requires several approvals from different stakeholders which may take a long time to obtain due to the reluctance of some opposition groups. In order to obtain all the required permits, the project’s owner must create a Special Purpose Vehicle (SPV): it is a subsidiary created by the parent company which owns its own assets, liabilities and its own legal status, so the financial risks borne by the SPV are isolated. In fact, if the parent company goes bankrupt, the SVP can continue its operations. First the SPV must sign a lease agreement with the landowner, who can be private individuals or a public entity, to be able to build and exploit the project on this particular site. The SPV must demand a building permit to the public authorities and an interconnection permit with the local utility in charge of the electricity distribution by the grid. This results in the sale of the renewable power generation to the grid operator (often a public company) by signing a Power Purchase Agreement (PPA). A feed-in tariff is imposed in many countries to stimulate the development of renewables; it forces electricity operators to buy electricity generated from renewable energy at a tariff determined by the authority and guaranteed for a fixed period (Amundi, 2022). In another case, a Corporate Power Purchase Agreement (CPPA) can be signed. It is a long-term contract signed between the power producer (the SPV) and a corporate company to provide it directly with electricity from renewable sources. It provides the company a guarantee against the volatility of electricity prices for a determined period. The terms of those contracts are often between 15 and 25 years. All this process to obtain permits and negotiate contracts can be long. In fact, this period can last between 2 and 3 years, even more if there are complaints from local opposition or concerns about potential biodiversity damages that can lead to important delays (Reuters, 2022). The objective of the EU is to reduce this period to a year which would be a great opportunity to accelerate the deployment of renewables.
The construction’s phase
Before the construction really begins, the SPV must collect money in order to fund the construction activities. In renewable project, the financial structure is often as followed: 20-25% of the investment come from the equity sponsor that could be an independent power producer (IPP) or a dedicated fund, while the remaining 75-80% of the total investment are loans from general or investment banks. The loan terms often finish before the end of the operating contract.
To build the project’s facilities, the team must sign an agreement with an EPC (Engineering, Procurement and Construction) contractor. This contract defines the scope of the project, the time schedule, and possible penalties in case of no respect of the schedule. The construction time varies between one and two years depending on the size of the project. It is at this period that the SPV spends a lot of money in CAPEX (Capital Expenditure) to make the project a reality.
The operation’s stage
This phase lasts as long as the period stipulated in the PPA, between 15 and 25 years. While during the other periods, the SPV was only carrying out cash outflows, this time, the project generates cash inflows apart from the repaying of the loans and maintenance costs. Indeed, during the whole life of the project, the SPV will realize OPEX (Operational Expenditure) to run the facility effectively. The SPV can conclude an O&M contract (Operation & Maintenance) with a specialized entity in order to increase performance and reduce costs.
Finally, the steps preceding the renewable plant operates can be long. Indeed, in total, it can last more than 5 years before the project starts to generate revenues. Therefore, the longer the PPA is, the more stable it is for the equity sponsor which looks for return on investment. As the concern about climate change and its effects are now on everyone's mind, the governments are trying to reduce the period before the plant starts its operation. The objective is to increase the number of renewable projects by reducing the necessary time to develop one single project. By doing that, renewable energy sources will have a more important part in the energy mix which will allow us to decarbonize our economies and reduce greenhouse gases rejects from fossil fuels.
Sources:
Amundi. (2022). Financer la transition énergétique en Asie. ESG Thema
European Commission. (2022). RePowerEU Plan.
Communication on REPowerEU (2021).
President Biden's Bipartisan Infrastructure Law. The White House. https://www.whitehouse.gov/bipartisan-infrastructure-law/#powerinfrastructure
Kate Abnett. (2022). EU plans one-year renewable energy permits for faster green shift.