Page 68 - North American Clean Energy July August 2015

investing in clean energy

Giving Diligence its Due: Part 1 of 2
by Bryan Banke

Figure 1 Figure 2 Figure 3 Figure 4

Image 1

A DECADE AGO, BEFORE THE ADVENT OF UTILITY-SCALE SOLAR and residential solar lease Diligence and The Diligent
programs, commercial solar had a project inance problem: afordable money was hard to Due diligence is a fuzzy term. Most in this business consider it “checking others’ work”
ind. his was not surprising given that credit default swaps and mortgage derivatives were as it applies to purchasing or inancing a project. But, the applicable scope should be ex-

considered safe, proitable bets while 100kW solar arrays and 20 year PPAs were exotic panded beyond the buyer to include everyone involved in a project from start to inish,
beasts from strange lands, not to be triled with.
and broaden the deinition to mean “working with careful and close attention to detail and
Time passed. Global module manufacturing capacity grew to exceed demand while raw thoroughness.” In other words, miss nothing, and make no mistakes. hrough this redeini-
material prices fell. Modules became a commodity. Climate change was becoming obvious. tion, diligence is given its due.

A global inancial crisis readjusted risk outlook, leading to rock-bottom interest rates. And, It doesn’t matter where one stands in the project pyramid, due diligence and determina-
key to the equation, it was found that solar actually worked as described, both physically tion are key. A project can fail if deprived of either, so everyone involved needs to perform
and inancially.
their role with great care. Developers bear the brunt since they typically start from scratch,
As a result, the solar atmosphere lipped from one of many projects chasing little money deal with the most hurdles, and their work will be scrutinized repeatedly by others in later

to one of lots of money chasing few projects. As dynamic as the environment sounds, the stages.
goals and processes behind project diligence have remained fairly stable. It is the position
of the diligent that has changed.
Developers
A developer focused on build-and-lip utility solar projects is typically responsible to:

The Project Risk Pyramids
• look for suitable land near transmission lines connected to a willing utility of-taker with
Gauging project development risk comes down to the value placed on money, time, and adequate renewable resources;
good-will. All three are inite so wasting them is never desirable. he value of each, how- • start a conversation with landowners, a utility of-taker, transmission entity, ISO, local
ever, is a matter of perspective, and understanding the viewpoints of the principal players permitting agencies, engineers, and others to determine project feasibility;

contributes to the success of a project.
• compile numbers to ascertain economic viability and negotiating start-points;
By taking a look at these core players in a renewable energy project, it is possible to • negotiate PPA, land lease/purchase, interconnection, etc.;
understand the risk each assumes. Image 1 shows the layers of renewable project devel- • engage Engineering to actively navigate permitting, and Legal to formalize agreements;
opment; developers at the base (development risk), inancier/owner at the peak (operat- • pay for preliminary design, interconnection costs, permitting fees, environmental/feasi-

ing risk), and in between is Engineering, Procurement, and Construction (EPC)/project bility studies, title search, tax opinions, legal costs, etc.;
management (execution risk). he pyramid is generic but adaptable to all manner of de- • ensure everything is accurate and nothing is left to question; and
velopment structures. A developer expends resources to build a base upon which an EPC • seek a buyer or engage with EPC and inancing.
commits capital that is eventually paid for by the owner/inancier. he developer, EPC, and

owner each assume the risk of the former. More speciically, an independent developer hese aren’t necessarily taken in progressive steps; many things run concurrently or super-
spends time and money maneuvering through dozens of hurdles—any one of which can sede one another. An interconnection agreement usually requires a prior feasibility study,
lead to a dead stop—until reaching Notice to Proceed (NTP). Regardless if they hold or
or an early tax opinion could determine whether a new market is worth pursuing. he no-

sell the NTP project at this point, the owner then assumes all of the developer’s risk plus, table point is that the outlay of time and capital begins early and increases as the project
eventually, the risks to be incurred by the EPC in procurement costs and deadline responsi- clears potentially project-killing hurdles, both recognized and overlooked.
bilities. As the project moves further to COD and beyond, operating risk, i.e. weather, of-
taker, technology, etc., get piled on top and are borne by the inal owner. he failure points EPC / Project Owner

reduce in number but the risks expand as the project advances and more capital and time Once a project reaches NTP, an EPC contractor is brought in to make the project a physical
are spent.
reality. he typical job of the EPC is to:
An inverted pyramid, or “V”, represents the concentration of risk through the project 1) review the project package, its underlying obligations and assumptions, and accurately
timeline. he width of the “V” at the top—or the owner’s position—varies depending on forecast costs to build a competitive EPC price;

many factors summed up as “depth of accurate knowledge”; knowledge of all facets of the 2) inalize drawings, engineering, permitting, scheduling, safety and logistics plans;
project and the competency of those involved. A narrow “V” means more knowledge and 3) begin procurement of capital equipment and contract with required sub-contractors;
less risk while wide means the opposite (Figures 1 & 2). he “V” can never go away due to 4) manage the construction site, logistics, cash low, contractors, employees, liens, per-
the variable nature of renewable resources, but it can be kept thin with proper diligence. mits, quality control, milestone obligations, safety issues, AHJs, and more;

Unknown mistakes or omissions will inadvertently widen the “V”. If not caught early, the 5) guide the project to substantial completion then tackle the inal completion punch list;
error will grow and increase risk as it concentrates upwards (Figure 3). Conversely, catching and
the error early can revert the “V” to an acceptable degree (Figure 4). Catching it too late or 6) administer the EPC warranty obligation through the contracted term.
not at all can kill the project.

68 JULY/AUGUST 2015 nacleanenergy.com