Framework for Project Development in the Renewable Energy ...

1 NREL is a national laboratory of the Department of Energy , Office of Energy Efficiency & Renewable Energy , operated by the Alliance for Sustainable Energy , LLC. Contract No. DE-AC36-08GO28308 A Framework for Project Development in the Renewable Energy Sector Robert Springer Technical Report NREL/TP-7A40-57963 February 2013 NREL is a national laboratory of the Department of Energy , Office of Energy Efficiency & Renewable Energy , operated by the Alliance for Sustainable Energy , LLC. National Renewable Energy Laboratory 15013 Denver West Parkway Golden, Colorado 80401 303-275-3000 Contract No. DE-AC36-08GO28308 A Framework for Project Development in the Renewable Energy Sector Robert Springer Prepared under Task No(s). and Technical Report NREL/TP-7A40-57963 February 2013 NOTICE This report was prepared as an account of work sponsored by an agency of the United States government. Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights.

2 Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States government or any agency thereof. Available electronically at Available for a processing fee to Department of Energy and its contractors, in paper, from: Department of Energy Office of Scientific and Technical Information Box 62 Oak Ridge, TN 37831-0062 phone: fax: email: Available for sale to the public, in paper, from: Department of Commerce National Technical Information Service 5285 Port Royal Road Springfield, VA 22161 phone: fax: email: online ordering: Cover Photos: (left to right) PIX 16416, PIX 17423, PIX 16560, PIX 17613, PIX 17436, PIX 17721 Printed on paper containing at least 50% wastepaper, including 10% post consumer waste.

3 Iv Acronyms and Abbreviations BEPTC Baseline, Economics, Policy, Technology, Consensus COD commercial operation date FC financial close NEPA National Environmental Policy Act NPV net present value NREL National Renewable Energy Laboratory PPA power purchase agreement RFP request for proposal SROPTTC Site, Resource, Off-take, Permits, Technology, Team, Capital v Table of Contents Acronyms and Abbreviations .. iv List of Figures .. vi Executive Summary .. vii 1 Introduction .. 1 2 Key Project Development Concepts .. 2 Concept #1: Project Motivation .. 2 Pre- Development .. 2 Establishing Project Motivation with BEPTC .. 3 Concept #2: Project Development Framework .. 5 Seven Essential Elements of Project Development SROPTTC .. 6 Project Development Environment .. 7 Iterative Approach/Incremental Investment .. 9 3 Process: Applying BEPTC and SROPTTC .. 12 Further Assumptions .. 12 Defining the Role of Project Host or Sponsor.

4 12 4 Generic Example of BEPTC and SROPTTC Framework and Process Approach .. 14 vi List of Figures Figure 1. General iterative process concept in Project Development .. 5 Figure 2. Three phases of Project lifetime and corresponding milestones .. 8 Figure 3. Project stages with risks and unknowns .. 8 Figure 4. Iterations of SROPTTC Framework in the Development stage .. 10 Figure 5. Iterations of SROPTTC Framework and incremental investment decisions .. 11 Figure 6. BEPTC, SROPTTC, and Development phases .. 13 Figure 7. BEPTC and SROPPTC process diagram with 10 steps .. 14 vii Prior to embarking on the specifics of any particular Project , it is essential to gauge the fundamental market characteristics that create the conditions for success and provide sufficient support to generate what we call " Project motivation." Executive Summary The Development of Renewable Energy generation projects has become attractive to a variety of Energy consumers, installations and large institutions, land and real estate owners, and others (collectively referred to herein as the Project "sponsor" or "host") who recognize the economic, environmental, and/or security potential of Renewable Energy .

5 Whether the aspiration is for projects large or small, and regardless of whether the host will ultimately finance and build the Project themselves, each will find it necessary to take on the role of Project developer during the early stages of Project Development . The size and diversity of potential Project sponsors is significant, including but not limited to, the federal government and the military (including all its agencies and departments, facilities and installations); public and private universities and colleges; local and state governments; tribal nations; private and public companies from sole proprietorships to Fortune 500 companies; real estate investment trusts to private individuals; nonprofits and nongovernment organizations. It is rare to have resident professional Energy Project Development experience within the vast majority of these new market participants many of whom have largely dealt with electrical Energy by simply "paying the bill," and now are motivated to consider the relatively radical change of "producing their own," or at least participating in a Project in some meaningful way.

6 The concepts, descriptions, diagrams, and acronyms developed and described herein are meant to provide a contextual Framework as well as a systematic, repeatable process to assist a potential Project sponsor in understanding and navigating early-stage Project Development . Professional Project developers will recognize these concepts and hold them as intuitive and even obvious, though the fundamentals of this specialized field are rarely written down and defined as they are here. Project Development is primarily viewed as an entrepreneurial activity, subject to significant risks and unknowns while requiring ongoing investment of time, financial, and even political resources toward output that consists of completed projects. Prior to embarking on the specifics of any particular Project , it is essential to gauge the fundamental market characteristics that create the conditions for success and provide sufficient support to generate what we call " Project motivation.

7 " A motivated Project is one that has a clear pathway to success and enough opportunity that it simply cannot be ignored. It is driven by some baseline need or interest in completing the Project , the fundamental economics of Energy in the area, existing policy environment (both internal and external to the Project sponsor), and available commercial technologies and Renewable resource. This assessment and communication of fundamental Project motivation is referred to using the acronym "BEPTCTM" for Baseline, Economics, Policy, Technology, and Consensus with Project stakeholders is ideally built around the four previous characteristics. 1 BEPTC is a trademark of the Alliance for Sustainable Energy , LLC, the operator of NREL. viii To manage Development risk, fatal flaws absolutely need to be identified and analyzed quickly and accurately to avoid investment of scarce risk capital into "bad projects" and to conserve these resources.

8 With Project motivation clearly established and communicated using the BEPTC Framework , one can seriously approach a specific Project with purpose and confidence that the first incremental investment in the Project (in time, financial or political capital, etc.) is worthwhile. It is immediately clear that all expenditures are subject to the risk of complete loss, and this risk must be recognized and managed. In response, a key tenet of early-stage Development is fatal flaw analysis. To manage Development risk, fatal flaws absolutely need to be identified and analyzed quickly and accurately to avoid investment of scarce risk capital into "bad projects" and to conserve these resources. This concept shapes the process of moving a Development Project forward. Project Development now begins in earnest; it is essential to have a clear understanding of the overall context and operating environment, a Framework with which to organize and interpret information, an iterative process and fatal flaw analysis that mitigates risk while incrementally moving the Project forward, and tools that support and inform decisions, monitor Project motivation, and do so in a regular, repeatable, disciplined manner.

9 NREL has defined the seven core subject areas of Renewable projects to be: Site, Resource, Off-take, Permits, Technology, Team, and Capital and describe each in more depth in the sections that follow. These core areas form the informational Framework , and are the source of the acronym "SROPTTCTM," which has come to represent collectively all of the environment, Framework , processes, and tools of Project The principles and concepts represented by BEPTC and SROPTTC in their entirety are universal to the Project Development process and essential in successfully managing Development risk. 2 SROPTTC is a trademark of the Alliance for Sustainable Energy , LLC, the operator of NREL. 1 1 Introduction To establish a common understanding and language around the fundamental principles of Project Development two concepts need to be developed Project motivation and the Project Development environment.

10 This report details each of these concepts by using the National Renewable Energy Laboratory (NREL)-developed BEPTC and SROPTTC frameworks to highlight and support the predevelopment and Development processes and activities each Renewable Energy Project should undergo. The author is writing this for primary use by an employee or decision-maker in a Project host or sponsor role who is considering the pursuit of an on-site Renewable Energy Project of some significant scale. While larger-scale Renewable Project Development is most obviously in need of an intensive Development management scheme, the general principles and practices are applicable on projects of any size. The first concept is Project motivation a motivated Project is one that has a strong basis to come to fruition and is built on economics and risks that are acceptable to all parties; supportive policies and an execution pathway; and Project bankability. The five essential areas for strong Project motivation Baseline, Economics, Policy, Technology, and Consensus are referred to as BEPTC.