Descriptive Text of Value Chain Step
Project development is a commercial activity which inevitably involves risk, time, and financial as well as political resources. The project developer typically initiates new solar power projects and retains ownership of them during at least the early stages of development. Project development activities usually include site selection, negotiations with the landowner, the permit application and grid connection, and acquisition of financial resources. The project developer often arranges the engineering, procurement, and construction (EPC) contractor through either in-house capacity or hires a firm specializing in EPC. The EPC is responsible for engineering and design, procurement of PV systems and other balance of plant equipment and materials, and construction and commissioning of generation facilities. The project developer also typically identifies a suitable power off-taker. Based on NREL’s estimates, project development and EPC account for four to five percent of total project costs, the fraction can vary by project size and mounting type (see Figure DI.1).
Figure IO.1 Utility-Scale PV System Cost Breakdown, 2017 $/W
Source: Figure 29 from NREL U.S. Solar PV System Cost Benchmark Q1 2017.
Project development and EPC activities of the utility-scale PV value chain are covered by the aggregated industries “Power and Communication Line and Related Structures Construction” (NAICS 237130), “Utility System Construction Architectural, Engineering, and Related Services” (NAICS 5413), “Industrial building construction” (NAICS 236210), and “Electrical Contractors and other Wiring Installation Contractors” (NAICS 238210). However, even at their most disaggregated level (six-digit codes), NAICS codes cover a range of components, products or services that are not specific to PV activities.
Below we provide brief descriptions of major project development and EPC tasks involved in developing a solar project.
Land acquisition: The land rights needed to build a utility-scale PV project can be acquired through easement, lease, or fee title, depending on the project location and current owner of the land. For example, on federal land, sometimes a right-of-way may be granted under Title V of the Federal Land Policy and Management Act (FLPMA) if the proposed project is consistent with the land-use planning of the U.S. Bureau of Land Management (BLM). BLM manages more than 19 million acres of public lands with excellent solar energy potential across California, Nevada, Arizona, New Mexico, Colorado and Utah. Between 2010 and 2016, BLM approved 34 utility-scale solar energy projects with a total capacity of 9,763 MW for construction on public lands in the U.S. Southwest. This value suggests that about 42% of utility-scale solar projects were located on federal lands as of 2016; prior to this time period, the majority of utility solar installations were on private land.
One important consideration when acquiring the land for a utility-scale PV project is the land use efficiency, measured in watts per square meter (Wm−2). Utility solar installations on private land tend to have a significantly greater land use efficiency (35.8 Wm−2) than installations on public land (25.4 Wm−2). Producing a sizable quantity of electricity from utility-scale solar requires a vast amount of space; Hernandez et al. (2015) estimate that with a land-use efficiency of 35 Wm−2 at a capacity factor of 0.20, a single terawatt of utility-scale solar project capacity would require 142,857 km2 of land, roughly the area of New York. Today’s utility-scale solar power technologies and environmental practices ensure that land impact is minimized when these plants are sited. For example, according to EPA’s “Re-powering America’s lands” program, current and formerly contaminated lands, landfills and mine sites are particularly encouraged to re-utilize for renewable energy development.
Solar resource analysis: This step is to determine if a site has sufficient solar resources, and to project the amount of energy it will be able to produce, in order to determine the size and economic viability of the project and to inform negotiations with potential power off-takers. Solar resource analysis can be conducted using public data sources (e.g., NREL National Solar Radiation Data Base) or independent solar resource analysts can be hired to perform this task.
Permitting: In the U.S., permits are required at the local, state and federal level to construct and operate the solar project and to sell the electricity produced. Typically, a solar project needs approval from a local land use board or zoning authority, a building permit, an electrical permit, and in some cases, a permit from the fire department. Solar projects located on federal lands may require permits from the BLM or the Department of Agriculture’s Forest Services. The complexity and time requirements of the permitting process and limited availability of large, contiguous parcels of appropriately located land can delay projects and create a barrier to developing utility-scale solar.
The permitting process varies among states. Some states have a single agency or siting authority to process the project application, while in other states the developers may have to obtain permits from different state and local agencies. Project developers need to be familiar with the local authority having jurisdiction (AHJ) and their specific codes.
Transmission and interconnection: Utility-scale solar projects usually sell the electricity they generate to wholesale utility buyers. Interconnection agreements are typically pre-approved by the state public utility commission and usually are not negotiable. The project developer must pay the costs required for the utility to accept an interconnection and for any facilities and upgrades that may be required to ensure the grid stability. Sometimes upgrades may not be possible or feasible at all. Pre-existing availability of nearby transmission of adequate excess capacity is the norm. Also, when transmission upgrades are planned, the project developer can try to time the project timeline with the transmission upgrade timeline.
PPA and financing: Financing will need to be obtained to pay for the costs of getting the solar project up and running. Many factors can impact the financial viability of a utility-scale PV project, including the availability of preferential tariffs (e.g., feed-in tariffs), production or investment tax credits, and other policy incentives. During 2010-2014, onshore wind and crystalline silicon PV technology risk were classified as low, and thin film PV was considered medium risk during the same period (Mazzucato and Semieniuk 2018). Investors will take this into account when aiming to build heterogeneous investment portfolios.
One factor of key importance to potential lenders is the presence of a power purchase agreement (PPA). A PPA is a financial agreement with a power off-taker that specifies the terms under which electricity produced at the PV project will be sold (other related agreements, such as the loan agreement, grid connection agreement, and EPC contract, should align with the PPA). A typical PPA specifies: the rate to be paid for electricity or the method that will be used to determine it (e.g., fixed rate, reverse auction, marginal cost of supply, etc.), the installed capacity of the PV project, the predicted annual electricity production over the project’s lifetime, and the rights to any environmental credits accruing from the PV project. Other factors related to the PV project’s costs and expected revenues may also be specified in the PPA. The creditworthiness of the PPA counterparty is of high importance to financers.
Environmental review: Depending on the project size, location and other characteristics, the solar proposal is usually subject to environmental review. This process evaluates the project’s impacts on natural, cultural or historical resources and wildlife, including consideration of the visibility of solar panels within the broader landscape, detrimental effects on vulnerable species, and potential for disturbance of archeological and key heritage sites. Utility PV projects located on federal land typically require a review under the National Environmental Policy Act, and possibly a follow-up Environmental Impact Statement. At the state level, some states conduct this review simultaneously with the permitting process, and the details of the environmental review process differ between states.
Engineering, Procurement, and Construction (EPC)
For many utility-scale PV projects, the project developer hires an EPC firm to perform tasks other than those related to permits, financing, and legalities. In some cases, a company may be vertically integrated between manufacturing, development, and EPC (e.g., First Solar), and there exist a wide range of possible arrangements of tasks between project developers and EPCs (Figures DI.2). EPC activities (e.g., design and engineering) may occur at the same time as project developer tasks (e.g., finalization of legal agreements). The decision between in-house EPC, speciality firm or generic EPC is related to the overall riskiness of the technology.
Figure DI.2 Examples of Relationships between Project Developers and EPCs
Source: Table 4 from The evolving landscape for EPCs in U.S. renewables (BNEF 2014)
A typical EPC’s functions in the process of commissioning an energy project can be broadly categorized as: engineering, procurement, construction. EPC costs for PV projects range from about $1.38/W to $1.97/W depending on the size and location of the project. While PV modules and inverters account for the largest share of a PV project’s cost (generally 40-50%), labor costs can be more problematic for planning purposes as they can be unpredictable and vary strongly by locations and between unionized and non-unionized employees.
Engineering (E): The engineering phase, which can be up to a multi-year process for very large plants, begins with a site survey and feasibility analysis and results in a full design of the PV project, including the number and arrangement of PV modules and inverters, as well as buildings and roads that will be used for operations and maintenance activities. This design will be used to inform procurement needs and guide construction.
Procurement (P): Procurement entails the purchase of all physical equipment and materials and the hiring of all labor required to complete the PV project. Equipment and materials include construction vehicles and key generation infrastructure such as modules and inverters. The timing of procurement activities impacts total installed project costs because early delivery may result in storage costs and late delivery may cause costly delays in construction.
Construction (C): In the construction phase, the modules and inverters are installed and all supporting infrastructure is built. For PV projects, the term “balance of system” is used to refer to all components of a solar project apart from the modules (e.g., cables, racking systems, wiring, road grading, inverters). Generally, multiple companies will be involved in construction, with specific tasks (e.g., electrical, roads) subcontracted from a general contractor to specialists.
Throughout the project development and EPC processes, many types of labor are required. Real estate brokers acquire land through purchase or lease. Atmospheric scientists or other solar specialists assess the suitability of a location for solar energy production. Environmental scientists perform the environmental review of the proposed site. Engineers design the PV system and supporting infrastructure. Procurement specialists arrange for the purchase and delivery of all necessary equipment and materials. General and specialized contractors assemble the PV system and construct supporting infrastructure. The scale and profitability of the project development and EPC industries will be impacted by changes to the availability of these types of workers and changes to salaries.
Figure DI.3 and Figure DI.4 illustrate examples of project schedule for solar project developers and EPCs.
Figure DI.3 Flowchart of Solar Project Development, EPC and Operations
Source: Slide 11 of YPE presentation by Alejo Lopez https://www.slideshare.net/alejolop/developing-solar-projects
Figure DI.4 General large scale renewable energy project development process and stakeholders for projects locate on federal land
Source: Figure 6 from DOE. 2013.