The knowledge associated with project development and EPC primarily has to do with procedures (e.g., how to obtain financing, how to navigate contracting, permitting, and relevant regulations, etc.), rather than the products and processes of a physical technology (e.g., compare to Knowledge Conditions for PV modules). However, the same three facets of knowledge (i.e., absorptive capacity, knowledge creation, knowledge spillover) can still reveal insights and research gaps regarding project development and EPC. Of interest are such issues as: do project development and EPC firms act to protect the knowledge they generate, and if so, what mechanisms do they use? Below, we review our working definition of these knowledge categories, then discuss how they apply to the specific case of project development and EPC; in cases where we do not find evidence of related research in the literature, we briefly outline how these topics could be addressed in our framework. Due to the somewhat unconventional application of innovation terminology to this industry and the nebulous nature of the types of knowledge under discussion, interviews with project development and EPC firms may be the best way to learn about the state of knowledge in this industry.
Knowledge as a Resource – Absorptive Capacity
Absorptive capacity (ACAP) refers to the conditions that allow firms to incorporate outside innovations. A popular metric of a firm’s ACAP is research and development (R&D) input (e.g., the amount of money or share of revenue a firm devotes to R&D). Beyond simply increasing R&D input, ACAP also depends on whether or not a firm has continuously invested in R&D. Employee education level (i.e., share of employees with higher education in total employee) is associated with ACAP and diversity of backgrounds among R&D personnel can help an organization maximize “novel associations and linkages” (Taylor et al 2013). Organizational structure and knowledge management culture within a firm, as well as the type of knowledge to be learned externally (e.g., intra- versus inter-industry; science-based; private-to-public or public-to-private sector) also impact a firm’s ACAP (Schmidt, 2010).
In the case of an industry like project development and EPC, traditionally defined R&D generally will not apply. However, these companies will still make investments into relevant knowledge capacity. Without the R&D metric, case studies of, for example, firm organizational structure and employee recruitment for key positions, may be necessary to understand ACAP within this sector. Below we discuss R&D, training and personnel expertise in the context of absorptive capacity for solar PV developers.
The largest solar developer in the U.S. in terms of market share, First Solar, is a highly vertically integrated firm, which provides it with incentive to invest in R&D to improve solar panel efficiency as well as to develop new cutting-edge PV cell technologies. The company spent about 88.6 million dollars in research and development in 2017, around 3 percent of its sales revenues which is nearly twice the solar industry average (SEC filing).
With the large capacity of solar expected to come online in the near future, hiring a skilled workforce to build, operate, and manage it will be a key focus for the project developers and EPCs. To this end, Cypress Creek Renewables, a major U.S. project developer, supports five solar training programs at community colleges across the country in the company’s primary markets. To equip the students with viable skill sets for future solar jobs, these programs include skills in holistic building, infrastructure and project management.
In-house expertise, particularly regarding interconnection issues and negotiation experience with PPAs and EPCs, can provide advantages to project developers. Innovative Solar Systems claims to be the “one-stop shop” for solar farm projects. Some of the core competencies they highlight include elite interconnection specialists, negotiations to secure top-quality PPAs with utilities and/or corporate renewable buyers, as well as negotiating superior pricing on EPC contracts, which they claim to achieve 30% below average utility-scale market price, based on the volume and scale of their projects.
Generally, a firm’s R&D input has a strong correlation to the number of patents it generates. Using the number of patents generated as a proxy for knowledge creation is an imperfect yet useful way to measure innovation. Other similar indicators include publications, licenses, and tacit knowledge “know-how.” Using International Patent Classification (IPC) classes, information on patents can be found in numerous patent search databases including the United States Patent and Trademark Office (USPTO), the European Patent Office (EPO), Derwent World Patents Index, World Intellectual Property Organization, and Google Patents, etc. In the case of project development and EPC, much of the knowledge generated within a firm is tacit (e.g., how and when to finance, how to negotiate contracts, etc.) and not patentable in the same way that technological innovations can be. However, intellectual property (e.g., computer program to streamline contracts) may be developed within firms and could potentially be protected through patent or copyright.
As Sivaram (2018) notes in Taming the Sun, “fueling solar’s continued rise will take three kinds of innovation: financial innovation to recruit massive levels of investment in deploying solar energy; technological innovation to harness the sun’s energy more cheaply and store it to use around the clock; and systemic innovation to redesign systems like the power grid to handle the surges and slumps of solar energy.” Knowledge created as “know-how” in financing and contracting practices (“financial innovations”) are the key processes with which project development is concerned.
The power purchase agreement (PPA), described under Descriptive Information, is a fairly recent form of contract that has developed as utility-scale renewable energy projects have become more common in recent years. Thoughtfully designed federal legislation could potentially ease the requirement for long-term PPA contracts or otherwise reduce the burdens of the utility-scale PV contract process. There are several innovative solutions to the costliness of the time and effort required to complete a PPA already in use, such as multi-award contracts (MAC) with preapproved project developers (e.g. Naval Facilities Engineering Command Southwest MAC with five solar project developers for projects in its region).
Financing is key to determine both the rate and the directions of renewable energy development. Continued growth in utility-scale PV capacity will require substantial investment, including traditional financing mechanisms, as well as innovative financing models that have emerged in response to PV market conditions, such as varying federal and state incentives, rapidly decreasing system cost, and the desire for the access to low cost capital. As utility-scale solar scaled up in recent years, financing options and processes developed concurrently, as parties involved were forced to navigate issues specific to PV and other renewable energy generation.
The appropriate financing mechanism will also depend on the nature of the firm(s) that will construct, own, and operate the PV project (e.g., independent power producer or utility)..
Tax equity financing and historical methods: A recent study by Krupa and Harvey (2017) summarized various prominent sources used to finance renewable energy project development in the U.S. These include, for example, corporate finance, private equity and venture capital, family offices and hedge funds, and institutional investors. Tax equity currently plays a major role in utility solar financing. Tax equity financing structures have included the following models: sale-leaseback, inverter lease or lease pass-through, partnership flip (Mendelsohn and Kreycik 2012). In each of these models, an entity with sufficient tax liability to take advantage of the investment tax credit for renewable energy partners with the project developer; each model results in a different state of ownership, revenue flow, and risk conditions split between the investor and project developer.
Dominant design – Project finance: Project finance (or project-based financing) is defined as “the financing of a project by a sponsor that will be repaid principally from the cash flow generated by the project or asset being financed;” it can alternatively be described as “off-balance-sheet financing” or “limited recourse” financing, in reference to two ways in which this form of financing can benefit the project sponsor. Under ordinary “corporate finance,” a company raises debt or equity against its full balance sheet and uses all firm assets and revenue flows to guarantee repayment of credit; project finance generally involves the creation of a special purpose vehicle (SPV), which is self-contained and separate from a firm’s other business interests. This type of financing involves high transaction costs and was traditionally used for large, high-risk projects where sponsors needed to protect their core business from repercussions of project failure. Over the period of 2004 to 2016, the share of new renewable projects funded through project financing grew from 16% to 52% (Krupa and Havery 2017). Early IPP power projects were largely financed using the sale-leaseback mechanism; the majority of recent utility-scale solar projects are owned by IPPs who use project finance secured through the specific project’s assets and the expected value of the project developer’s PPA with the utility (Feldman and Bolinger 2016).
Emerging finance methods: Tax equity and the sponsor equity of project finance are both expensive sources of capital; therefore, solar industry stakeholders are developing alternative lower-cost financing mechanisms that can draw down the cost of capital and bring the LCOE of utility-scale solar in line with fossil fuels. Table IO.1 summarizes many of the emerging finance mechanisms that ai m to lower capital cost or otherwise facilitate investment in utility-scale solar. Of note, YieldCos and similar financial vehicles to open the market for renewables by attracting a pool of investors to purchase shares in moderate-sized projects that are unlikely to produce the very high returns that typically attracts private equity investors. A YieldCo is a publicly traded company that owns a portfolio of utility-scale solar projects and distributes the revenue of these projects to shareholders in the form of dividends (Feldman and Bolinger 2016). In another mechanism of note, several major PV manufacturers, who are already vertically integrated across PV hardware (i.e., modules, inverters, balance-of-system components) now offer financial services; example companies include Canadian Solar and Borrego Solar. This “one-stop shopping” solution aims to reduce soft costs in large-scale PV.
Table KO.1 Emerging Finance Methods in Utility-Scale Solar
Source: Table 4 from J.Krupa, and L.D.D. Harvey (2017)
|Securitization through asset-backed securities||The process of polling illiquid assets into liquid and readily tradable securities. One example-asset-based securities (ABSs) represents rights to cash flows derived from portfolios of real asset loans.|
|Master Limited Partnerships (MLPs)||Liquid, tax-advantaged limited liability partnerships that have been popular in the conventional energy industry. Hold significant potential for application to RE, but legislative changes are required.|
|Real Estate Investment Trust (REITs)||Publicly traded entities used on several international exchanges that typically own, operate, and –to a limited extent-develop income-producing real estate property. Hold significant potential for application to RE, but require definitive tax rulings from the IRS or legislative changes.|
|Yieldcos||A dividend distributing publicly listed company, a yieldco combines different operational assets that have predictable cash flows|
|Green Bonds||Standard (or “plain vanilla”) bonds applied to environmental-friendly projects|
|Green Banks||A model that leverages a set amount of public monies to attract greater sums from the private sectors.|
|Institutional investors||Corporations or other legal entities that ultimately serve as financial intermediaries between individuals and investment markets.|
|Corporate PPAs||Contracts inked by corporates with renewable generators to provide renewable energy generation.|
|Crowdfunding||Websites that allow the public to fund causes or business.|
|Community Energy||Non-profit generators, such as communities.|
Knowledge spillover is hard to measure because it tends to be less tangible or readily observable than other innovation metrics. Spillover can be considered between companies, between public and private institutions, and across geographies. Firms often aim to appropriate the returns of innovation (i.e., prevent knowledge spillover) through patents or secrecy. Backward and forward citation of patents can reveal connections between the knowledge imbedded in technologies; backward citation refers to patents cited by the patent of interest, while forward citation refers to patents citing the patent of interest.
Knowledge can also spread as teams collaborate on research and publication. Network analysis, the characterization and investigation of social structures through graphs of nodes (e.g., people, things) and linkages (e.g., relationships, interactions), can be used to explore the connections between different groups of researchers involved in the same field of study. In the case of project development and EPC, such things as attendance of industry conferences or publication in the special topic issues of trade journals could potentially reveal key interactions between industry players. Other relationships of interest include pairings of project development and EPC firms, and the degree to which certain developers work with only a small number of EPCs versus a variety of them, and vice versa. Among those firms with many partners, an EPC may be able to spread knowledge between two project developers or a project developer may spread knowledge between two EPCs.
Tacit knowledge is a primary source of research spillovers because this type of knowledge is embodied in the skills of the firm’s employees. Informal exchanges between researchers, training/workshops, and job turnover between firms are channels through which tacit knowledge flows from one firm to the other (Kaiser, 2002).