Part 2 – Solar Development Risks 101

This article is the second part of a three-part series about how to identify land that is suitable for developing a ground-mount solar project in Massachusetts. The inspiration for this post is my personal interest in acquiring land to lease to a solar developer, in addition to building a house on it.

Part 1 of the series is about general project risks, my investment criteria, the factors that will drive the economics, and some basic sensitivity analysis. This article (Part 2) is about understanding the characteristics of the land required for a solar development project so I can reverse-engineer the land research process and reduce risk as much as possible. It’s also about understanding key items I’ll need to be aware of when screening potential developers to work with.

Part 3 focuses on the the tools used to screen properties and a step-by-step example of how I screened a property.

If you’re new to commercial solar finance and need to review some basics, sign up for our Free Course: Commercial Solar PPAs 101.

Article Outline

• The general risk of land acquisition
• General development. What are the pieces that need to be in place to develop a solar project and what of those items can I screen for before acquiring the land?  I’ll address the components of the land, the utility sector, and then solar specific items that must be addressed to develop a project.
• Risks in the land acquisition process. For each of the above items, I’ll outline the risks that I see in the process and how, if possible, those risks can be dealt with prior to purchasing the land.

The Risk of Land Acquisition

The worst thing that can happen is that I acquire land that I think can be developed, but after acquisition I realize it can’t be developed on. The financial risk is twofold: an ongoing negative cash flow required to pay property taxes and the opportunity cost that could have been gained by investing that cash in the public market or in education opportunities that could yield higher returns over the next 20 years.

If you look at the sensitivity analysis from Part 1, the worst-case scenario is only losing a few thousand dollars over 20 years while the best- and middle-case scenarios are great returns.

However, I’d still like to remove as much risk as possible.

In this process there are risks that need to be understood and researched before buying the land and risks that are known but cannot be researched beforehand and must be dealt with after purchasing the land and starting the process.

General Solar Project Development 101

First, I’ll outline the general items that need be addressed to develop any solar project. While I will work with a solar developer—so that they can deal with most of the headaches of developing the project—it’s key to understand all of the things they will need to do and how the land impacts those decisions, to give the project the best opportunity of succeeding. If you want a basic review of all the items a commercial solar developer needs before selling a project to an investor, review this article: “A Step-by-Step Guide of How to Sell your Solar Projects to Investors”.

1. Land Characteristics 

• The ideal scenario is that the land is flat with less than a 6-degree tilt. If the land is tilted more than 6 degrees, it’s still possible to develop the property, but the tilt must be south.
• In Massachusetts SREC II policy, the best-sized project for a ground-mount under current regulations is 650kW. This will use approximately 4 acres, but it could be a little more. An acre is 43,560 square feet, so I’ll be looking for land that has at least 174,240 square feet. I’ll show you why this number is important when using Oliver GIS in the next article.
• The land is zoned correctly. Massachusetts has state-wide zoning that allows for solar projects, but it’s good to check the zoning of the specific AHJ to see if any towns have solar-specific regulations on setbacks, project size, etc.
• The land has no use restrictions, easements, wetlands. The land deed must be researched to verify that no existing easements exist on the property that could stop development. Also, wetlands and other features that can restrict development must be researched.
• The land has road access. The property must have road access for the project to be built.
• Wooded. It’s easiest if the property is not wooded, but it can be wooded if all other criteria are met. Removing woods is rather easy, and, depending on the tree stand, companies will pay you to remove the trees.

Land Risks

All of the characteristics of the land can be researched and identified with public knowledge using existing tools that are cheap or free. The most important factor that can take some time is deed research. However, if I’m serious about the project, my guess is that a real estate agent can help me.

2. Utility Grid Characteristics

In addition to land characteristics, the project will also need to be interconnected with the grid. This means that there are a number of grid characteristics that need to be met in order to develop a project. Here are the most important items:

• Access to three-phase power. The project will need to have access to three-phase power. This means that the closest street will need to have three-phase power and be within about 500 feet of the project.
• Capacity on the feeder. In addition to having three-phase power, the closest feeder will need to have the additional capacity to be able to allow for the added load. We can figure this out by emailing the utility in question with the address of the proposed project and asking about the feeder capacity.
• We can get into the interconnection queue. Even if the site has access to three-phase power and capacity in the interconnection queue, we’ll need to be able to get into the interconnection queue.

Utility Risks

Identifying access to three phase power and feeder capacity is all possible before acquiring the land. The largest utility risk is simply that we cannot get into the interconnection queue and that this completely stops the process. Because anyone can submit a project into the interconnection queue, there might be space one day and not the next. Also, because it’s impossible to predict when and how much capacity might be added to the interconnection queue, it’s a grey and unpredictable process. This is one of the largest risks that cannot be mitigated with research before purchasing the land.

3. Solar Land Development Risks

In order to develop a solar project there are a number of other items that must be considered in addition to acquiring the right land and handling all of the utility risks.

It will be the solar developer’s responsibility to deal with most of these issues. However, it’s important to know what they are because it will be easier to find the best developer to work with. My definition of the best developer: someone who will build and close the project as fast as possible with the smallest number of problems.

• Virtual PPA off-taker. There will be no on-site electric use on the property. This means that in order to sell the power, we’ll need to find another electric user who is interested in purchasing the power. While this shouldn’t be difficult given the recent rate hikes in Massachusetts, it’s a key component of the project that must be completed. Finding a solar developer that has existing relationships with heavy electric users in the territory where the project will be developed is very important.
• Investors to buy the projects. After the project is developed, the developer will need to be able to sell the project to investors. From my perspective, my lease payments will be coming from the investor and not the developer. Thus, it’s key to work with a developer who has multiple sources of funding and has a proven track record of developer projects similar to mine.
• EPC relationships. After the project has an off-taker and an investor, the project will need to be built. The EPC market in Massachusetts is very developed, so this should not be a problem.

Developer Risks

The single largest risk in the solar development aspect is finding an off-taker that is willing to sign a PPA to buy the power. I’ve heard anecdotally that there are MWs of projects waiting to be built in Massachusetts that are looking for off-takers. This will be a key item that I’ll need to be aware of when screening potential developers.

Also, having a fund to buy the project is extremely important. While I’ll only work with a developer that has multiple sources of funding, I don’t see this as a huge risk. Everyone I’ve spoken with lately in Massachusetts is saying that there is actually too much Wall Street capital flooding into the solar industry.

Conclusions and Question

Did I miss any large risks in my analysis? If yes, please let me know in the comments below.

My main conclusions after writing this are that there are two large risks that cannot be researched prior to purchasing the land. The rest of the risks are real, but it seems possible that they can be researched and understood prior to purchasing the land.

• Interconnection queue risk. It will take time and money to submit a permit package to get a spot in the queue and the availability of space can change from day to day without warning.
• PPA off-taker risk. Even if we can get into the interconnection queue,  the project cannot be built without an off-taker.