Tip:
Highlight text to annotate it
X
I would like to introduce our speaker for today. Our speaker is Jeff Dominick. Jeff
holds a Bachelor's Degree in Mechanical Engineering from Virginia Tech and an MBA from University
of Colorado. He is currently the National Renewable Energy Laboratory’s Principal
Investigator for energy improvement demonstration projects funded at Navy sites in Hawaii and
Guam. His responsibilities include leading the demonstration planning and reporting of
results. Previously Jeff led the Federal Energy Management
Program activities at the Laboratory, including the delivery of energy efficiency and renewable
energy technology assistance to federal agencies. Jeff specialized in the financing and development
of federal solar and wind distributed energy systems. Jeff also worked with an energy services
company specializing in large renewable generation projects on federal sites.
Previous to NREL employment, while at NASA’s Johnson Space Center in Houston, TX, Jeff
was a project manager responsible for the design, development, and test of spacecraft
life support and cooling systems. With that, I’m going to turn it over to
Jeff. Jeff… Hello, my name is Jeff Dominick and I’m
a project development specialist at the National Renewable Energy Laboratory (NREL). I’d
like to introduce you to FEMP’s Large Scale Renewable Energy Guide.
Here’s the cover page of the document, which is available from FEMP’s website.
For those of you that are new to the Federal Energy Management Program, FEMP is a great
resource for helping agencies meet their energy goals.
The FEMP Renewable Energy program works to increase the proportion of renewable energy
in the Federal government’s energy mix.
We provide four services to help meet this goal: (1) web-based knowledge and tools; (2)
project assistance; (3) interagency coordination; and (4) guidance.
Our technical assistance is organized around three different types of renewable energy
projects: (1) distributed-scale projects, which are typically smaller than 10 MWs; (2)
large-scale RE projects, which are typically larger than 10 MWs; and (3) integrating renewables
in green building construction or major renovations.
Unlike distributed-scale renewable energy projects, large-scale renewable energy projects
are limited to the few agencies that have the land and sometimes the load to host these
projects. We see the Army, Navy, Marines, Air Force, the Department of Energy, and NASA
as the main agencies in this space.
Like other agencies, these six Federal agencies are motivated by several Federal agency goals
(1) renewable energy goal to consume at least 7.5% of total electricity from renewables
(2) the new goal from the President’s Climate Action Plan from June 25th to have 20% consumption
of renewable electricity by 2020, and (3) the goal to reduce greenhouse gas emissions
28% by 2020.
In particular, the Department of Defense has the ambitious goal to produce 3 GWs of renewables
by 2025, with the Army, Navy, and Air Force each contributing 1 GW.
: Our approach to large-scale renewable energy
projects is captured in our Large-scale RE Guide. The Guide is based on a common project
development and implementation process that was adapted from private sector best practices,
and is pictured in the three horizontal lines on this graphic. Each line represents a different
perspective: (1) Federal Agency; (2) Developer; and (3) Financier. I’ll develop and explain
the pieces of this key graphic later in the presentation.
Our objective is that Federal agencies and the private sector have a common process for
developing large-scale renewable projects even though their language and terms are different.
You can see on the graphic that the left and middle parts of the process seem to be broken
down in stages with different names and stages that sometimes don’t align in time. However,
the work going on in these stages is mostly the same and can be coordinated by using the
Guide.
Large renewable energy projects require large financial investments, both in their development
and ultimately in their construction. Your project has to compete against other projects
to obtain the funding it requires. Early on you will be competing for funding within your
agency to identify and establish feasibility and value of your project. Those early federal
investments enable the selection of a development partner who can complete the development and
position your project favorably to attract private capital investment
The Guide will help you maximize your odds of success.
So far the Guide has been used by three agencies.
FEMP is using the Guide to provide implementation support to DOE’s Pantex Plant wind farm.
It is being financed through an Energy Savings Performance Contract, or ESPC.
FEMP has worked closely with the Army’s Energy Initiatives Task Force, which is the
Army’s central management office responsible for its large-scale renewable energy projects.
The process in our Guide is a basis for the Army’s internal process. The EITF is currently
supporting 4 projects.
Many elements of the Guide have also been incorporated by the Navy.
To develop these competitive projects, the Guide outlines the perspectives, goals, and
roles of the Federal agency, project developer, and financier so that each party can understand
the other and see where they fit within a common project development process.
The Guide creates a methodology to (1) build strong business cases; (2) define and mitigate
risks; and (3) establish good project characteristics.
If agencies develop projects that follow this process and methodology, they should be able
to issue strong competitive solicitations that should attract the interest of the most
experienced project developers.
Although Federal agencies and the private sector have different sub-goals, both have
the primary goal of deploying significant amounts of large-scale renewable energy projects
on Federal lands using private investment.
This slide highlights the difference in perspective between the project developer and the government.
The developer is used to finding creative solutions with private sector partners and
expects to be able to apply them to Federal agency projects as well. However, Federal
agencies don’t always have the same flexibility because they can only do what is authorized
by law. The Guide identifies these types of important differences, and adapts the private
sector best practices for use on federal projects.
FEMP adopted the best practices of commercial development in its guide, so let’s run through
the normal commercial development process:
It begins with Market and Portfolio Analysis, where the developer identifies its target
markets (technology, region, client, etc.) and queues up project opportunities. Based
on its portfolio analysis it picks one or more projects to develop, using an incremental
approach to address key issues and identify any fatal flaws as quickly as possible, minimizing
development expenses.
If the project remains viable through the iterative process and key agreements are secured,
it becomes a “bankable” project that can obtain construction financing.
At construction completion the project’s operations generate revenues that provide
a return on the prior investments.
Now we will explore how the commercial development process has been adapted for use in a federal
project, showing the roles of both the federal and developer partners.
Just like the developer had to step back and consider what types of projects it wants to
pursue, the federal agency should also perform a rigorous identification and vetting process
to focus scarce federal resources on the highest potential and most likely to succeed projects.
These first two steps are led by the federal agency, allowing them to dictate where and
what projects are developed, and building a strong basis for attracting and selecting
a developer partner. The last three steps are typical for most federal projects implemented
through contracts with the private sector.
As you recall, private developers are always on the lookout for project opportunities that
meet their criteria.
So when the federal agency puts out a solicitation package containing its pre-development results,
interested developers will adopt that package, and supplement it as necessary to respond
to the RFP. They trade the risks of doing the pre-development for the risk of submitting
a competitive proposal.
The winning development partner joins the project team, leading the remaining development
activities
So you can see how the federal agency leads the process in the early stages…
And that federal leadership transitions to developer leadership to complete the development.
Depending on the project type, the developer may need other agreements and contracts to
ultimately assemble a “bankable” project that can obtain construction financing.
Although these early steps don’t always align, they share common functions.
Both entities address Project Fundamentals to identify and select the most promising
projects to develop, and…
Then they work together on an iterative process that FEMP has called the Project Development
Framework to complete the development work. We’ll talk more about Project Fundamentals
and the Project Development Framework in the next two slides.
Project Fundamentals need to be assessed to identify and screen project opportunities.
We’ve grouped those assessment tasks into five elements to determine if there’s a
strong market or environment for your project opportunities.
The first element is baseline. Baseline looks at the current characteristics of the local
energy market (e.g., current fuel mix, and energy demand and supply projections) to see
how renewables might compete against existing generation, local and imported. Renewables
do not make sense everywhere, so there should be supportive reasons for doing a large-scale
project at a particular Federal agency site.
The second is economics. Which types of renewable technologies and projects could produce power
at market rates be and profitable for a developer? If a project is not economic at this stage,
it will likely not improve later in project development. In that case, the agency needs
to decide whether it or any other off-taker is willing to pay above market rates for green
electricity, which leads to the next element of Policy.
Supportive policies, such as state renewable portfolio standards, can make project economic,
while unsupportive policies, such as limitations or bans on “behind the meter” third-party
power purchase agreements, can kill a project. Other Federal, state, and local policies typically
affect the economics and risks of a project.
The fourth is technology. For large-scale renewables projects, the technology should
be commercially available and have a good track record – avoid unproven technologies.
The quality of the local renewable resources will dictate what types of technologies to
consider – an agency should consider only one or sometimes two realistic renewable resources
per site and at least have a preliminary assessment of the renewable resource.
The fifth is consensus, at least internal to the agency. After analyzing the first four
elements on a portfolio of projects, the agency should identify the renewable opportunities
with the strongest fundamentals and then agree to support only those opportunities. After
this stage of a project, the agency will have to make an even greater investment in the
development of specific projects. Further, more players will start to be involved in
the project. Consensus is therefore critical to ensure that the best projects continue
to move forward with a minimum of second guessing.
Project Fundamentals queue up the most promising projects for development. The project development
process iteratively assesses and builds on seven categories of information, ultimately
leading to a bankable project that’s attractive to private investors.
The first four categories are the most important and are the focus of both the Federal agency
and private sector. The agency is the initial party that addresses these categories, focusing
on the first four, but after a developer is selected, the developer will complete each
category.
The first category is site. The agency needs a site that can host a renewable energy power
plant, and that can be made available to the developer under a long-term land-use transaction
such as a lease or an easement. The characteristics of the land have to match the characteristics
of the technology (solar wants flat and no shading) and the developer and operations
and maintenance provider will need to have easy access to the project.
The second is resources. A detailed assessment of the renewable resource that meets industry
standards is necessary. That study will answer important questions about resource variability
and probability. A P50 assessment would be for an average year, while a P90 assessment
would determine the potential output 90 percent of the time. This is important, since the
developer often takes the weather risks, and a bank wants to get paid even in a bad weather
year.
The third is off-taker. The off-taker is the buyer of the energy from the renewable power
plant. In some cases the Federal agency will be the sole off-taker. In larger projects,
the agency’s annual load may be a fraction of the project’s total annual generation
and therefore some other customer, most likely a utility, will be the primary off-taker.
It is essential to find an off-taker because its purchase of electricity is the revenue
stream for the project. Especially when the project is financed with debt, the off-taker
agreement is usually longer than 15 years so that there can be a reasonable expectation
of earning a return on the investment. In addition, this category assesses any interconnection
and transmission constraints to assure you can deliver your energy to your off taker.
The fourth is permitting. Before a project can be constructed and interconnected to the
grid, all related Federal, state, and local authorizations must be granted. Often, NEPA
compliance is the most important factor in this category. The Federal agency leads the
NEPA process, and should at least start the process during pre-development. Once selected,
a developer can assist in performing any remaining studies and assessments required to support
the government’s final determination.
The fifth is technology. In this category, the technical design detail increases over
time, culminating with the selection of specific technology vendors and manufacturers. Quotes
are obtained from at least one reputable construction firm with sufficient bonding authority and
availability to take on such a large project.
The sixth is team. Just as banks consider the experience of the project development
team when making financing decisions, the Federal agency team should consist of members
experienced in key areas, such as contracting, real estate, legal, and security.
The final category is capital. After the first six elements are in place, the developer can
then work with the financier to reach financial close.
Stepping back, this slide summarizes the process, which is reliable and repeatable. This consistency
helps reduce the risks for the project developer and is familiar to the investment community.
Here we tie the project development framework back to the project stages.
Once a project is selected for development, a first pass through the framework is made,
particularly the first four elements.
If no fatal flaws are identified, additional iterations are made. When the project looks
sufficiently viable but will need larger amounts of development funding and expertise, government
will document its results to date and put out a solicitation.
Once the developer is selected, it will lead the remaining iterations. At each iteration,
you are looking for the most important fatal flaws or major risks in the seven categories.
After an iteration, you decide whether to make another incremental investment in development.
So the federal agency leads the early stages…
That are documented in the RFP to select a development partner.
With the private developer partner leading the later stages.
These identifiable stages and common understandings of the project development framework enable
the federal and private sector partners to communicate and act as a team, building a
bankable project. The Government starts the process, with the developer leading the later
stages.
This process is familiar to your private sector partners, so if you adhere to it, your project
will appear less risky and more attractive to the financiers and developers you want
on your team. The “Iterative, disciplined process for investing” makes sure you spend
your federal development dollars responsibly, and helps your developer partner manage his
risk.
We’ve talked about the federal partnership with the developer, however...
In both federal and private project developments…
There is a financial dimension that plays a role in moving to the next stage. The developer
will use its own funds to do most or all of the development, however at some point it
will need to tap the capital markets to complete the project.
On federal projects the agency will pay for the pre-development; however the remaining
development and major capital expenses will require private sector investment. The relative
scale of these investments, and how they relate to project risk, is addressed in the next
two slides.
Underlying the project development process is risk. Risk is key because large-scale renewable
energy projects are highly complex and risky. The Guide acknowledges two types of risk:
(1) project risk and (2) investment dollars at risk.
Project risk is shown on this downward sloping red line. This risk is the most familiar.
As unknowns about the project are reduced or mitigated, risk decreases throughout the
project’s life. Less familiar is investment dollars at risk.
The government is the initial investor in a Federal agency project. Its investment dollars
at risk steadily increase as the agency spends more money to develop the project without
any guarantee that the project will eventually be built.
Yet, when the project is passed on to the developer, his or her investment dollars at
risk increases more rapidly because the developer is spending money in a greater amount and
at a higher cost with the same lack of a guarantee.
But once the project reaches financial closing, this risk decreases as the asset is being
constructed.
It then stabilizes at a certain level of operational risk after the project is placed into service.
The high cost, high risk capital of project developers should help highlight the importance
of developing competitive projects.
This slide show the relative size of investments that have to be made, and how those investments
yield a return over the project operating life.
Development costs are borne by both the federal agency and the developer. This example shows
Federal agency investment in the first two years. In your project it might be more or
less than two years, but the constant is that the federal agency uses its funds to identify
and pre-develop the project so that it’s ready for solicitation. In the third year
of this example, the selected developer earns the right to invest its funds to complete
the development. The pace of this investment is much higher than in pre-development, and
in some cases (like interconnection) there may be an automatic series of studies and
expenses that progress at their own pace once initiated by the developer. The developer
does his best to balance the investments across all seven elements of the project development
framework. It is racing towards assembling a bankable deal that can reach financial close
with a third party financier.
At construction, the project incurs high capital expenses typical of renewable energy projects.
These expenses are mostly funded through tax equity and debt. Once construction is complete
and the risks are reduced, the project may be re-financed to include a higher percentage
of bank debt to reduce the total financing cost.
The energy sales and tax benefits provide the return on investments made by the developer
and financier.
So we have briefly covered much of the material in the Guide. The Guide is structured in three
sections, (1) starting with a discussion of the language differences, (2) moving to the
project developer process and the project fundamentals and development frameworks, and
(3) ending with the Federal agency process.
The details and some tools are in the appendices.
The appendices provide a wealth of information beyond what’s covered in the front 3 sections.
There are overviews of the portfolio approach to projects, electricity markets, and the
steps for applying the project development framework. They also provide tools for project
development, such as checklists and an example of a pro forma, as well as examples from the
Army’s approach.
The project development checklists in Appendix B are particularly important. These checklists
provide not only a systematic way to assess a project, but also a way to capture lessons
learned. Developers add items to their checklists as they gain additional project experience.
You may read the Guide only once, but you’ll find yourself using the checklist on each
project you take on.
Appendix B is organized to cover each of the 7 elements in the project development framework.
This is part of the checklist for the first element, Site. This section of the appendix
also includes a discussion of what site related concerns should be addressed in pre-development
and in the later development steps, and how site issues might inter-relate with the other
6 elements.
I wanted to conclude with some takeaways organized by the audiences of the Guide.
Federal agencies need development expertise and private investment to get these projects
built.
Risk reduction is the most universal action a Federal agency can take to attract developers
and private capital investment. The Guide provides agencies with a consistent process
and frameworks so that an agency can help reduce these risks.
Understanding the private sector process should help Federal agencies understand why and how
to pre-develop large-scale projects.
Project developers should be aware that there is a significant Federal market for large-scale
renewable energy projects.
They should also be aware that with this Guide, Federal agencies can start to take actions
that help reduce project risks and therefore protect project developers’ high risk, high
cost capital.
At the same time, the private sector needs to understand how the Federal agency process
works.
Utilities should know that Federal agencies are committed to hosting large-scale renewable
energy projects.
As a result, Federal agencies will need to develop strong partnerships with their local
utilities. In many cases, utilities will be the primary off-taker of utility-scale renewables
projects, and both will have to work together on interconnection and transmission.
Thank you for your time. We’re glad to have this opportunity to present.
We also welcome any feedback, as we will continue to update the Guide. Information for the FEMP
Points of Contact is provided here.
Thanks again.