The U.S. renewable energy industries are persistently on the hunt for means of cutting down the cost of delivered energy. For example, in the case of solar, module costs have historically been the prize game. Although, now that modules are selling at bargain-basement prices worldwide, attention has shifted to "soft cost" components. And this is where document standardization — the creation of an industry-wide set of contracts, forms, permits, etc., required during the project development cycle — could pay some real dividends.
Currently, power purchase agreements (PPAs), site leases, requests for proposals (RFPs), permits, and the rest of the project paperwork is mostly drawn up on an ad hoc and per-project basis. Conducting the necessary due diligence for each of the myriad of counterparties, including utilities, financiers, regulators, and legal entities, is time consuming and costly for developers, even if they have larger project pipelines and the ability to aggregate these efforts. Standardizing each of these documents (while still allowing for local variations in laws, markets, and geographies) and making them available to developers for a flat fee could help to mitigate a number of these transactional expenses, headaches included.
The benefits of document standardization would extend beyond developers to span the value chain. From an insurer's perspective, if a project can furnish documentation that is standardized across the industry, then its risk profile could be easier to decipher and compare across other projects in its class. This could help to relieve some of the due diligence in the underwriting process and ultimately contribute to more affordable premiums.
From a financial standpoint, standardization could beget a host of benefits that go beyond direct cost reductions. Firstly, standardized PPAs, leases, interconnection agreements, and other contracts could clarify the project evaluation process for financiers and facilitate their investment. The transaction costs associated with securing financing can be burdensome, and relieving some of this friction in the early stages can have positive impacts throughout the development cycle. This could in turn provide some relief in the project's required equity yield, reflecting the reduced risk of investing in a stable product whose cash flows can be predicted based on a standardized pool of project data.
Lastly, standardization of project documents could lay a foundation for the securitization process, which requires an accurate assessment of risks to project cash flows over time. If all the necessary information is included in these contracts, and included in places where it is easily accessible to securities analysts and ratings agencies, then the market could be more amenable to trading a renewable asset-backed financial instrument of this sort.
To promote document standardization in the renewable energy industries, NREL's Strategic Energy Analysis Center's RE Project Finance Team has created a webpage to act as a sort of clearinghouse for the forms required in the development process. The collection houses a range of publicly available templates and samples including:
While this library represents only a small step, the aim is to keep the dialogue open while making readily available the resources that could hasten a standardization effort. If you have any documents that you would like to post, or to which you would like to direct our attention, please send us an email with your name, organization, and a brief description of the document(s). Please also include an attachment in the email or a link to the page where it can be accessed. Your participation is greatly appreciated.
This article was originally published on NREL Renewable Energy Project Finance and was republished with permission.
Lead image: Document stacks via Shutterstock