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The solar sector has witnessed changes in the critical interconnection process from the early stages of many utility-scale projects that are now finally starting construction to the recent interesting developments arising from widespread and organic commercial-scale implementation, mainly due to falling equipment costs.

Furthermore, the interconnection process for solar energy projects is one of the most important processes during development and receives special scrutiny during due diligence and when projects are being sold or financed. Surprises in the interconnection process can lead to major design changes, significant readjustment to the project’s construction schedule or outright cancellation due to an interconnection fatal flaw.

This article will provide an overview of the evolution of the interconnection process in California and its effects nationwide, with a special focus on how the interconnection process plays into the entire development scheme to create a successful project. We will also discuss the recently announced Federal Energy Regulatory Commission (FERC) guidelines that are aimed at streamlining the integration of small renewable energy projects.

During the early years of mass solar project development in California, there were two distinguishable interconnection processes that separated small generators from large generators, with 20 MW as the dividing threshold.

Fundamentally, this distinction made sense when enormous utility-scale projects were all the rage, and a process to study smaller ground-mounted projects meant quicker processing times. As more project developers entered the market, it became evident that not everybody had the financial resources and a period of two to three years to go through a large-generator interconnection process (more than 20 MW).

The small-generator interconnection process started to get massively oversubscribed, and the California Independent System Operator (CAISO), among others, became overwhelmed with applications. An enormous number of speculative entrants got into the interconnection process to gain interconnection queue positions with very little up-front financial commitment.

 

Cluster study process

As 2011 began, CAISO implemented a new process with financial obligations that would require a $50,000 fixed application fee plus $1,000/MW; this structure encouraged only serious projects and project developers looking to interconnect.

This new “cluster study process” was intended to enhance interconnection study efficiency and share costs for conducting those studies between projects in a cluster group. At a minimum, valid applications needed to contain proof of site control, single-line diagrams, site-plan diagrams, a financial deposit and technical information.

In an ideal setting, these cluster study projects would take about a year, which likely does not include the interconnection agreement execution and interconnection implementation steps. Independent from the cluster study process is a fast-track process, which involves passing a number of screens and then proceeding directly to an interconnection agreement, bypassing interconnection studies. This fast-track process is for up to 5 MW on the transmission system and up to 2 MW on the distribution system.

When developers choose a project site, there is inherent risk associated with whether it will be achievable to win a power purchase agreement (PPA) with a utility offtaker; these are competitive bid processes. There is also risk associated with local conditional-use permitting due to environmental impediments that are unforeseen until environmental studies have been concluded and assessed by the local lead agencies.

Interconnection viability at a specific site does carry risk, but it is something that can be better rationalized for success prior to formal site development. Proximity to the nearest point of interconnection, alternative locations of grid connection, smaller groups of projects in the interconnection queue within a region and experience-based evaluations that network upgrades will not be required are all attributes that can be verified beforehand.

Once it is decided that a project will be developed, the interconnection process needs to be started immediately and in parallel with PPA negotiations and site permitting. The various processes must occur in parallel, as key dates and pricing within the PPA will depend on characteristics of the interconnection.

 

 

Drastic photovoltaic system cost reductions over the last four years, coincidentally, have offset unforeseen interconnection costs, but the next four years are not likely to be as kind, as there is expectation that PV system costs will not continue to drop at such a rapid rate.

Due to the time involved with performing interconnection studies and the associated interconnection upgrades, the interconnection process is perhaps the most important permitting process to maintaining an expected construction schedule and closing of financing.

Prior to the expiration of the U.S. Department of Treasury’s Section 1603 cash-grant program for projects not needing to monetize federal tax credits, project investors were very willing to take investment positions in projects with, at minimum, an interconnection queue position. Investors in non-cash-grant projects in 2012 came with a broader set of expectations to have a more clear pathway of interconnection certainty, which includes reaching the facilities study phase of an interconnection process, where costs and upgrade timelines are generally defined.

Between now and 2016, investment standards will be even stricter to ensure that interconnection does not create a fatal flaw to project viability.

 

New FERC notice

Given its objective of improving the time and lessening the cost involved with processing certain types of interconnection requests, along with its prediction that many more solar facilities would be integrated into the grid with a few reforms, FERC announced new actions on Jan. 17.

Petitioned by the Solar Energy Industries Association, FERC issued a Notice of Proposed Rulemaking (NOPR) designed to decrease timelines for projects going through the small-generator interconnection process. Interestingly, when interconnection entities fall behind on published timelines they are, in some ways, opened up to legal action from FERC.

Certainly, some groups have tried to take large utilities and interconnection entities to the curb and file formal legal complaints to FERC, but without much success.

Under the four revisions within the NOPR, FERC has proposed to increase the size of a fast-track-eligible project and, for a few hundred dollars, allow an option to the interconnection customer to acquire from the transmission provider a pre-application report of possible points of interconnection.

Furthermore, if a project fails the fast-track screen and the transmission provider indicates that the project cannot be safely connected as proposed, the developer has the ability to request a re-review or supplemental review.

These supplemental reviews, at a $2,500 study cost, will identify modifications to the system or transmission facilities to allow the project to connect safely. In an additional effort to make the process more efficient, and perhaps address the complaints of previous process participants, the NOPR is proposing more opportunities to make comments on interconnection upgrades identified within the facilities study. In the past, groups had to live with the sometimes expensive and unreasonable upgrades required by the interconnection entity.

However, there is no guarantee that the transmission provider has to take the comments into consideration for the purpose of the facility study agreement, so it is to be determined if this change will make the interaction between the transmission provider and interconnection customer any more beneficial for the interconnection customer.

In general, the process seems to be a step in the right direction to improve what was a late and one-way process into a more two-way street that should meet published timelines. Perhaps the most important indication for the solar sector in all of this is that FERC understands the extensive implementation of solar facilities under 5 MW going forward.

 

Future

The expiration of the investment tax credit (ITC) at the end of 2016 poses a challenge for financing projects that are expected to reach commercial operation around the ITC expiration. These projects seeking executed interconnection agreements and to be connected to the electrical grid in a timely manner need to coordinate with respect to the rest of the project’s construction schedule prior to the sunset of the ITC.

Any potential delay risk associated with interconnection connectivity, causing a project to shift into 2017 with a step down to a 10% ITC level, will create a roadblock for definitive investment. Because rates of return on solar projects in the U.S. are typically thin, any drop in the amount of applicable tax credits will compromise the viability of a project’s investment.

Uncertainty related to meeting interconnection timelines may lead to danger for other milestone dates, such as required securities agreed to in the PPA or conditions within conditional-use permits. Even if major non-interconnection project milestones are not missed, interconnection delays around the end of 2016 would easily lead to reduced development fees paid to the project developer to offset the lower investment potential and potentially to project termination.

Although interconnection does have an obvious impact on projects in the execution phase during the expiration of the 30% ITC, it does provide a clear motivation for developers to take advantage of projects with an easier pathway to securing interconnection rights. Commercial projects and small utility-scale projects that have lower interconnection upgrade requirements will push very hard over the next 18 months to secure interconnection capacity and not create a scenario that puts the project in jeopardy to incur exposure to ITC reduction risk.

As the ITC expiration will coincide closely with the 2016 presidential election, it is unlikely there will be a conclusive decision on the subsidies provided for solar power until after the next president has been elected. R

 

Jesse Tippett is a manager of North American business development at Aries and can be reached at jtippett@aries.com.es. Albie Fong is a key accounts executive at Talesun Solar and can be reached at albie.fong@talesun.com. Together with 13 other industry subject experts, Tippett and Fong recently published a 250-page book titled “Project Development in the Solar Industry,” which covers interconnection and other topics.