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What are “Project Economics” in Solar Development?

Solar developers frequently talk about “project economics.” But what does that term mean, and what should landowners understand about it?

In short, “project economics” is about the relative profitability of a specific project (a solar farm) versus others. Ultimately, developers will sell the energy a solar farm generates at a fixed price in dollars per megawatt-hour ($/MWh) to a utility or to a corporation. Like any for-profit enterprise, a solar developer seeks to make a profit. That means they want to maximize the spread between the price at which they sell the energy and the total cost of developing the project. 

That development cost is a function of several things, such as:

  • Payments to landowners to lease their land
  • Property taxes paid by the developer on behalf of the landowner
  • The cost of the solar panels, inverters, racking and other equipment
  • Transmission and interconnection-related fees typically paid to a utility, including transmission studies
  • The commissioning of various environmental studies
  • The cost of various permits
  • The labor to build the solar farm
  • The cost to prepare a property for construction, such as clearing trees or structures
  • The developer’s overhead (salaries, travel costs, and other operating expenses)

These costs are highly sensitive in some markets, meaning that even small cost differences can render a project viable or not. In Texas, for example, typical energy prices are now approaching a very low $20/MWh. The developer who can drive down costs slightly and still make a profit at, say, $19.95/MWh, might win a contract with an energy buyer just because of that five cent difference. 

Many costs are approximately equal between developers. For example, only a small number of contractors actually build large solar farms in the United States, and if any two solar developers quote the cost of constructing a 100 MW solar farm in the same region, they will usually get competitive bids. Likewise, the cost of many studies in a particular region are approximately equal, no matter who conducts them. So what factors, then, give a particular solar developer a financial edge in developing a particular project?

Landowner lease payments. The payments made to landowners over the lease duration (typically 20-25 years) represent a significant portion of a project’s total development cost. By reducing their payment expectations, a landowner can increase the relative attractiveness of building a project on their land. This is the only input into project economics that a landowner can directly control.

Interconnection costs. A solar farm needs to “interconnect” to the electrical grid to supply the power it generates. The further away the point of interconnection (“POI”), the more expensive the project cost and thus the less compelling the project economics are. Most developers will reject a project where the POI is more than 3-5 miles away, and even that is a stretch; the cost of building what’s called a “gen-tie” to connect a solar farm to a POI (think of it as an extension cord) can be $1 million per mile.

Equipment costs. When purchased in large quantities, the costs of solar panels and other solar equipment is relatively constant between developers on a per-MW basis (i.e., the cost of panels for any 100 MW project is roughly the same). However, some developers find advantages. For example, some manufacturers of solar equipment are also developers, or have development partners. This gives them a price break on the equipment and helps guarantee supply. Some developers also pre-purchase large amounts of equipment ahead of their need in exchange for a price discount. Some developers also purchased foreign-made equipment before new import tariffs took effect.

Landowners should keep in mind that project economics are relative. Just because a solar developer does not choose to develop a project on your property does not necessarily mean that there is a fundamental flaw with your property. Rather, it could mean that a particular developer has other projects in its pipeline with more “favorable” economics (i.e., that it can make more profit on). This situation can change over time, so landowners shouldn’t be discouraged if their property isn’t of interest to developers right now. 

 

 

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