United States: How To Value A Solar Development Pipeline (Part 2 Of 4)

Last Updated: March 28 2019
Article by Leslie C. Hodge

Recently, in a quiet moment between energy transactions, I pondered: When does a solar project become a solar project?

It's a philosophical question, perhaps. Thankfully (and not surprisingly), my colleagues in engineering had a few opinions. While no two opinions were the same (also not surprising), each opinion did tie to one concept — interconnection.

In this second installment of How to Value a Solar Development Pipeline (read Part 1 here), we will explore the second pillar of project success: interconnection. 

It is estimated that there are about 150 gigawatts of solar projects in interconnection queues across the United States. Compare that to the 12.1 gigawatts expected to be installed in this year. Clearly, a queue position is not in itself an indicator of project success. Interconnection provides the physical path to deliver power and imposes the physical constraints of such delivery. Interconnection also represents one of the critical fixed costs of a project.

These features naturally lend themselves to old-fashioned wildcat speculation. While some developers chase power-purchase agreements in search of demand for their power, other developers seek out ideal localities (or nodes) from which to supply their power. Skilled developers can do both.

In order to determine a pull-through rate for a project and to properly value a pipeline, we will explore strategic considerations related to interconnection development and evaluate the various stages of the interconnection process. Finally, we'll consider trends that may factor into the interconnection process in the years ahead.

Interconnection as a Strategy

Because interconnection costs do not have a one-to-one correlation to system size and are even less tied to revenue, projects with low interconnection costs provide distinct advantages. Developers with site control and low-cost interconnection may speculate on these queue positions and wait for projects to find them, in a sort of "if-you-interconnect-it,-they-will-come" strategy.

There are plenty of reasons to be optimistic. Module prices and build costs continues to fall. Corporate offtakers are buying at record rates and becoming increasingly more comfortable with contracts for differences (see Part 1, Pillar 1, Revenue Streams). Political will at the municipal and state level continues its steady push to incentivize renewables development.

The strategy may be sound.  Nevertheless, site control and interconnection are but two of four pillars of project success.

The value of assets without offtake and permitting ought to reflect the outstanding binary risks and associated pull-through rates. For investors with the patience and appetite to warehouse or hold assets, this style of development may provide long-term, outsized returns. For investors looking for a quarterly or annual returns on capital and/or investors with high carrying costs, on the other hand, this strategy may be too risky. 

Alternatively, investors looking for a platform that does both (recycles capital with near-term gains and places a few long-term strategic bets) may consider pipelines that combine varying levels of interconnection speculation.

Stages of Interconnection

Within a single development pipeline, you may encounter projects of various stages of interconnection development: 

  • Application submitted
  • Feasibility study
  • System impact study
  • Facilities study
  • Interconnection agreement executed
  • Commencement of construction of interconnection facilities

Each of these stages vary from utility territory to utility territory.  Nevertheless, there are some technical and economic commonalities.  A typical progression for territories in the Pacific Northwest, Southwest, Northeast, Mid-Atlantic and Southeast may look like this:

  1. Application submitted: With a basic level of design and engineering, a developer may submit an application to the utility to interconnect a system. At this stage, the project is assigned a queue position. For congested feeders, this queue position is valuable, but it is just the beginning. It is important to recognize that, while utilities are governed by public service commissions and while interconnecting to the grid may be a matter of right where technically feasible, the utility maintains broad discretion to determine what is and is not technically feasible. The utility's primary function as an interconnecting authority is to ensure the safety and reliability of the grid. That focus will shape its responses (and response times). Upon its review of the application, a utility will either suggest a study or (for lucky behind-the-meter projects) move straight to the interconnection agreement.    
  2. Feasibility study: At this stage, the utility will do a high-level assessment as to whether the project could interconnect to the grid. The utility's engineering team will analyze the impact of the generation on existing grid infrastructure and may determine where thermal, voltage, or short circuit contributions would shape the manner in which the project is to be interconnected. This study will inform the scope and contours of a system impact study, if necessary.   
  3. System impact study: This study will determine if any upgrades to the grid (on the utility's side of the meter) are necessary in order to interconnect the project. If upgrades are necessary, the utility will provide a cost and schedule estimate for any work related to such upgrades. This provides insight into the earliest date by which the system may achieve commercial operation. With a schedule and costs now in hand, developers may refer to interconnection at this stage as "de-risked."
  4. Facilities study: Certain utilities may perform a separate study known as a "facilities study." This study may be required or optional and may be performed concurrently or following a system impact study.  The purpose of this study is to devise equipment lists, technical specifications, a detailed schedule of costs and a granular construction schedule, which will be incorporated into the interconnection agreement.
  5. Interconnection agreement executed: The project must execute the interconnection agreement within a certain period of time from receipt of the system impact study and/or facilities study in order to maintain its queue position. And generally, execution of the interconnection agreement requires a deposit or down payment on the necessary upgrades. For many developers, this stage provides an inflection point for monetization of the asset.
  6. Commencement of construction of interconnection facilities: If utility upgrades are required, the utility will likely commence its work upon receipt of the full estimated interconnection costs (plus a characteristically conservative contingency). For larger utility-scale projects, interconnection costs may be paid on milestones agreed to by the utility and project.

Time and Money

Money: Before System Impact Study, High Risk

Before the system impact study is completed, a developer may have a view on interconnection costs and the utility may have a view, as well. A developer may input its view into the financial model and a utility may express its view on paper. However, until a utility has performed a full system impact study, interconnection costs are unknown. The critical features of the system impact study are that (a) the project pays for the study, (b) the study's results are the work product of an engineer (typically a third-party engineer), and (c) the utility sets a dollar value for the anticipated costs. If the developer's financial model reflects a value for interconnection costs before the system impact study has been completed, consider it a hopeful placeholder. 

Time: Before the Interconnection Agreement Is Executed, High Risk

When reviewing any timelines or Gantt charts of a development pipeline, it is important to ask where the dates come from. These dates may have their basis in law or tariff. A utility or the public service commission may set timelines within which the utility is to review and/or provide responses. Given this statutory patina, these dates feel reassuringly firm. They are not; they are aspirational. A utility may fully comply with the timelines, but the process is iterative at nearly every stage.

A response from a utility may call for a new submission or clarification, and you will suddenly find that the clock has started over again. Other times, a utility may miss a deadline by a few days (or weeks). These slips hardly rise to the level of a public service commission hearing, and there is generally no practical recourse for these slips that does not have the perverse effect of delaying the project further.

Therefore, it is critical to understand what development milestones are tied to utility action. Questions to ask include (a) whether utility action is a gating item for another development task on the project schedule (e.g., the execution of interconnection agreement is a condition precedent to application for an incentive), (b) whether utility delay could present a binary risk (e.g., tax equity deadlines), or (c) whether utility delay could present a cost adder (e.g., liquidated damages in the offtake agreement).

Once an interconnection agreement is executed, the utility may be contractually bound to act within set timelines. Most typically, utilities take these contractual obligations seriously. Therefore, dates based on an executed interconnection agreement are more truly firm. Before the executed interconnection agreement is in hand, however, time may not be on your side. 

Trends: Congestion, Storage and Additional Revenue Streams

Congestion is of particular concern for distributed generation projects. Certain regional markets that have fostered renewable development for many years have high concentrations of systems net-metered to the grid. In these areas, utilities may impose export restrictions. Even rooftop systems now face such restrictions. In such cases, a storage solution may preserve project value. If storage is too expensive, developers need to weigh the economics of downsizing capacity against building beyond the export restriction, using a combination of reverse power relays and/or inverters that are programmed to self-curtail energy. 

Developers that choose the latter path will need to convince the utility of the effectiveness of such a solution. (This is just one area in which in-house engineering is a critical value-add.) Even if a utility greenlights the larger capacity, the utility still may require that a utility-owned reclosure device be installed to ensure that the system is curtailed when it reaches the export limit. It is important to model out such curtailment when financing such a system. 

The race is on to pair storage with solar at scale. It is important to consider what information was submitted in the interconnection application and what systems were studied, if the project has been studied, to determine if adding any particular type of storage would require a revised application or study. Either case may result in a loss of queue position.

Solar assets are expected to produce revenue for decades.  It would be rather shortsighted to assume that the grids to which they connect will remain static. As more renewable assets come online, grid operators will need generation that can be flexible and respond in a second (or split second) to signals from the regional transmission organization. Most grids have already monetized such services. Historically, this has been assumed to be where "baseload" power (e.g., natural gas or nuclear) steps in. However, a solar project (especially where paired with storage) can be incredibly flexible and responsive to the intermittency of other generators on the grid. It's a "clean get cleaner" sort of world. Therefore, early engineering should contemplate flexibility with respect to the grid and interconnection applications should build in as much optionality as is commercially reasonable.

Bonus: Note on Interconnection Agreements

Interconnection agreements, by and large, are form agreements. Their legal terms are concise at best, lacking at worst. Nevertheless, with certain exceptions, there is generally no opportunity to negotiate. For investors looking to cover over any and all risks associated with the interconnection agreement, it is important to note that seeking an executed estoppel from a utility can be a lengthy and fruitless process. If an estoppel is not forthcoming, the business team ought to find alternative ways to confirm that the utility is ready to work with the project company. 

So, if the legal terms are sparse, there is no room to negotiate, and an estoppel is out of the question, should your lawyer skip over the "interconnection" folder in the data room? No. 

Legal diligence is necessary to determine the mechanics and ramifications of milestone dates and cliff dates, particularly with regard to deposit payments and placed-in-service dates. Your legal team should also read the interconnection agreement in the context of the applicable utility tariff. 

Finally, interconnection agreements are peppered with various obligations during construction and operations, which should be considered when drafting the various construction contracts and operation and maintenance agreements for the project. Keep your lawyer out of this data room at your own peril. 

Joe Song, vice president of project operations at Sol Systems, also contributed to this piece. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions