by Kristina Shih

“Riding the solar coaster”, “death by a thousand paper cuts”, “flying a plane while building it at the same time”… these are all expressions seasoned developers in the renewables industry are all too familiar with, yet those of us who have been in the trenches for a while stay in the game, always hoping that the future will be smoother than the past. You think you’ve been executing your development strategy, and then an unexpected twist of policy or macroeconomic issue punches you in the face, leaving you with difficult choices to make on a tight budget. Maybe it's the thrill of navigating these gauntlets which keeps us going. Or, maybe we’re just masochists?  

Development isn’t for the faint of heart. Often what separates great developers from average ones is the ability and willingness to pursue market opportunities before a regulatory framework is even established. The best developers invest time, energy, and money before the subsidy regimes are finalized, revenue profiles are modelable, development costs are understood, or monetization values are anything more than a wild guess. In essence: a series of calculated bets designed to maximize optionality while minimizing sunk costs.

This approach and skill set has been especially necessary in the community solar sector, where the passage of enabling legislation typically signals a “market opening”, or at least the moment when developers and investors can begin constructing projects. But as community solar markets become more competitive, it’s becoming increasingly critical to make calculated development bets before legislation passes. Early movers find more suitable sites and interconnection points, are first in line to establish relationships with landowners and AHJs, and may even influence local ordinances that improve project viability and profitability.

Of course, this is a risky approach that will sometimes result in lost capital and time. Developers willing to take this risk must be willing to wait many months before legislation is transmuted into program rules, and spend real money to secure and de-risk sites before knowing what future revenue streams will look like or how much their projects will be worth. A live example of this is the Pennsylvania market, where many developers both big and small have been investing in the market for ~4 years, but still await the anticipated legislative market “backbone”. Historically, markets like Illinois and Virginia emerged only after a couple years of limbo, but eventually offered plenty opportunity for profitable projects. Still other markets – New York and Massachusetts are perhaps the best examples – have experienced interim phases of uncertainty as they transitioned from successful programs that “ran their course” to subsequent program iterations.  

Broadly speaking, the risks fall into three categories: 

  1. Profitability – how lucrative the projects will be. This is also a proxy for how much “room for error” projects have, which in turn affects likelihood of project attrition (risk)
  2. Scale/Size – how big will the market be. This also affects likelihood of project attrition (risk)
  3. Time – How long it will take for the market to “open,” which affects the carrying costs of entering the market before it opens

So, getting burned is a distinct possibility. Enough so that “front-running” a market with one’s own personal or family money is outright irresponsible for most individuals – essentially gambling household financial security on things entirely out of a developer’s control. However, if the capital comes from a pool of money which is diversified across a few markets with this risk and uncertainty, the combined risk/return profile is far more digestible. Third party investors, like Segue, manage a portfolio of investments that fit this profile. We approach such situations knowing that if we made a handful of investments, one, two, maybe even three of them might turn out to lose us money, but by being an early mover in all of them, we can expect to do well enough in the markets that coalesce to make up for the markets that fall flat.

Let’s look more closely at one of those lucrative markets: Illinois. While Illinois’ community solar market was established via the Future Energy Jobs Act (“FEJA”) in 2016, the rules of the game weren’t officially established until the Adjustable Block Program opened to applications in November 2018. Between 2016 and 2018, the Illinois Power Agency and the Illinois Commerce Commission were embroiled in the complicated process of formalizing the state’s renewable energy goals through the Long-Term Renewable Resources Procurement Plan (“LTRRPP”), creating a program guidebook and standardized REC contract, and navigating stakeholder input from everyone ranging from utilities, developers, environmental groups, consumer advocates to labor unions.

This initial phase of Illinois’ Adjustable Block Program was a particularly long “limbo” period in which the community solar market was held hostage by a dysfunctional regulatory and policymaking process. Developers that entered the market early right after the passage of FEJA had millions of dollars tied up in land option payments, interconnection study costs, and other development expenses while they waited for the program to open, and some completely struck out when the Illinois Power Agency pivoted to a chaotic lottery-driven process. Even after the initial wave of REC contracts were awarded the state came dangerously close to a funding shortfall that would have caused it to miss initial REC contract payments, making for a drama-filled journey throughout 2020 as the first projects began to make their way to commercial operations. But in the end, there was plenty of profitability and investment returns to enjoy. Many firms found the risk (and the wait) well worth it.

Historically, placing these bets has often felt more akin to gambling than investing. Thankfully the industry has had strong advocates such as the Coalition for Community Solar Access (of which Segue is a member), who have been working hard to change that dynamic. They help build broad stakeholder consensus to create programs in new states, and empower legislators with the tools to create policies that can be successfully implemented. There also better data sources out today to help developers evaluate the attractiveness of new community solar programs, such as Orennia’s scoring matrix. While established markets like Illinois and New York remain poised for continued growth, developers and investors both will continue to build and support project pipelines in emerging community solar markets all over the country, accepting the reality that in today’s market you have to make your move before doing so is comfortable.

Timing new market entry requires patient capital and a financial partner that isn’t going to pull the parachute the moment things get hard. In addition to market policy risks, there are endless project-level risks that can make or break the economics, and good developers are able to rely on experience and pattern-recognition to discern true binary risks vs. those risks that can be resolved with time, creativity, and money. Whether it’s optimizing interconnection costs while the utility is trying to re-write the rules or dealing with hostile third parties when perfecting site control, the Segue team has enough bruises and paper cuts from our own development experiences to support our developer partners through these challenges. And, when all is happily monetized, we’ll get back up and do it all again because, like most folks reading this, helping unlock high potential markets and flying planes while building them is what keeps this solar coaster worth riding.