January 7, 2021

Investors buying pre-construction projects will disrupt the traditional model of development: here’s why

As published in PV Magazine Dec 2020

The current developer / EPC model has increasingly turned to focus on quality over a two-year time horizon. This contrasts with long-term owners who are focused on quality over the lifetime of their projects (20-40 years).

With long term owners now buying projects in the pre-construction phase, the current model looks set for disruption: can a new emerging model provide increased focus on longer lifetimes, improved operational performance and lower lifecycle costs?

Everoze believes so. This is why we have created Skyray – a new subsidiary providing design and engineering services for large scale solar PV (and new-build solar-storage). In this blog Skyray’s MD, Olivier Crepon, reviews the emerging model of project development, explains how it will impact developers, EPCs and third-party services, and ultimately lead to a stronger, more mature PV sector.

The current model of development in solar PV often has an inherent focus on quality over a two-year time horizon – In this model, a developer or short-term owner develops the project and seeks to sell at Provisional Acceptance (PAC) or Final Acceptance (FAC). In the current sellers-market, long-term performance and costs make little difference to the sale price. The project is built by an EPC who is focused on meeting a two-year PR figure and under pressure to deliver at the lowest possible cost. In this model, the commercial drivers on both the developer and EPC are largely driven by quality over a two-year time horizon. This may in turn explain why Everoze sees problems emerge during reviews and transactions of operational projects. And there is no judgement in this – EPCs and developers do a wonderful job – it is just that the game they are playing often ‘ends’ 2 years after construction.

Long term owners buying in pre-construction look set to disrupt the traditional model – Due to quantitative easing, super low interest rates and solar as a stable asset class, there is white hot competition for projects in construction and operation. Everoze has seen this first-hand, supporting transactions with multiple bidders, very low prices and short timescales that challenge effective due diligence. For investors seeking to procure operational projects this means i) that their success rate in winning projects is low (making it difficult to meet fund targets) and ii) that returns are being hit in the battle to secure projects. As a result, leading investors are moving upstream, seeking to procure projects in the development phase (pre-construction). Examples of this are Octopus buying a 175MW development portfolio in Spain, Encavis partnership with Solar Century and many funds buying into developers. This may not seem that important but marks a significant change from the current model.

In this emerging model, long term owners have much greater influence over the design and construction of projects. This means owners can now focus on:

  1. Designing for long term value

  2. Optimised procurement approaches

  3. Better supervision of construction

Let’s review each in turn.

Design for long term value and returns

In the current model, the owner takes over a project at PAC or FAC, usually with significant debate over performance and the punch list. However, at this stage the project has already been constructed, and so any issues identified are expensive and difficult to change, with design errors often the root cause.

In the emerging model, the owner is involved pre-construction. This means they can now shape the design of the project, at the stage where there is the most influence on project outcomes. We expect this to result in a drive for longer-life projects (30 to 40 years); greater focus on through-life performance; and, particularly in subsidy free markets, focus on flexibility to access alternative revenue streams. Long term value and returns now becomes a core part of the design process, with owners increasing their input through prescriptive design or through more detailed design reviews.

Increased procurement options

Longer term owners can now shape and decide which procurement approach is best for achieving long term value, with a mix of approaches likely to be seen. For those owners procuring an EPC, then opportunities exist to select the EPC and to specify their own specific Employer’s Requirements (rather than depending on a generic technical specification developed by a developer or EPC). For those owners interested in more control, then multi-contract is an option, with significant freedom to specify preferred components.

Better construction supervision

A medium sized utility solar PV project can include millions of parts being put together in an outdoor environment and in timescales that normal construction industries (and other renewable technology projects) would find breath-taking. In the current model, this is managed by an EPC and developer with short term horizons. The long-term owner then tries to identify any issues through a one-day site visit, all while seeking to win rights to buy the project in a highly competitive situation.

In the emerging model, the long term owner is now able to choose the level of their own site supervision so that they can identify and mitigate any issues before they have been repeated across a site, and can ensure that build quality meets owner’s requirements.  We expect long term owners will scale up their own construction supervision with a flexible approach between full-time attendance at large projects and periodic inspections at smaller projects. 

Natural evolution

In summary, long term owners buying pre-construction will disrupt the current model, which has increasingly focused on quality over the short-term. The new model offers opportunities for owners to design for long-term value, optimise procurement approaches and better supervise construction. In turn, this can lead to significant improvements in long term performance. All of which represents another important step along the path for solar PV as it becomes a high quality, long term, cost competitive infrastructure asset.

Olivier Crepon is the managing director of Skyray, a new subsidiary of Everoze that provides design and engineering services for large-scale solar arrays, as well as new-build solar+storage. He has 20 years of experience at engineering service companies in the energy and environment sectors. For more details on Skyray, visit www.skyrayengineering.com

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