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Ep351: Challenges and Opportunities in Distributed Solar
00:19:48
John Stroud, managing director at Limes Renewable Energy North America, discusses the challenges and opportunities in developing community solar and distributed generation projects in a changing policy and market environment.
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- [00:00]
A
Foreign. Welcome to Currents and Norton Rose Fulbright podcast. Today we're recording with John Stroud, managing director at Limas Renewable Energy North America. Limas Renewable Energy is a developer of renewable energy projects globally and John oversees their community solar and distributed generation operations in the U.S. thanks for recording with us today.
- [00:24]
B
Hi Todd, good to be with you.
- [00:26]
A
All right, so first I gave a very high overview of what you guys are up to. But just so people in the audience have a better feel for When I say community solar dg, what is it that you guys are really after and what technologies are you deploying?
- [00:42]
B
Yeah, it's a great question. We are across the board generally in the parent company, we are more focused on utility scale and transmission connected assets. Here in the US we are focused solely on distributed generation. So and with a particular emphasis on community solar. And so, you know, at this point we are, we, we own, I think three or four small utility projects in Michigan, but really looking to develop projects under the community solar construct, which is, you know, a slight discount on the offtake to the retail rate as opposed to wholesale or corporate ppa.
- [01:27]
A
Why pick the DG market and community solar in particular? You have a lot of choices and you could switch your focus and it sounds like you got a lot of expertise overseas. I know you've done deals outside the US Why pick community solar as opposed to whatever utility scale solar or for that matter, wind?
- [01:46]
B
Yeah, wind is a little bit more, I think, challenging than it's been in recent years. But we, you know, we really focused on distributed generation and community solar in particular for there's a number of reasons, but maybe I'll focus on three economically. As I mentioned, the assets are generating revenue and selling kilowatt hours at a slight discount to the retail rate as opposed to the wholesale rate. From a timing standpoint, we, you know, at this point we're targeting anywhere from, it's kind of broad, but anywhere between nine and 18 months on average for developing these assets, starting from site control and moving all the way to ready to build or shovel ready. The timeline is more compressed than utility scale projects. But I think not to be ignored is really the positive impacts which I think all solar projects bring. But in particular community solar. These are impacting families, businesses, farmers throughout the markets that we are developing. And they are really helping these communities. They're providing money through increased property taxes, for better roads, for more teachers, improved infrastructure. Those are real and tangible benefits. So I think those are primarily the reasons that we're focused on DG and community. It doesn't mean that we won't expand. I mean we set up Limas North America in 2024, whereas we set up the parent company back in 2017. So I think the initial push here was on community solar and looking to expand. I think from a technology standpoint solar and storage is going to be where we stay in the relative near term. I don't think we're incorporating wind assets at this point. We'll see as maybe things get a little bit less hectic over the next couple years.
- [03:41]
A
Well, let's talk about the next couple years. One, we got the tax credit expiring. I don't know how small your projects are, but for most projects they're expiring and then you guys just got started in the US So I don't know how much you got safe harbored at this point.
- [03:56]
B
Yeah.
- [03:56]
A
So what's the next three, four years look like given the changing nature of the itc?
- [04:04]
B
Yeah, and it continues to change. You know, I would really kind of lay it out. I bifurcated in between kind of two specific stages. The first tranche of projects that we have, we anticipate reaching NTP Q2 of next year. These projects are in Illinois mostly upstate and in ComEd, roughly 30 to 40 megawatts of DC coupled with storage. The second batch that we have is anticipated to be about the same size and it'll come in, you know, Q1 of 27. Sorry, 2027. Maybe Q1, 2028. The mandate that we have is to successfully move about 100 megawatts from NTP. Excuse me, from site acquisition to NTP on an annual basis. But around your question on ITC, the first portfolio, this 30 to 40 megawatts, we have been in discussions for some time with owner operators to safe harbor the solar assets through various agreements and strategies. But I think that as we look forward, we have to have an eye on a post ITC world and that's really the inevitability that we're developing towards. But for this first tranche we are, you know, we do have strategies with ultimate buyers of our projects.
- [05:34]
A
What do you think though, the viability then of solar and more specifically community solar in a landscape where you're not getting the itc?
- [05:43]
B
You know, I think it's, it's not necessarily a community solar specific challenge, but we are, you know, we can only look at the models and see where it makes sense. And our forward looking models we are budgeting for a pretty significant drop in equipment prices. I think that coupled with retail and wholesale rates as well. Continuing to move in the right direction. And again I would emphasize that this is in kind of the non contractual offtake scenarios, right? Community Solar being one of those. I would have some trepidation around locking into a 20 year PPA with rates rising the way they are. But Community Solar specifically I think is situated in a way that we are able to begin to envision these assets in a post ITC environment.
- [06:39]
A
So what, what do you guys view then as your differentiator? You know what, what, why do you guys think you're going to be able to outcompete the other people in the community? So it was pretty crowded market already out there.
- [06:52]
B
It is a crowded market and there's some really, really great folks that are, that are doing this now. We have a pretty specific area of, area of expertise and we don't try to get too far out of our lane. You know, we are Community Solar and storage. We are, we have a specific emphasis on bringing projects from site control to RT to ready to build and then selling those assets. We're not, we are not a traditional greenfield developer. I think there's a lot of great groups out there. We don't get involved in, you know, GIS analysis or site screening, the spatial analysis, parcel identification, all this, land identification. We have vetted partners who really are able to specialize in those important areas and we rely on their expertise. You know, they bring us sites with full control, we then advance the projects forward. So in our, in our process we are looking at doing two things. We're looking to drive down costs and compress timelines. And the way that we're doing that is we're taking the work that we've done internationally. Right now we've, you know, we're up to about 300 megawatts that we've developed and sold. And we are looking to tighten the process that we have in the US And I think that if we're able to replicate some of what we've done, we can't replicate all of it. It's a different market. But if we're able to do that, that I feel will provide some differentiation. We're also, I know this is a buzzword these days, but we're also able to employ AI tools in non client facing tasks such as entitlement strategy, just to name a few, permitting package prep, coordination of civil environmental engineering partners. So we are looking to where we can leverage these tools to both compress the timeframe and bring down the cost. Because I think ultimately in a post ITC world, but even before The ITC expires. The group that can do that and get it through without being caught up in these, you know, protracted affairs with permanent or title or anything else are going to be the ones that are able to get some projects across the finish line.
- [09:17]
A
What do you think are the biggest hurdles at this point besides the loss of the ITC to the further expansion of community solar across the states?
- [09:27]
B
Yeah, you know, we are trying to stay pretty focused on Maryland and Illinois and just in, in those states alone, you know, the way that I look at it is in, in Illinois, especially downstate, on, not to pick on our friends from Ameren, but you know, the process there is, I wouldn't say it's untenable, but it's really, really, really challenging. You know, they're, they're reviewing individual projects of which there are thousands and the timeline can stretch into the, to the years to get projects through. So I think in Illinois that, you know, and this is, I think in community solar more generally, the, the interconnection challenges that we have, although I think that we are better situated than utility scale projects, are still sizable. Right. And so being able to for us work with partners that can bring us sites that have a quicker path to ultimate interconnection is really important. I think when we move on to the Maryland side, you highlight the second issue of which there are many, but I'll just pick on these two. On Maryland, the permitting issue is really a challenge. Getting the special use permit. There are many, many really good developers who have good projects and just simply can't get the special use permits. I think that the permitting, the interconnection highlight two of the big challenges. But I think that also being able to get the land that's free and clear from an entitlement standpoint is also a challenge. So I don't think there's, and I don't think any of your guests who have come on, on the development side have had any illusions about the challenges of solar in general, but specifically about community solar. But again, when, when projects do make it to the finish line, you're looking at selling kilowatt hours that are, you know, just shy of retail rates, which is really a differentiator.
- [11:31]
A
I think given the fact that retail rates have been going up, especially in pjm, you know, talking. Have you seen a shift in the focus to try to get projects to make it easier to get projects online? Because obviously more supply we got out there, the helps combat higher prices.
- [11:52]
B
Have I seen a shift? You know, I'm, I'M I'm not sure. I think that the way that I. What I've seen, I've been in renewables for about 12 years. Prior to that I worked on the banking side and I, I worked in fossil fuels, natural gas and coal fired plants. But you know, in just the last five or six years I've seen a couple of different headwinds and tailwinds kind of come together at the same time. We have a community solar market which is comfortable from a debt standpoint. Finally, I remember not even five, six, seven years ago, the banks were not comfortable with back leverage on community solar. What do you mean? They can leave anytime. But I think now there is a significant comfort around that. I think with retail rates continuing to increase, there is, there is an eye on the prize mentality for projects that do make it across the finish line. But with that inevitably you've got more talented developers that are out there. I've never seen such a huge quantity of really talented developers going after a finite number of sites. And so I think that we talked about technology a few questions back and I think that storage, when you look at just the land required for storage, I think that that is going to play an outsized important role going forward. The question is in some of these PJM markets, can we mimic the revenue line items that Massachusetts has or that New York has so that you can go after some of these smaller sites, storage only, and not have to worry about how am I going to engender my revenue? Right. They have. Having an actual construct in place in which it allows you to operate these storage assets independently of the RTOs I think is going to be something that developers like us are going to be focused on.
- [13:57]
A
So it sounds like then you haven't seen regulators or politicians really start figuring out ways to make not just renewables, but the supply side of the energy equation better match things. How have you seen things change then given the increased demand from AI and EVs and just generally? Or do you just think like we're heading up against supply demand problem and the only way to fix that is going to be increased pricing?
- [14:32]
B
I think so. I don't want to be too hard on policymakers at all because I think all of them on the municipal, state and federal level are working to incent projects that are going to shift that dynamic of supply demand. Right now there is such an amazing demand is just through the roof. We haven't seen a lot of demand increase over the last two decades and now we're actually seeing it. But I, I do think that the inevitable, well, we'll fix this by increasing rates has a limit. You know, I think that if I read it correctly, there was a, there was a piece of legislation in Maryland that just passed that was specifically focused on how do we reduce the utility bills for our paying customers in Maryland. And I think that right now in the absence of any real thoughtful, creative legislation, you're simply going to have rates go up and up and up and up, you know, multiples of the cpi. And that works for a while, but I think eventually the cries will be, you know, loud enough. Where legislation needs to get creative and it needs to, there needs to be a construct in place which is incenting the assets that we need. And right now I think that certainly on the solar side that's important, but on the storage side that is incredibly important. And if you look at the markets that we're currently playing in, in Maryland, Illinois and other PJM markets, sorry, you know, north of Illinois and ComEd, you're not really seeing that, that incentive, that's a clear path to why should I start an 18 month, two year development cycle on those assets? I wish I had a better answer than that.
- [16:22]
A
No, I get this answer from most people. I'm hoping somebody's going to be up to me.
- [16:27]
B
Yeah, sorry to let you down.
- [16:29]
A
You're not the first. Yeah, I don't think you'll be the last either. But at some point, you know, there will be the flip's got it. The switch has to flip here.
- [16:38]
B
Agree.
- [16:39]
A
So let me ask you in conclusion then, what do you think? Maybe, maybe I'm going to ask you a little different question now that I know you had a finance background. What do you think's the biggest misconception you think that the finance community has about the development process? You know what surprised you the most? From switching sides.
- [17:00]
B
Yeah. So you know, it's really interesting. On the buy side, all M and A groups, at least the ones that I have been privy to, will look at these pipelines and say I can't believe the developer is demanding such a dev fee. And you know, look at the projects. Come on, look at that. That's all there is. And I think that I understood logically that you're not just paying a dev fee for those projects, but all of the countless projects that went belly up. I think that on the buy side we have to appreciate that a little bit more that these developers a project gets across. I say this a little bit tongue in cheek, but every time a solar or storage project gets through the finish line. I think it's a small miracle considering how many different ways it can be cut off at the knees. I think the more sophisticated ipps are beginning to understand that. I'm not sure in conversations with tax equity and back leverage and banks that there's a full appreciation of just how hard it is. I've heard you talk on your show with other developers about why would you do this to yourself? It's such a tough racket and it really, really is. You both need to have a talented group, but you also need a little luck. And so I think that certainly in Community Solar, the dev fees that are there are a reflection of the work that needs to go into it. I think there's another perhaps misperception that it's simply easy. All I need to do is just knock on a couple of doors, I'll get some sights and I'll be able to sell a hundred megawatts and I'll skate off into the sunset. There's a lot. It's always been more difficult than that. But I think certainly in the last three, four years, with the increased competition, there is a smaller and smaller aperture towards getting good quality projects that you can sell to counterpart.
- [19:05]
A
All right, well, now that you proved that you are a listener, I was surprised by that because that is a comment that I do make a lot. Absolutely. Thank you for listening and thank you for recording with us today.
- [19:15]
B
Thank you, Ty. Appreciate it.
- [19:19]
A
You can find us online at www.projectfinance.law or send us an email at currentsortonrosefulbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the current. Sam.