Utility Week reports on our warning over growing revenue risks from network outages

Following our press release making developers aware of the risk to their investments due to circuit outages and the possibility they could stand to lose millions, we were delighted that Tom Grimwood of Utility Week picked up the story.

You can read Utility Week’s full article here. (It is paywalled for non-Utility Week subscribers).

Energy developers are unaware of risk to investment due to circuit outages and stand to lose millions

PRESS RELEASE

Renewable energy developers are putting investments at risk of millions in lost revenue, by failing to plan for grid outages over the lifespan of projects. Roadnight Taylor has warned developers to urgently review the growing risk in their portfolios.

The firms analysis of data(1) from UK electricity network operators shows that 8% of renewable projects in England and Wales will each face an average of four weeks of downtime a year, over 40 years, due to planned connection, maintenance, and reinforcement-driven outages on the grid.

The UK’s complex electricity grid is a system that is evolving to meet the needs of new energy assets, balancing generation and demand to ensure a reliable supply of power.

Circuits require maintenance and reinforcement which result in planned outages. Alongside this, we are in a new era of next generation energy projects, including wind farms, solar farms and energy intensive projects like data centres, all of which require connection to the grid. This growing pipeline of projects requires circuits to turn off to allow connections to take place. Combined, this means that the number of planned outages each year is rising, impacting projects across the grid.

Hugh Taylor, CEO of Roadnight Taylor, says:

“It is likely that developers are unaware of the weeks and months of outage risks that many of their projects will be carrying.

“The pipeline of projects seeking to connect to the 132kV distribution and transmission networks, and increasingly the 275kV and 400kV networks, is ramping up. Consequently, this is simultaneously increasing both occurrences of planned outages and the scale of income risk to affected investors.

“Investors that have not assessed this impact for the full lifespan of projects across their portfolios are at risk of lost revenues totalling tens of millions of pounds, perhaps hundreds in some cases, which is largely avoidable. The expertise is available to manage this risk, no matter if the project is already acquired.”

Roadnight Taylor has provided advice and solutions for energy project investors that face financial impact from planned outages, with investment or asset management teams sometimes realising they have an issue after a project is up and running. One such example is a 132kV wind farm in Wales. It ran smoothly for the first five years before suffering revenue losses, with the developer then notified of an upcoming, seven-month outage, expected to cost up to £5 million in lost revenue.

This research highlights the need for the industry to ensure appropriate due diligence is carried out at the stage of the connection offer review, at acquisition, and during the operation of the project. Crucially, developers need analysis that qualifies and quantifies outage risk, especially for projects with single- circuit connections. Minimising the volume and frequency of downtime will save projects millions of pounds in revenue that can be reinvested into new projects, ultimately supporting green growth in the UK.

(1) Data and results : Roadnight Taylor analysed two random samples of 50 renewable energy schemes accepted to the 33kV and 132kV networks in England and Wales.

Results found that 33kV schemes have lower outage risk than the 132kV ones, though 8% still face higher risk of “abnormal” running (periods with outages). From the 33kV sample, 4% risk experiencing 30 to 50 weeks of downtime during their lifespans, while a further 4% were found to face even more extensive risks of 50 to 100 weeks of outages.  

With more than a fifth (22%) of schemes found to be high risk, the 132kV network presents a challenge for developers, with 18% at risk of 124 to 166 weeks of downtime, and the 4% in the highest risk category facing over three years’ total time disconnected from the network during their lifespans.

The rule book is about to be rewritten. Are you ready for Connections Reform?

With radical change fast approaching, our CEO Hugh Taylor shared his insight with Current±. Find out the latest about National Grid ESO’s Connections Reform programme, as well as the potential risks and rewards. You can read Hugh’s article here.

As the regulatory landscape evolves, the Connectologists®, our specialist experts, are here to keep you up to speed. Sign up to The Connectologist® newsletter for invites to our join our webinars and listen to our podcasts.

Solar developments on Best and Most Versatile (BMV) Land have come under increasing scrutiny by Local Planning Authorities (LPAs). As this development has largely come about after connection offers have been accepted for many projects originated on such land, this represents pertinent context when considering grid queues.

BMV land is land best suited to agricultural production and is a finite national resource requiring LPAs to consider the agricultural productivity impact of developments. It is important for solar developments to show at an early stage that impact on agricultural productivity has been considered, demonstrating to LPAs that the use of BMV land for solar is appropriate.

Undertaking an Agricultural Land Use Assessment (ALA) as part of the planning process can effectively demonstrate use of land for solar is appropriate in a local and national agricultural context. As Bidwells has undertaken many of these assessments for successful major developments, their Head of Rural Investment, Roland Bull, is well placed to talk to Hugh Taylor and provide insight.

Hugh: Hi Roland. Please can you tell us a bit about Bidwells?

Roland: Bidwells is a multi-disciplinary property consultancy working in all key property markets for a range of landowning and investor clients. Bidwells manages, or advises on, over 1.5 million acres of English and Scottish countryside and is the leading consultancy in the high-growth forestry, renewables and sustainable investment sectors.

Hugh: Are you involved in UK solar projects?

Roland: Yes. Bidwells act for landowners and developers to bring forward a range of renewable energy schemes. We’re advising both developers and landowners, working on lease and option negotiations, supporting planning applications and acting as expert witness at planning appeals.

Hugh: Why are LPAs concerned about solar development on BMV land?

Roland: BMV land is defined as grade 1, 2, or 3a of the Agricultural Land Classification and is considered to be the most productive, efficient and capable of delivering crops for food. It is classed a finite national resource in the National Planning Policy Framework (NPPF), so LPAs are required to consider the impact on agriculture of any development of BMV land.

This does not mean solar development cannot occur or is not appropriate on BMV land. It is generally accepted that such development is necessary, and utilising BMV land in a lot of instances can be an efficient solution. Solar developments need to evidence that impact on agricultural production has been considered and mitigated where possible and an effective way of doing this is via an ALA. National and local opposition to solar development often revolves around BMV land but, with evidence and correct justification through an ALA, solar developments can be shown to be an effective use of a key resource.

Hugh: So, what is an Agricultural Land use Assessment?

Roland: An ALA explores the issues relating to the current and potential use of agricultural land and the impact of solar development. They present an objective assessment of the relative importance of the current agricultural land use in a local and national context and the consequences for the existing agricultural business.

The main areas covered are:

• Interpretation and analysis of soil surveys in considering the impact of development.
• The importance of the existing agricultural use in the context of the current UK market and the trade surplus or deficit of agricultural commodities and the relevance of the development area to UK production. Removal of relatively small parcels of BMV land involved in high value specialist crop production can have a material impact on national production so this is an important factor to consider.
• The impact on the incumbent farming business should the proposed development be consented.
• The impact of temporary removal of agricultural land from its current production regime, which in many cases will actually benefit soils and preserve agricultural production potential over the long-term.

The purpose of an ALA is to assess if a solar development represents and efficient and appropriate use of land, and that there is limited impact on the agriculture at a local and national level. By analysing farm data and comparing to national data, impact of the removal of land from agricultural production looking at yield, performance, farm business operation and commodity markets, can be determined.

Hugh: And so, when should an Agricultural Land use Assessment be undertaken?

Roland: An ALA should be considered at the earliest opportunity and be included in the planning application documents. In order to undertake the assessment, data on current and historic farming operations and performance is required. The quality and consistency of data is key to forming a strong argument. Engaging with the individual/ business that is farming the land is important to obtain this information, especially where that individual/ business is not the landowner so possibly not benefitting financially from the solar development.

Hugh: How can it be shown that solar development is an appropriate land use?

Roland: When undertaking an ALA there are some key areas to consider:

Land grade and soil type
A soil assessment is required to determine this as land grade maps are not sufficiently accurate to determine grade and soil type of individual sites. Sites, even small scale, are unlikely to be homogenous and may encompass several land grades and soil types. Land is nearly always farmed according to the poorest quality land present so, unless an entire site is of the quality to support high value specialist cropping, it will likely to be restricted to conventional combinable crop rotation as the most viable farming system.

Agricultural characteristics
Agriculture is not a major contributor to the UK economy but food security is a national concern so assessing the type of agricultural activity on the site and its contribution to food security is an important point to understand.

Farming operations on the ground ultimately determine agricultural importance of a site. For example, certain non-BMV land can be locally important in an area of generally poor-quality land as well as naturally poor land able to take high value specialist cropping if properly irrigated. Similarly, in areas where BMV land is prevalent, some BMV land can be locally unimportant but present the only economically viable opportunity for renewable energy to be generated.

Loss of BMV land
Unlike other forms of development, solar does not represent a permanent loss of BMV land. Consents are typically temporary, and apparatus can be removed to allow land to be returned to its previous agricultural use. However, land will still typically be out of production for at least 30 years, so there is scope for material impact on agriculture. Therefore, while temporary loss is a strong point in favour of solar development, the impact of a development must be considered comprehensively.

The attrition rate of large-scale energy projects is very high. From finding sites through to selling shovel-ready schemes and energisation, many developers will be aborting schemes and/or suffering financial losses for various reasons.

Hugh Taylor spoke to David Peill, Commercial Director at One Planet Developments, to drill down into the costs and losses. David has a deep understanding of how and when development spend accrues, having been involved in hundreds of utility-scale generation and storage projects from origination to energisation, and beyond.

Hugh: Hi David. Please can you tell us a bit about yourself and One Planet?

David: I spent the first decade of my career in the commercial property world with Savills and then in property fund management. I entered the renewables industry in 2012. Since then, I have been focused on large-scale solar development and, more recently, energy storage development. I was one of the first team members of the British Solar Renewables Group (BSR) and ran their development platform as Commercial Director from the company’s inception up until 2019. At BSR, I oversaw the promotion, construction, funding and investment of over 650MW of solar and energy storage assets.

In 2020 I joined One Planet Developments, which at the time was a recently formed start-up.  Since then we have raised significant capital and are developing a 1.3GW pipeline of solar and energy storage projects.  We would like to think we are one of the most professional and experienced early-stage developers in the UK, focused on taking projects from inception through to ready to build (RTB) stage.  We have recently also expanded our scope and are currently helping a FTSE Listed company build out a 20MW solar park.

Hugh: Thanks David. We know that, across the market, a successful connection application is made for less than 20% of prospective sites. Can you give us an idea of the origination investment that a developer would make up to a connection offer being issued by a DNO – and so the typical write-downs that developers are suffering some 80% of the time?

David: I’m not sure the connection offer success rate is even as high as 20% as finding viable sites has become ever more challenging.

The origination investment will depend on how developers go about finding sites. Some developers will use third parties to source land while some will do it in-house. In any event, the resource and staff cost alone in site finding is significant.

On top of that there is the grid connection application fee and any grid consultancy fee. Grid applications are getting more complicated, so it’s unlikely now that developers do that part themselves unless they are a large developer with in-house resource. We like to use external professional grid experts from the outset to keep our attrition rates low.

Putting those elements together, it costs upwards of £20,000 per project to establish if a grid connection is viable. That assumes that a developer takes the risk of making a grid application ahead of any formal legal contracts or agents fees being in place.

Hugh: How do you recommend developers minimise abandoned projects, and the associated write-offs, up to the connection offer acceptance decision-point?

David: Our key approach is to be very disciplined about site selection. While no-one likes walking away from a site, it’s much better and easier to walk away at an early stage rather than after several 10s or even 100s of thousands of pounds have been invested in a project.

Firstly, to state the obvious, choose good sites! In the frenzy of the last two or three years, that has often been overlooked. Having a good grid offer on a piece of land that’s never going to get planning is not a good grid offer.

Minimising write-offs is an accumulation of the constituent parts that make up a good site, with planning and grid being the most important. This comes back to the point I made about using appropriate professionals from the outset.

I’d suggest having a feasibility study and then a grid application carried out by appropriate experts. We know that the publicly available grid information is always very out of date, inaccurate and therefore entirely unreliable. Grid heat maps are designed to do a job, but finding grid isn’t that job.

Next, don’t take the cost of connection offers at face value. Have the offer expertly reviewed to identify errors and omissions on the DNO’s part – which does happen – before you accept or walk away. Constraints are a huge part of grid offers these days, and some developers are not appreciating the commercial realities and risks of these.

Strategic planning is also a key element to minimising having to abort projects.  Depending on how the developer is funded, they will need to operate within different time horizons and target returns.  There is little point in a developer who is backed by an investor who is seeking an exit within, say a three to five year period, pursuing a development site that can’t be connected for 10 years.

One Planet Developments is fortunate to be supported by long term patient capital which allows us to look strategically at projects.  In fact, we are keen to partner with other developers who have viable projects that fall outside of their investor’s time horizons.

Hugh: There is a high cancellation rate for projects after offer acceptance. Whether a scheme cancels in this phase because of planning, land or grid issues, what are these costs and how high can they stack up?

David: A large proportion of early-stage costs are professional fees including lawyers, agents, planning consultants, grid consultants and environmental consultants. Most projects will also include an Option payment to the landowner when the Option to Lease is signed.  Add that all together and it ultimately makes the grid deposit look small.

There’s also a bit of a misunderstanding within the industry about the expectation that if you cancel a project, you will get most of your grid deposit back. This is because, if you genuinely think you’ve got a good project, by the time you’ve got to the point where you realise it’s not good, the DNO will have probably (and correctly) spent most of the money on the initial design and the Statement of Works application.

To professionally take say a 50MW solar project through planning is going to cost somewhere between £300,000-400,000 of external costs alone. Add in further grid payments and the possibility of grid securities and the abort costs could be even higher. So, if you’ve got all the way through planning and get refused, and then also fail at appeal, there’s a risk that a capital investment of £400K is lost alongside opportunity cost of the time taken to develop the project. Not many projects get that far and then fail, but some sadly do, and sometimes one wonders why they have been promoted in the first place.

Hugh: How do you go about minimising these massive write-offs?

David: Essentially, the key measure that should be taken along the whole journey is de-risking. Focus on identifying, dealing with and mitigating those risks as early as possible. Each project will have different risks at different stages, so projects must be moved forwards at different speeds and in different ways to minimise any kind of write-off.

Seasoned developers know which elements of a project must be dealt with first before moving to the next stage but all developers ultimately have to take risks to get projects through. So sadly, occasionally failures do happen.

Again, working with appropriate professional consultants is important to minimise failure. They will review and give you an opinion on the situation, be that the grid offer, the likelihood of planning, restrictive covenants or legal, access, easements and timing issues. All of those need to be reviewed.

So, for example, your team, Hugh, have deep grid expertise, and most of the developer community do not have that depth of knowledge. We understand the grid system, but we’re not grid experts. How many developers are going to sit down and forensically read a 50 page grid offer? I suspect a lot of people will read the first few pages, get either very excited or very disappointed and not get to the bottom of page 10 where there’s something that really messes it up, or a mistake or important omission – which is frequent.

We commission grid reviews to summarise the offer in layman terms and then we can then make a commercial decision.

Hugh: Assuming a project does make it to financial close, how are exit valuations calculated and what are the key measures that should have been taken along the way to maximise exit valuations?

David: Development rights are calculated relative to the investment returns being sought by the buyer.  The greatest impact levers to the value of a solar project are the irradiance levels and grid connection costs. In energy storage, it’s mainly the grid connection costs and the locational specifics of the connection point that are the swing factors of value.  The other significant impact on value is the connection date, with near term dates commanding a significant premium to more distant connection dates where a connection may be conditional on the completion of reinforcement works.

Anything that can be done to bring development costs down will have a direct positive impact on the net value of development rights. Therefore, if a consultancy can support us in reducing any costs or accelerating a grid connection then that’s a huge help. Making the grid connection cost more effective (such as by reducing non-contestable costs) and mitigating against curtailment risk, for example, would have a commensurate impact on the value of any project.

Abnormal running, security of supply and how many outages a project have are important issues to address. In such a bullish market, there is a danger that buyers are turning a blind eye.  If a viable grid offer comes through, the likelihood is a developer will take it. If the project is being bought by an infrastructure fund who are going to own that scheme for a very long time, they should get the connection offer thoroughly checked and valued.

We have used Roadnight Taylor for such due diligence on the buy side and also had our homework marked, so to speak, by yourselves when you’ve acted for purchasers of our projects and we’re pleased our projects have successfully passed the Roadnight Taylor interrogation to date.

Financial Times approaches Roadnight Taylor for deeper understanding of grid connection delays

Renewables groups sound alarm over grid connection delays

Further to the Financial Times article in May last year (2022) after we first flagged long grid connection delays, we were delighted that FT journalist Gill Plimmer returned to us for further information and a quote for another article as delays are pushed back to as far as 2036.

This time, our CEO Hugh Taylor engaged with Gill. You can read the article in full,  on the FT website here.