The energy industry is seeing a shift toward renewables from companies traditionally focused on oil and gas — a transition accelerated by pandemic-related disruptions to supply and demand forces as well as political administration changes. Capital groups, E&P companies, independents and private investors alike are seeking renewable deals and opportunities to capitalize on the energy transition. Not unlike the land grabs seen historically in oil and gas, companies are now urgently seeking out the best property for renewable development. That leaves the question: How are these areas identified and evaluated?
According to LandGate’s research, the total market size of land resources is estimated to be $5 trillion annually. The growing energy demand and the limited supply of land to extract resources create huge opportunities in land resource transactions. Renewable energy specifically is seeing a greater level of attention due to state and local incentives, government policies and an ever-increasing environmental PR battle facing oil and gas companies.
LandGate projects the capital expenditures of commercial onshore solar farms to double in 2022 reaching over $20 billion for solar farm development alone.
In this article, we address the economic factors driving land resource transactions while highlighting solar energy growth in the U.S. We also discuss the key value drivers for developing renewable energy projects and how companies are acquiring data to make decisions on renewable opportunities such as solar.
SOLAR DEAL STRUCTURES
Option and Lease Agreements
Renewable energy deals begin with project developers entering into agreements with landowners to develop a solar farm on a commercial size tract of land. The deal terms offered typically start with an option agreement, giving the developer time to research the costs and feasibility of the project before executing a lease. Most option and lease agreements compensate the landowner in the form of rental payments, which are fixed annual payments on a dollar-per-acre basis and sometimes include escalators to increase the payments year over year. An obvious difference between solar lease structures and oil and gas is that solar lease agreements almost never include royalty payments based on output or the revenue of the project. Royalty payments offer a much greater opportunity for landowners to participate in the success of the project and — perhaps more importantly — also provide an asset class that can be bought and sold. It is LandGate’s opinion, however, that until state and federal regulatory agencies uphold the same energy project reporting requirements as oil and gas, it will be difficult to accurately track the royalties owed based on a renewable project. Wind projects can sometimes provide royalty payments. In the current market, landowners can sell their current and future solar rent payments, project developers can sell their renewable energy credits and the projects can be bought and sold at any stage. LandGate has an open and free marketplace for land resources where these energy deals are bought and sold. The platform also offers unique data intelligence of automated engineering studies with solar values of each parcel in the US calibrated to comp data collected on the platform.
Feasibility Studies and Interconnection
During the planning phase of the project, the developer conducts a feasibility study to ensure that the economics of the project are profitable. The engineering and economic drivers of the feasibility study will be discussed in the next section. The developer must check the capacity of the nearest transmission line and substation. Depending on the available capacity, the developer enters an interconnection queue and must wait for approval of their interconnection application. Permitting is also required at this stage which includes local government, and potential easements. Since these factors are normally unknown, developers often choose option agreements before entering into lease agreements with the landowner.
PPA and Planning
If all of the previous steps are complete, the developer exercises the option, finalizes the solar lease with the landowner, and begins construction plans. One crucial step is entering into a power purchase agreement with a company or utility looking to purchase electricity. The PPA allows capital providers to finance the project knowing that the economics are profitable for the project developer.
Deal Structures for Non-Project Developers
Similar to royalty buyers in the oil and gas industry, solar deals provide ways for groups to buy cash flow streams. LandGate has multiple clients buying rent payments from landowners under solar farms. We assist these groups by identifying the solar farm outlines and then extracting the parcel owner information for our clients.
One of the intellectual property data points that LandGate has developed is all solar farm outlines at any stage of development, including farms that are planned or under construction. These farms do not have satellite imagery available, so the farm sizes and exact locations have to be calculated. LandGate makes this data available to our clients and provides the parcel owner contact information to pursue the rent payments.
ECONOMIC DRIVERS FOR SOLAR
During the planning phase, the project developer also begins to evaluate the economics of the solar project. The process starts with a resource assessment, such as calculating the solar irradiation in an area. The next step is examining the buildable acreage, which would not include acres in flood zones, dwellings, parks, grasslands or other exclusion zones. The economics can then be calculated to include the capital and operational costs, the local marginal prices, federal and local incentives, taxes and projected cash flows. LandGate has compiled all of this data and applies market values to actual parcels of land across the United States. The results are then displayed as heat maps over a geographical area to find the most economic opportunities for investment. LandGate has compiled data around all of the economic elements of renewable energy and uses the data to derive values for any tract of land in the United States, enabling developers, buyers and capital groups to immediately focus on the most profitable areas while avoiding the 3-plus-year feasibility studies typically required.
GROWTH OF SOLAR DEVELOPMENT IN THE U.S.
The growth of renewables in the U.S. is reflected by the amount of solar projects being developed. As an example, a high-level view of solar energy capacity starts at the state level. What often confuses new entrants to renewable energy is the assumption that sunny areas are the most profitable.
However, state and local incentives play a significant role in the economic cash flows of renewable energy projects. Figure 5 below shows total solar capacity on a state level. As of May 2021, Texas accounts for 34% of the total capacity of solar farms under construction in the US and also makes up 22% of the total capacity of planned solar farms. Solar projects are being added each year at an exponential rate according to LandGate’s data.
CONSIDERING RENEWABLE ENERGY
Companies in a position to include renewable energy in their portfolios are finding the benefits of diversification — a key concept for any investor. Renewable energy allows for exposure to the power markets while providing energy diversification as a hedge against oil and gas price fluctuations.
It is no surprise that renewable energy deals are more favorable in traditionally blue states due to state and local incentives and by contrast oil and gas deals are favorable in traditionally red states. The result is geographical diversification that gives savvy energy investors exposure to the entire U.S. energy market. As many have experienced, political decisions impact commodity prices and taxes — and can even dictate locations for development. A portfolio that includes oil and gas as well as renewable energy allows for economic benefits in any political environment.
For companies that are flexible enough to capitalize on renewable energy, the opportunities are certainly available and likely lucrative. The key is taking all of the data and boiling it down to the value of a particular deal as quickly as possible in order to close more deals than the competition. Check this article out in the July 2021 issue of NAPE, starting on page 34.