Overcoming clean energy’s slowdown requires 'investment grade' policy

It now takes twice as long to connect a utility-scale power plant to the grid as it did 15 years ago. These delays can dramatically increase costs, right when we must be accelerating deployment to meet climate goals. 

Recent delays stem from forces over which developers and policymakers have little control: supply chains, interest rates, or geopolitics. But circumstances like land access or interconnection troubles aren’t going anywhere, unless we fix our outdated rules that delay projects by years — or even halt them altogether. Each challenge introduces new risk, making renewable projects difficult to finance.  

However, new Energy Innovation research highlights policy solutions that reduce that risk, and ultimately drive down clean energy project costs. For instance, mitigating financing risk can lower renewable energy costs by 20% to 50%, while speeding up deployment.

The term “investment grade policy” echoes financial terminology used to distinguish between low-risk “investment grade” bonds that enjoy low interest rates, and higher-risk “junk bonds” that require high interest rates. In a clean energy context, the policy environment is investment grade when developers see the business case as low-risk, and therefore can readily find low-cost equity and debt to finance the projects.

Because clean energy projects are so capital-intensive, investment grade policy can ensure an affordable and reliable transition to a clean electricity system. If we make our clean energy policies investment grade, we reduce the risk to project financiers, cutting costs for these capital-intensive projects.

Clean energy development risk comes in three flavors: technology performance, project development, and market revenue. 

Technology risk reflects whether the performance of the technology matches the plan. Project development risk is uncertainty as to whether, and how quickly, a project can be built and physically connected to the grid. Market risk is uncertainty about future revenue. 

All three are closely linked. For example, unanticipated lapses in technology performance, like a battery plant catching fire, will affect market revenues. (Fortunately, due to massive strides forward in solar and wind research, technology risk for those proven renewables has been largely reduced.)

Strategies to address development and market risk

Project development risk for clean energy projects comes down to two questions of access: to the grid and to land. 

Currently, two terawatts of generation and storage projects — more capacity than exists on the grid today — are in line to interconnect, exemplifying this risk. Interconnection processes are more administratively burdensome and inequitable than they need to be. Each individual project is required to undergo an interconnection study with unclear and potentially untenable costs that last an average of three to five years (including wait times).

The recent Federal Energy Regulatory Commission rule reforming interconnection is a big first step in the right direction. It requires RTOs that run interconnection processes to implement cluster studies that improve efficiency, prioritize viable projects, and more equitably allocate cost between projects. Penalties will also be imposed on RTOs that fail to complete studies on time.

These measures will help, but RTOs and utilities can go further by adopting a “connect and manage” approach to transmission interconnection more widely. This approach, embraced by ERCOT, has allowed Texas to connect record amounts of wind and solar resources while keeping development times short.

Strategically building out new transmission lines and investing in grid infrastructure is also crucial. Building a network that links diverse renewable resources with demand centers across geographies can connect high-quality renewables to new markets and unclog interconnection queues. 

Again, Texas is an instructive example here — the Railroad Commission’s decision to build transmission in the early 2010s linking excellent wind resources in the northwestern part of the state with industrial demand centers to the southeast made the state a global leader in wind penetration. Today, Texas enjoys some of the cheapest wind contracts in the nation.

When it comes to siting, the picture for development risk is equally if not more risky. Development processes are riddled with unclear and redundant forms, ambiguity in land requirements, and even contradictory guidelines from different authorities. And even after developers jump through these hoops, community opposition can be an obstacle. Improving zoning frameworks and creating streamlined, standardized systems will make a huge difference.

In terms of siting, pre-zoning lands for development -– and for non-development — and clarifying permit requirements can slash time, uncertainty, and risk. A public lands agency like the Bureau of Land Management can zone public lands as strictly green or red with public input. Red lands will never be developed — don’t even ask. Green lands are suitable for development, so long as clear, pre-specified standards are met.

The Western Electricity Coordination Council’s environmental data viewer tool, which evaluates environmental and cultural regulatory risk, is a great example of how this could work. It already exists, contains land use layers, and scores risk on a scale of one to four; the score reflects risk to developers, helping private actors avoid conflicts upfront. The tool could produce even greater risk reduction if low-risk areas received special streamlined permitting designations, which would provide greater certainty for developers.

(A version of this process is already underway in Europe: last year, the European Commission released a plan for proactively mapping and designating low-conflict renewable sites.) 

In addition to environmental suitability, green land designations could be used to signal a commitment from regulators that permitting will be fast-tracked or otherwise efficiently processed. Such a commitment from reviewers would dramatically reduce risk.  

Policies to standardize processes by higher jurisdictions, prioritize renewable development over oil and gas, and build trust between developers and communities should also be in the works.

Once a site has been selected and approved, developers then face dozens of other permitting requirements, including construction standards, inspections, and limits on noise and traffic. This paperwork blizzard can add years to a project. But a jurisdiction with a goal of deploying clean energy can cut down on this costly clutter by thinking ahead, setting clear standards, and offering rapid permits for projects that meet standards. Providing developers with support to work through regulatory and permitting problems across different agencies and jurisdictions is crucial.

Finally, market revenue adds another layer of risk. A long-term, certain price for renewable energy from a reliable purchaser makes it far easier to invest capital at lower discount rates and raise competition for project financing. A renewable portfolio standard can offer price-collaring for developers because it means they are bidding only against similar energy suppliers. Tax credits should last ten years or more, and should not be subject to year-on, year-off uncertainty. The 2022 Inflation Reduction Act’s tax credits that last until 2032 are an example of how to do this well.

Increasingly, curtailment presents market risk that can affect the value proposition of a new renewable project as well. The Energy Information Administration found that in 2022, ERCOT curtailed 5% of its total available wind generation and 9% of total available utility-scale solar generation. By 2035, EIA projects this could rise to 13% of total available wind generation, and 19% for solar. 

Some additional curtailment is to be expected as clean energy penetrations rise, but storage, system flexibility, and interregional transmission upgrades are key to keeping it to a minimum while increasing the market value of renewables.

The public wants energy that is affordable, reliable, clean, and safe. Today’s technology can meet these standards, but only if built in a smart policy environment. Investment grade policy can help solve the problem.

Mike O’Boyle is the senior director for electricity at Energy Innovation, and Elli Newman is project manager to Energy Innovation CEO Hal Harvey. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.