Topping the early to-do list for developers of renewable energy projects is snagging a spot in the interconnection queue. This task has become particularly important as high demand has led to long wait times to interconnect – estimated at four to nine years for wind, solar and battery storage projects – so developers often seek a place in line even before permitting and site control is in place. In exchange for a spot in the interconnection queue, developers must pay costly, though initially refundable, interconnection deposits that vary by project size and interconnection provider. As the project hits certain milestones in development, the interconnection deposits become non-refundable.
Foley & Lardner recently represented a sponsor client in a novel development financing for these interconnection deposits. The loan was sized using a “borrowing base” consisting of refundable interconnection deposits made by the borrower, and these deposits were pledged as collateral to the lender. As projects advanced through development and the deposits became non-refundable, those deposits would drop out of the borrowing base and the loan sizing would be recalculated. In the event of a default under the loan facility, the lender would have the right to withdraw the project from the interconnection queue, and thus liquidate the collateral by triggering a refund of the interconnection deposits which would be paid directly to the lender to pay off the outstanding loan. This structure required the lender to conduct extensive due diligence on the refundable nature of the interconnection deposits, resulting in higher legal costs at the front end. However, the lender viewed this structure as lower risk, resulting in lower borrowing costs. Therefore, the transaction costs were ultimately more than offset by the lower cost of the borrowings.
Historically, because projects have few assets in the early development phase, development loans have largely been backed by relying on the borrower’s or upstream parent’s balance sheets. Instead, these parties have successfully pioneered an asset-based project finance model, with an opportunity for it to be replicated by sponsors in the future to address a crucial step in the development of energy projects.
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