By Lea Maamari
As developers of projects that may have three decades of longevity in a community, we want to assure our neighbors that we will leave the land in the same or better condition than we found it. We know that this is also important to our communities, as questions about decommissioning have risen with virtually every solar project proposed in Virginia. In a comprehensive report, which can be downloaded here, SolUnesco has reviewed 45 county ordinances and 50 projects and found decommissioning requirements in 15 ordinances and 31 projects in 32 counties. We have identified best practices with respect to decommissioning solar projects, as well as some concerning trends in the requirements being imposed by some counties.
We advocate for the following principle to be applied by counties: counties should implement reasonable risk mitigation to protect their communities from an owner or developer abandoning the project without removing the equipment. Mostly, counties are doing just that. However, we are seeing many situations where counties are misunderstanding the risks and imposing unreasonable requirements–potentially killing the projects (and the corresponding investment in the local economy) in the name of mitigating risks that do not realistically exist.
In effort to eliminate the 100% of risks, however unlikely they might be, some counties are putting themselves in a position where they will be eliminating 100% of potential investment and growth for the local community and economy.
The Decommissioning Plan
In 31 instances, the county requires a decommissioning plan, prior to construction. This plan. typically includes:
- The anticipated life of the project
- The anticipated present value cost of decommissioning
- An explanation of the calculation of the cost of decommissioning
- The physical plan for decommissioning
- A surety to cover the cost of decommissioning
In addition or augmentation to the above, we recommend using the following requirements:
- Financial security in the form of surety bond, letter of credit, or cash escrow held by a federally insured financial institution;
- Updated decommissioning costs and salvage value projections every five years and including a mechanism for truing up the security;
- A reserve factor to the cost projections to protect against changes in market values;
- A detailed decommissioning plan with a documented decommissioning costs and salvage value projections. This plan should be either produced by, or reviewed by, a licensed engineer; and
- A process to require decommissioning if the solar energy system is no longer operational.
A great deal of variability can come into play when calculating decommissioning costs. For example, an estimate of decommissioning of the 80 MWac Water Strider project in Halifax County came in just over $2 million, while the 50 MWac Sunnybrook project—two-thirds the size of Water Strider—had estimated decommissioning costs 50% higher—over $3 million. These variances are created because of the methodology used by different parties, the requirements imposed by counties, and the lack of calculation standards. We feel that this extreme divergence in cost estimates has resulted in a loss of credibility in the industry.
SolUnesco has two key recommendations with respect to decommissioning costs. First, the estimate should be produced by a licensed engineer. Second, the industry needs to develop standards by which these estimates are created to avoid the wide variation in calculations and thereby restoring trust in the estimates.
To address inflation and other changes to market conditions, most counties also include a mechanism for calculating changes in the removal costs. In 21 instances, counties require the decommissioning cost estimate to be updated every five years.
Salvage Value as Part of Decommissioning Cost Estimates
Many county ordinances and individual solar permits have addressed salvage value with respect to decommissioning cost estimates. The Code of Virginia recognizes salvage value and most Virginia counties either explicitly allow for salvage value, or the relevant ordinances or permits are silent.
We feel that counties that eliminate salvage value from the calculation create a financial barrier to projects in their county for little to no benefit. Rather than disallowing 100% of the salvage value, we recommend using one of a number of alternatives to address fluctuations in market prices and changes in technology—both of which can affect the final net decommissioning costs.
For example, in three instances the counties adopted an approach that both recognizes salvage value and protects against fluctuations in salvage value by reducing salvage value by 20% while increasing the gross cost estimate by 20%. We discuss other treatments of salvage value in the comprehensive report that can be downloaded here.
We strongly believe that including salvage value in the decommissioning cost calculation is both necessary and beneficial to the developer and to the County. When calculating decommissioning costs for a number of projects, we have estimated the salvage value to be at least double the cost of decommissioning. For example, the engineer’s estimate of the decommissioning of the Water Strider Solar Facility in Halifax County was $2,013,600. The engineer estimated a salvage value of just under $5 million. Therefore the cost of decommissioning was 42% of the salvage value of the site materials. In this case, the developer expects to be able to sell the materials for more than twice the cost of removal. The logical business decision would be to salvage the materials, as opposed to abandoning the assets.
While salvage materials are not guaranteed to retain the exact value assessed at the time of project permitting, the values for the materials involved in solar projects (steel, copper, silicon), have historically trended upward and these materials have a been reused, reclaimed, or re-purposed for decades. As suggested above, it may be reasonable for a county to add a buffer to account for the possibility of a temporary downturn in value, but giving them a value of zero reflects a scenario that has no historical precedent.
SolUnesco recognizes that counties should protect their citizens from a scenario in which the solar generating facility owner, for whatever reason, fails to decommission the facility at the end of its useful life. In this highly unlikely hypothetical, it would be imperative that adequate funds had been secured to ensure that the County can take over the decommissioning process.
Most counties include requirements to secure decommissioning costs by an adequate surety. In 35 instances, counties require financial security while allowing for a letter of credit, cash, or a guarantee by an investment grade entity.
Prior to construction, the developer typically posts a Letter of Credit in an amount sufficient to ensure decommissioning of the solar facility and removal of the improvements from the site–consistent with standard industry practices. The amount of this Letter of Credit is typically based upon the estimate of decommissioning cost and is adjusted after updated estimates are completed every five years. A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make that payment, the bank will be required to cover the full or remaining amount of the obligation.
Letters of Credit are commonly used in the construction industry in the United States and they have become a very important aspect of international trade. Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit. Banks also collect a fee for service, typically a percentage of the size of the letter of credit.
A Letter of Credit is a reasonable method of ensuring that a developer will complete the decommissioning process. However, a handful of counties have proposed that funds to cover decommissioning be held in a cash escrow account. This imposes a financial hardship on the developer. Because of the decades-long longevity of a solar project, it is akin to holding cash in a money market account for 25 years. If the County demands a cash escrow and disallows the inclusion of salvage value in the decommissioning calculation, we feel confident in saying that no project will happen.
After our comprehensive review, we have several recommendations with respect to decommissioning plans and calculations:
- The decommissioning plan should outline in detail the methods for decommissioning
- Decommissioning, salvage value, and land restoration costs should be included in the decommissioning cost calculation and prepared by a licensed engineer
- A reserve should be included in the cost estimate as a hedge against fluctuating prices over the life of the project
- The decommissioning plan and cost estimate should be updated every five years
- The Letter of Credit or other security instrument should be adjusted every five years based on the updated cost estimate
- The financial security instrument should be part of the building permit. Allowable security instruments should be one of the following: performance surety bond; an irrevocable letter of credit; a guarantee by an investment grade entity or another acceptable security. The surety bond and Letter of Credit must be issued by a federally insured or equivalent financial institution.
As we discuss in the report, decommissioning is a critical piece of any solar energy project and requires detailed attention during the planning phase. Because a solar energy project can have a useful life of 25 years or more, it is necessary to ensure that the funding and planning of decommissioning is handled upfront. However, each county in Virginia handles the issue in a slightly different way, which adds complexity and uncertainty to each project.