The current Dev Fee structure is a Win/Lose model. It often ends up being a race for dominance, but usually it is a race to the bottom!
In the current Dev Fee structure, Purchasers are caught in the dilemma of bidding too much or too little for a site.
If they bid too much, their returns suffer. They will end up with a portfolio of sites made up of returns at the two extremes of the return spectrum. If the sites with the high returns slide, the remaining portfolio of sites will have marginal returns.
If the Purchaser tries to pay too little, they will lose sites to the competition and not be able to pull together a large enough portfolio to make it attractive to the financing community.
Most site acquisition targets are offered well before they are in a true NTP condition and require spending a lot of resources “Due Diligencing” the sites. This also requires each site to have a complicated “one off” set of contracts to protect against the Developers sub par sites.
The other major problem with the structure is the “push and pull” between how to split the return (Dev Fee) and it is always a Win/Lose situation.
So why not try something new and make it a Win/Win for both Developers and Purchasers of Large-Scale Solar sites?
I call it the “Horizontal Dev Fee”. It is easy to understand if we think of the traditional model as the “Vertical Dev Fee”.
The “Vertical Dev Fee” means the site is split at NTP.
The “Horizontal Dev Fee” split happens on day one but splits the ownership of the site at an agreed upon ownership split (e.g. 80%/20%).
The “Horizontal Dev Fee” keeps both the Developer and the Purchaser involved in the site from the time of early-stage development until the solar asset is finally retired. Both partners’ interests are aligned as they share equally in the risk of the site's outcomes.
With the “Horizontal Dev Fee”, the Purchaser invests less in the site, but receives the same return as if they initiated a “Greenfield” Site themselves. Talk about Win/Win!
With the “Horizontal Dev Fee”, the Developer invests in the site and receives long term recurring revenue…the other side of Win/Win!
The “Horizontal Dev Fee” offers many advantages to the Purchaser. Below are some of the key benefits:
- A constant stream of site deals.
- All sites have the returns of a “Green Field” Site.
- No more negotiating Dev Fees. Each site will stand on its own financial return merits.
- The end of Site specific contracts requiring significant negotiations and legal expenses.
- The opportunity to easily enhance financing portfolios with “high return” sites.
- Partners with resources to support the development and construction of a growing number of sites.
We have a series of articles to help you better understand this pioneering concept.
- A New Concept for Solar Dev Fees - “Horizontal” vs “Vertical”
- “Horizontal Dev Fees”…a Primer for Developers
- “Horizontal Dev Fees”…a Primer for Purchasers
- Top Ten Reasons to Use a “Horizontal Dev Fee”
- Top Ten Reasons to Stop using a “Vertical Dev Fee”
- “Horizontal Dev Fees” … Key Contract Points.
They can be found on the Financial Blog on our website.
Comments and ideas from fellow Large-Scale Solar Pioneers are more than welcome. Let's work together to accelerate the trajectory of the energy transformation!
Sincerely
Jeff
516-527-8390