October 11, 2024
Introduction: This article begins a five-part series addressing the critical components contributing to the successful development of Battery Energy Storage Systems (BESS). Each segment will focus on a vital phase or document necessary to navigate the complexities of BESS development, starting with one of the most foundational: the Term Sheet, also known as the Letter of Intent (LOI). The following articles will cover other essential topics: site control, project timelines, permitting processes, and innovative solutions to drive efficient and profitable BESS projects.
The Challenge of BESS Development: Developing renewable energy projects, particularly utility-scale photovoltaic (PV) and Battery Energy Storage Systems, is a lengthy and complex endeavor. The interconnection and permitting processes can take several years to complete.
Given the long timelines involved, securing early commitments cannot be overstated. At Oncore Origination, with over a gigawatt of BESS projects originated across the U.S., including in highly competitive markets like PJM and NYISO, we have identified several best practices that streamline the development process. One of the most critical best practices involves using a well-crafted Term Sheet or LOI. Securing early commitments not only accelerates the development process but also provides a competitive edge in the market
Why the LOI is Critical: The LOI is often overlooked by developers eager to move directly to an Option to Purchase or Lease, especially in markets where queue pressure is lower. However, competition for prime parcels near substations is fierce, and securing early site control through a LOI is a strategic advantage that should be considered. Despite its relatively low cost in the overall capital stack, a well-drafted, non-binding LOI can achieve the following key objectives:
- Clarifying Intentions: The LOI serves as a “meeting of the minds,” putting the agreed-upon business and legal terms in writing. It helps surface any significant issues or red flags early, preventing costly misunderstandings later in the process.
- Exclusivity: The LOI typically grants the developer an exclusivity period, ranging from 90 to 180 days. During this time, the developer can negotiate the full contract and perform limited due diligence without the pressure of competing interests. This breathing room is invaluable in complex negotiations.
- Fostering Commitment: While a signed LOI is non-binding and does not guarantee that a final agreement will be reached, it often leads to a formal contract. Most landowners respect the terms outlined in the LOI and proceed to a definitive agreement. This not only demonstrates good faith but also creates a solid framework for future collaboration, instilling confidence in the process.
In BESS development, the Term Sheet or LOI is pivotal in laying the foundation for a successful project. By clarifying expectations, providing exclusivity, and fostering mutual commitment, the LOI offers a cost-effective way to secure early site control in a highly competitive market. While the LOI is not a guarantee, it significantly increases the likelihood of reaching a final agreement, saving time and resources in the long run.
As we progress through this series, we will explore other essential aspects of BESS development, but it all begins with securing the basics: a well-drafted Term Sheet that sets the project on the right path from day one. In the next article, we’ll delve deeper into the importance of site control and how it impacts the long-term success of your BESS projects. Stay tuned for more insights on navigating the complexities of BESS development efficiently and profitably.
Joe Tassone Jr. is founder and a principal of Oncore Origination and has over twenty-five years of project development experience. Visit www.oncoreorig.com for more information.