Author: Craig Memery, Simon Holmes à Court
Contributor: Brett Dutton
In the context of building a wind farm, a 'developer' is a person or team with the technical expertise and experience to develop a wind farm from the initial site identification phase all the way through to construction.
Building a community wind project requires a lot of work, and considerable technical and business skill. In addition, in the early stages there is significant commercial risk. Getting a project off the ground can be daunting for a community organisation. If the community doesn't have access to the required skills, you'll need to find expert help. If you decide to partner with a developer, securing the right relationship from the earliest stages is critical to the success of the project.
Overview
Developers may have the resources, skills and maybe even the funding to turn your idea into a reality, but there are many other factors to consider. In this article, we discuss the various types of community developer relationships, and things to consider when forming the relationship.
Commercial developers may undertake all or some of the following:
- Site identification.
- Feasibility studies.
- Wind farm layout design.
- Coordination and attainment of the necessary planning studies (fauna, visual influence, cultural, noise, etc.)
- Navigation of planning approval processes.
- Grid connection studies and agreements.
- Electricity sale negotiations.
- Wind farm construction management.
- Post-construction operations and management.
Why work with a developer?
The main advantages of working with a developer are the benefits you can gain from their expertise, experience, and available resources. Developers have access to in-house skills and industry contacts, which can help them progress a project quickly and professionally. Rather than researching and driving the project step by step, a community can essentially hand the work over to a developer.
Another reason to form a partnership is funding. The developer may fund the project's feasibility expenses in exchange for a development fee, which you only pay when the project has sufficient cash reserves to repay the establishment costs. In this type of arrangement, the developer will take on the financial risk of spending money on an unsuccessful project and take a fee in the event of project's success.
Things to consider
Development finance
Developing a two-turbine wind farm is no easier than a 15 (or 100) turbine wind farm. It's a major endeavour, involving years of work and plenty of risk. It can cost hundreds of thousands of dollars just to select and assess a site and take the project through the development approval process.
At an early stage, your community needs to establish who will underwrite the development risk. Some developers may want to take on all or part of the risk in exchange for a development fee, as above.
Large developers are unlikely to be interested in community-scale projects. But for a small developer just starting out, a community-scale project represents a great opportunity to get something off the ground and establish their credentials. However, a small developer is less likely to have the financial resources to underwrite development costs.
Project ownership
If you choose to partner with a developer, you need to discuss and confirm ownership early on.
- Who 'owns' the project?
- Who controls the project decision-making process?
- If control rests with the developer during the initial stages, when will it transfer to the community?
- How will you resolve disputes?
Working with a developer may mean less community involvement in decisions and less overall control over the project. This can be a concern for community projects, but needs to be balanced with a community's ability to provide time and skills to the development process. Developers are likely to want a controlling share, or under certain circumstances, outright ownership. How you negotiate this will affect community engagement and consultation.
If the community wants total control of the project it will need to be more involved in it. In which case the project may be limited by the community's financial resources. On the other hand, it can be easier for you to win wider community approval for the project if it retains overall control.
Motivations and incentives
It's worth thinking carefully about where the motivations and incentives of the community might differ from those of the developer. A community group's number one priority isn't normally the project's profit margin. They tend to be more focused on outcomes like community involvement, local job creation and community fund creation. A developer is likely to be more business-minded, and will have profit close higher up on its list of priorities. These different motivations can cause differences in opinion when it comes to making important decisions.
Where the developer is providing 'at-risk capital' for the early stages of the project, they will expect a return in terms of a fee that reflects their time and the risks they've taken. A developer may also take a different approach to engagement with the broader community, and wind farm design.
Community and developer arrangements
There are many different ways to work with a developer. Each has its advantages and disadvantages.
Developer covers development costs in exchange for a fee if the project succeeds
This was the arrangement between Hepburn Community Wind Farm in Victoria and Future Energy, a Victoria-based developer. Essentially, Future Energy underwrote a portion of the development costs in exchange for a 'success fee'.
The advantages of this approach include:
- the community is unlikely to lose money on developing a project if it doesn't go ahead
- a developer's expertise and contacts can help speed up the project's development process
- the community doesn't need to invest nearly as much time or effort.
The disadvantages of this approach include:
- the community and the developer may have different priorities or motivations, which can affect the decision-making process
- the community is unlikely to benefit from all of the project's ongoing income if it's successful.
The community hires a developer for a set fee at different stages of the project
In this arrangement, the community will hire a developer or a consultant for each specific task.
The advantages of this approach include:
- the community retains control of a project's budget and direction
- the developer's skills make technical tasks easier and faster
- the community can select different developers or consultants for each task, based on price and expertise.
The disadvantages of this approach include:
- the community will need to fund developer activities
- the work of each developer or consultant will not guarantee project success, so there's a much more significant financial risk.
Should you partner with a developer?
This checklist can help you choose the best partnership option for your project:
- Will the developer provide skills and resources you don't have in your project management team?
- What happens if your team has some or all of the necessary experience in-house?
- What's in it for you?
- What's in it for them?
- What is the developer’s main goal? It could be a return on future sale of the development, annual revenue share or dividend, future management fee, or a combination of these elements.
- Does the developer want a success fee? Can you pay this in shares? Are there any restrictions on selling the shares?
- What level of control will the developer have at key stages of the project?
- How will you resolve disputes?
- Does the developer share your vision, goals and objectives?
- Who is responsible for each of the project's risks?
- Will the developer enhance your credibility?
A tip from Hepburn Wind
As the Hepburn Wind community project matured, it attracted a range of talented and skilled people. They acquired different skills throughout the development process. At the beginning of the project most of the people involved relied on a developer. However, as the project progressed it started attracting more people with specialist skills and experience, many of them residents of Hepburn Springs and Daylesford. This added a huge amount of knowledge and expertise to the business and reduced reliance on the developer.