Network Upgrade Costs
Definition
Network upgrade costs are the costs of transmission system improvements beyond a project's own connection, such as new lines, transformers or substation work, that interconnection studies find necessary for the project to connect reliably. They are distinct from interconnection facilities at the point of connection. Transmission providers assign them to projects under their tariffs, and the amounts can change as other projects in the same study withdraw.
Why it matters
Upgrade costs can turn a profitable project into an unbuildable one, and they are often not known until late in development. For investors in development funds or early-stage projects, assigned upgrade costs and the security posted for them are central to whether capital is recovered. Investors should ask what upgrades are assigned, whether costs are final, what security is posted, and whether any amount is refundable.
Common misconceptions
- •Interconnection cost is not just the connection at the site; network upgrades are usually the larger and less certain part.
- •An early cost estimate is not final; restudies after withdrawals can raise it.
- •Posting security is not the same as paying; but forfeiture terms can make it a loss.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
Berkeley Lab, PJM (2017 to 2022 requests, real 2022 dollars)
Potential interconnection costs: storage $335/kW, solar $253/kW, onshore wind $136/kW, offshore wind $385/kW, natural gas $24/kW.
Completed projects: solar $99/kW, onshore wind $60/kW.
Costs are on nameplate capacity; data from a 2023 study.
Questions to ask
Which study phase assigned the cost, and can it change?
What security is posted, in what form, and when can it be drawn?
Is any cost reimbursable through transmission credits or refunds?
What happens to deposits on withdrawal?
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Who pays for grid upgrades required by a new power project?
- Usually the project pays or secures them first, under the transmission provider's tariff, with repayment or credit arrangements that differ by region. For SB Energy's Pelican's Jaw solar and battery project in Kern County, California, the financing includes a $10,024,065 letter of credit for 'the cost responsibility assigned to Pelicans Jaw Solar, LLC for Beneficiary's Network Upgrades related to the Project, pursuant to the California Independent System Operator Tariff.'
- How large are these costs?
- They vary widely. Berkeley Lab's PJM analysis found broader network upgrade costs rose to $71 per kW for completed projects and $227 per kW for active projects, while point-of-interconnection costs stayed around $12 to $15 per kW. Among withdrawn projects, network upgrades were 94% of costs, at $563 per kW (all in 2022 dollars).
- Why do upgrade costs cause withdrawals?
- Because a project's economics are set before its upgrade bill is final. Berkeley Lab describes high costs for withdrawn projects as 'likely a key driver for those withdrawals.' When one project withdraws, the remaining projects in its study may be assigned more of the shared upgrades.
- How are retail investors exposed?
- Through development-stage funds. Shasta Power Fund II, a Regulation A offering with a $10,000 minimum, says interconnection charges 'can be significant, often shifting from modest initial fees to large sums for network reinforcements' and that it intends to fund interconnection deposits by issuing its Class A Units.