Off the spreadsheet: Managing risk in renewables

No matter how much financial planning goes into a renewable project, there are some things that just can't be accounted for in investment models.


As Murphy's Law would have it, no matter how much planning goes into a project, there are always going to be circumstantials that stand in the way of progress.

“Black swans happen all the time in growth markets,” said Raza Hasnani, a managing director at emerging markets firm The Abraaj Group, at Infrastructure Investor's 2015 Renewable Energy Forum in Berlin last week.

He recalled the anecdote of a wind farm that was being built in India. “[Builders] were taking the blades up a winding road, and a blade hit the side of a Mosque. All hell broke loose, and they lost six months. How do you [fit] that in Excel?”

Without a reliably reactive management team on the ground, panellists said that even what looks to be the perfect renewable energy project on a spreadsheet can quickly become a detraction that stains a reputation and leaves projected dividends falling behind.

And emerging markets are not the only place where construction risk is relatively high in renewables, as Kevin Devlin of Equilibrium Capital pointed out.

“The regulatory risk in North America has been relatively high for manufacturers. And it's driven a lot of risk around the price of construction, the availability of turbines and the availability of panels, because everybody's rushing for the same target at the same time,” Devlin said. “I characterise that risk as relatively high and it doesn't seem to be changing. With the state of Congress we seem to go year to year with a huge amount of uncertainty.”

Particularly vulnerable to regulatory uncertainty in the US were power purchase agreements (PPAs), Devlin said.

“Changes to markets which affect PPAs and affect the way the PPA was written in the first instance may not necessarily apply during its entire course. So there are risks that what you thought was a good deal in the beginning may be impacted during the course of its life because there's been some change in the market structure around the asset.”

Of course, not all market fluctuations and technological innovations threatened to impose added costs for project developers and financiers.

“Five or six years ago I was in the school of thought that [operation and maintenance] (O&M) costs were following this very steep curve and that by year 10, you're going to fail 50 percent of all your gearboxes on the site,” Devlin said.

“All those things were true but one thing that's been done with those O&M costs is that with improvements in technology, a lot of gearboxes are now being repaired in the tower without taking the rotor off. So suddenly you've gone from probably in the US about $300,000 down to about $30,000, and that has definitely flattened the O&M costs.”

The lesson to take away from such examples, added Ian Berry, who heads Aviva's infrastructure investment team, is that when going into a project investors should assume that “every forecast is wrong.”

“You have to consider, particularly in case of a low-risk investor, a series of quite significant downsides,” he said.

Hasnani agreed, noting that “the key thing to have is investment discipline: One has to be able to walk away […] if it starts to get too pricey.” And remember, he said, “Anything is possible in Microsoft Excel.”