Finance » Renewable Energy Projects

Project Risk Matrix

Where several organisations are party to the renewable energy project, regardless of the financing structure or size of the project, numerous risks arise. The best projects allocate the risks to the appropriate parties.

Risk Category Stake Specific Risk / Events Risk Mitigation / Contol Mechanism Risk Allocation
Project Investors Commitment, competence and credit worthiness of investors. Will the alliance make the project work? Credit Risk Credit Assessment Sponsor / Lenders
Large level of investment/ long tenor of return Requires competence and industry knowledge
Additional equity required later Credit assessment of sponsors
Commitment  
Misalignment of investors' objectives Must understand the differences between strategic and tax investor.
Construction Risk Timing, cost and performance of the project Cost overruns

Fixed price Engineering Procurement and Construction (EPC) contract. If that is impossible, use one contract for turbines or paneels and another for all the electrical components (Balance of Power).

Completion guarantees

Progress Reports

Sponsor
Equipment Supplier

Completion delay
Abandonment
Non-completion

  • Equity in advance
  • Penalty Payments: up to cap of 20% for any delay on daily basis (except Force Majeure)
  • Delivery date in advance of off-take agreement
Project Specifications / Quality
  • Performance Tests
  • Use proven technology from well-known vendors

Force Majeure:

  • Sponsor changes order
  • Natural disasters
  • Political risk
  • Insurance
  • Agree to completion criteria between construction and operating companies.
Insurance
Land Availability
  • Exclusivity Agreement
  • Environmental indemnities
  • Long lease that coincides with useful life of plant.
Land Owner
Operations Cost, availability, environmental impact and changes in law Unsatisfactory plant performance
  • Performance Warranty
  • Operating & Maintenance Agreement
Plant Operator & Sponsor
Equipment Defect Manufacturer warranties for performance against power curve and availability Equipment Supplier
Market Risk Volume, price and demand of output (i.e. power) as well as input (i.e. fuel where appropriate and transportation)
  • Demand for power
  • Price of electricity
  • Off-take agreement (PPA) for the whole lifetime of the plant. Although this reduces the market risk, a PPA introduces credit risk with regards to the purchaser.
  • Hedge the risk (up to 5 - 8 years only)

More details in section on energy price risk

Power off-taker (utility)
Hedge provider
  • Price for fuel
  • Quality of fuel
Fuel supply contract & term Supplier
Transportation Risk Applies to construction and operations equally, if affected by blockages, strikes, and transport cost escalation  
  • Consider transport alternatives
  • Agree on pricing terms
Sponsor
Environmental Risks Risk of incurring fees, fines or withdrawal of license resulting from laws or disasters
  • Disposal of fixed assets
  • Disposal of spent fuel
  • Long-term contracts
  • Include expenditure for disposal in business plan
Sponsor
Financial Risk Changes in interest rates or exchange rates may affect payments

Interest Rate Swings and subsequent violation of terms

Interest Rate Hedge Bank
Exchange Rate Swing Currency Hedge Bank
Country Risk

Political risk arising from operating in a foreign country including

  • Transfer Risk
  • Sovereign Risk
  • Political Risk
  • Exchange Rates
  • Inflation

 

  • War and Civil Strife
  • Confiscation, Expropriation and Nationalization (CEN)
  • Increase in taxes levied on the project
  • Import / Export duties
  • Change in regulation
  • Political risk insurance through state sponsored agencies (range: 0.2% pa to 2% pa): Won't cover all events and based on book values.
  • Keep part of the technology secret
  • Debt finance preferred, as dividends are more likely to be blocked than interest payments.
  • Use of local debt
  • Use joint venture with local investors.
  • Joint financing with international lenders.

Export Credit Agency
Development Bank
Private Insurer

Foreign exchange rate changes due to devaluation, convertibility or transfer restrictions
  • Insurance hard to get!
  • Invest blocked funds in local financial markets or in internationally traded goods.
  • Spend blocked funds buying local goods.
 
Credit Risk Risk of default of counterparties or default on specific payments   Good credit risk management. As most parties involved are relatively small, insurance is not available. All

 

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