Financial Risk In Renewable Energy


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Financial Risk In Renewable Energy

  1. 1. Financial Risk in Renewable Energy Key risks faced by Developers & Potential mitigation Dr. Binny Prabhakar
  2. 2. Objective Financial Risk in RE - Evolving  Project Development  Energy Marketing – Carbon risks  Asset Management  Contextual Risks Mitigation of RE Risk  Identify some financial risk management instruments and approaches for RE  Develop risk mitigation solutions that continue to exist without or with limited public monitoring Stakeholder Management ‘Limitless RE sources do not translate into limitless profits’, requires understanding the complexity & mitigating risks
  3. 3. RE Financial Risks: Influence Size of Project: Large vs. Small project RE Technology  Stage: Lab vs. Pre-commercialized vs. Early Commercialized vs. Market  Location: Developed vs. Developing economies & regulations  Competing Technologies – potential silver bullet Financial Mode: Project vs. Corporate vs Micro Financing vs. Combination Complexity: Stakeholders, Technology, Regulatory, Financials Grid: Grid vs. Non Grid connected projects RE is characterised by higher uncertainty in ‘Downstream’ rather than ‘Upstream’, leading to higher transaction costs
  4. 4. RE Continuum (Large Project) Financial Project Ops: Marketing & Risk Structures Development Asset Management Management• Project Finance • Feasibility• Corporate Finance • Clearances• Mezzanine • Financial closure • Time overruns • Performance • Cost Overruns • Fuel/Feedstock-SCS • Tech specs failure • Credit • Changes to Project • Technology Counter Parties / Credit Non-Linear Financial / Cashflows Risk Political Regulations Profile Markets- Pricing /CER / VER Technology Force Majeure/ Weather / Resources Contextual / ‘Bubble’ Competition RE requires proactive and continuous Risk Management, external scanning and cognizant of challenges
  5. 5. Financial Impact Prior Current Profit and Loss Statement Period Budget Period Total Sales Revenue [J] Total Cost of Sales [K] Gross Profit [L=J-K] Operating Expenses Total Sales and Marketing Expenses [M] Total Research and Development Expenses [N] General and Adminstrative Supplies Depreciation Insurance Repairs and maintenance Total General and Adminstrative Expenses [O] Total Operating Expenses [P=M+N+O] Income from Operations [Q=L-P] Other Income [R] Total Taxes [S] Net Profit [T=Q+R-S]RE, so far, has demonstrated that it in early days, it requires an appetite for sustaining losses rather than profit
  6. 6. Challenges for the RE sector Free markets assumption (Vs. Vacillating Regulations)  Demand  Supply; Supply  Markets; Markets  Price; Price  Profits  Completely developed value chain  Investors to Buyers  Information availability: lack of technical and historical data (technology performance and weather data)  inability to predict prices, losses in economic and sustainable way or Diversify Portfolio Financial - Experience, Investments and Instruments  Insurance/Banks: experience not as deep as other Sectors  Insurance: International vs. domestic insurers  Instruments innovation: Funding gaps b/w equity and debt  Transactional costs: Higher compared to other projects  Financial crisis  drying of €100 billion EU IF bond market Uncertainty leading to real and perceived risks, impacting Investor confidence  Impacts Cashflows, Financing
  7. 7. Challenges for the RE sector Technology per se  Uncertainty/unproven & few precedents  Lack of tech expertise to estimate risk exposure and assessment  Economies of scale favoured, as most transaction costs are fixed  Small projects donot offer adequate commercial margins  Some proven technologies lack investors or insurance e.g. bioethanol or bio-diesel  Input & output prices poorly correlated –skew due to trade arbitrage (difficult to hedge)  Commodity Risk: Commodity markets exposure (well-developed markets) adds considerable more variability and risk to cash flows  Developers/ Farmers’ co-operatives have insufficient equity Insurance companies are hesitant to take commodity risk or market exposure risks
  8. 8. RE Risk Mitigation Options  CanRisks be Mitigated?  What instruments?  Insurance  Financial Instruments  Export Credits  ??  Who can help diversify Risk?
  9. 9. RE Risk Mitigation Options RE Project Risks Risk Mitigation Investors Actions/Attention Project/Pre-construction Get involved with developer early/ introduce partners Debt- equity Pre-Project as reqd. / structure, underwrite and syndicate/develop lending- Conceptualization Contingent grants offtake Pjt community/ participate/understand other Implementation transactions/value chains Infrastructure Construction Risks Construction Insurance - CAR/EAR Experienced contractors, EPC turnkey, Holistic Management of Risk Surety Bonds Indpdt. Tech Reviews, Completion guranatees Counterparty Performance guarantees Liquidation damages Operational Risks Performance Insurance Proven Tech, Operator incentives, Indpt Review Surety Bonds Counter Party Performance guarantees Liquidation damages Fuel/Feedstock Supply/Weather Weather Insurance/Derivatives/Hedges Fixed offtake n supply contracts, regulations Credit Risk Guarantees Credit derivatives/Swaps Generic - All Phases Policies, Subsidies, Funding, FITs etc Insurance/Hedges Financial (Interest/Tax, etc) Derivative Products Political Risk Guarantees Political MFI Guarantees Export Credit Guarantees Insurance/Hedges Force Majeure CAT bonds Market Markets Derivatives/Hedges Fixed offtake n supply contracts, regulationsFinanced Carbon Delivery CER Proposal Insurance/Guarantees Insurance/Carbon delivery & Permit CER Delivery delivery Guarantees
  10. 10. Risk Assessment: Improved Ratings  Financial Risk Management (FRM) Instruments - such as standard insurance, carbon credit delivery insurance, and weather derivatives can make a project solvent and attractive to investors  Impact of selected FRM were measured, separately & integrated together and the results reflected through increases and decreases in a project’s credit rating and internal rate of return (IRR)- at times higher than country’s own credit rating!! India (56,25 MW; 108 GWh/year; US$51.25M)Source: UNEP Study
  11. 11. RE Outlook Continuous high interest in and demand for Entities/Incentives renewable energy projects Renewable energy needs to become more  Developers / competitive-delink from regulations Sponsors Equity Higher proportion of baseload power needs to  Corporate/Project be achieved Financial Loans Industry consolidation in some areas expected  Banks  Large transaction costs favor economies of  Insurance scale  Grants/Tax incentives Short-to-midterm liquidity will be available  Mezzanine Finance Demand backlog in Eastern Europe  Export Credits Demand and potential in emerging markets  BRICS
  12. 12. Thank YouQuestions?
  13. 13. Financial risk instruments for RE projects