Renewable Project Risk
– An Introduction
Framing the Issue
• The political push for renewable RPS programs and projects have changed
the traditional way of thinking about physical and financial risks for energy
procurement functions and portfolio managers, but a subject that has
received little attention in the overall debate is how renewable energy
can/should be “integrated” in the traditional physical and financial risk
• By understanding these risks and choosing proper identification, monitoring
and management methods, communicating feasibility of projects and
expected price can be made easier.
• This presentation will address / introduce how risk issues present themselves
throughout the life cycle of acquiring / building a renewable resource and what some
of the qualitative and quantitative implications are to traditional Risk Management
focusing on the following segments of the life cycle;
A. Establishing the need / investment opportunity
B. Financial pro-forma assessment / fuel comparisons
E. Commercial operations
Establishing the need / Investment Opportunity
• Mandated RPS goals are still the primary reason for adding new renewable resources, however
investment opportunities may identify themselves dependent on various incentives and market
conditions. Regardless, importance should be placed on evaluating physical and financial
implications to communicate strategic implications to all stakeholders due to complexity of issues;
a) What is the primary reason for adding the resource (RPS Mandate / Commercial / Both?)
b) On what basis will these resources be compared physically and financially, stand alone or
integrated to an existing portfolio (incremental impact) ?
c) Is it expected that physical and financial contingencies need to be present for a sustained
period of time to communicate financial results/portfolio fit to seek optimal returns ?
d) What are the qualitative and quantitative processes in place to lower the strategic risk
implications for the organization throughout this process ?
e) Have NPV/IRR models been built to accommodate these non-typical issues (risk adders) ?
• The quantitative assessment of the “need” or investment alternative can be broken down to
applying prevalent methods to the two following categories;
• Stand alone impact / Incremental Impact
o Evaluation of how the resource will impact the market, credit, and operational risk of the existing
dispatch portfolio /RTO as it pertains to ancillaries, capacity and energy using Monte Carlo methods,
non-linear methods to determine cost implications before and after adding the resource. Stand alone
assessment should follow a regression based methodology to assess how the bus price is impacted
by changing the underlying supply situation.
• Method for determining Title of Risk Structure / Organizational model choice
o How does the organization plan to control the revenue stream of the facility for lending, FIN46
consolidation purposes ?
o Is there a strategic understanding of what risks developers, equity, debt and PPA holders are faced
o Have probabilistic scenarios been built to determine impact to variable interest holders to determine
primary interest holders in the proposed setup?
INVESTMENT OPPORTUNITY/NEED – Non-traditional risk issues
Who bears the risk for assumptions behind How compatible is the overall delivered
the need study / investment opportunity ? RPS price based on incremental portfolio
Are there implications for parties, between Legislation impact against other resource alternatives
parties if investment contingencies change ? and is this comparison sustainable over
time – can it be fixed ?
Holders Project Stake
How does the financial stability of How is the organization insured against
developers and proposed organizational these non-traditional risks that can surface
structure impact likelihood of delivered in the future dependent on legislation or
price and project feasibility ? Share other structural issues ?
FINANCIAL PRO FORMA ASSESSMENT
Building the financial pro forma (Income and Balance Sheet statement) for the renewable asset is an
important process and introduces some new risk issues dependent on the organizational structure chosen to
finance the project. The most important issues are centered around the following;
i. What is the variability in the overall income and balance sheet for the planned / contracted asset ?
ii. Who holds the variability (Equity holders, PPA holders, 3rd party contractors, debt holders) ?
iii. What type of variability has been identified ? (market, credit, operational, volume, tax incentives, other)
iv. Who holds the majority of variable interest (FIN46) and what are the financial implications ?
i. What is the basis for determining the various scenarios to identify variability ?
ii. Will Monte Carlo methods be used focusing on standard deviation input for identified variables ?
iii. Will deterministic probabilities be used to determine outcome for each scenario and deviance from
probability weighted scenarios (FIN46R method) ?
PRE - CONSTRUCTION
During the pre - construction period risks can be described as possible changes to project
assumptions. These variables can change feasibility and the delivered price of the project
dependent on contractual arrangements. It will become important to quantify these risks and
understand who has title to these risks in order to communicate possible effects to all stake
a) Amendments to financing contingencies (project financing, tax credits, dates etc..)
b) Amendments to cost estimates built into the overall project
c) Amendments to tax legislation or/and use of PTC/ITC appetite, incentives
d) Amendments to credit terms, sellers expansion, extension options
i. How do changes impact delivered price (short, medium and long term) ?
ii. Have variables subject to possible amendments been quantified from an upside and down
side risk perspective to communicate financial effect using prevalent methods ?
During the construction period focus is shifted towards identifying, monitoring and managing
operational risk associated with the construction phase that may make the project more or less costly.
i. What are the various milestones (segments) of the project ?
ii. What are the scheduled tasks within each segment that can be subject to issues leading to delay
or/and financial consequences for the overall project cost ?
iii. What is the probability and expected losses associated with identified operational risk within each
i. What historical experience data exist to draw distribution knowledge for operational risk for
identified tasks given project schedule ?
ii. Can Monte Carlo methods with known drifts be used to determine likely outcome for identified
iii. Have contractual and/or OTC methods been used to mitigate identified operational risk ?
During commercial operation the renewable attributes delivered from the facility will be
dependent on the actual capacity utilization of the facility and any variance to planned output
could lead to commercial risks.
i. What are the probable deviances from ancillary, capacity and energy, rec positions due to
unplanned outages or/and probable variances in production contingencies (wind, solar
capacity etc.) ?
ii. Are any incentives (Production tax credits, depreciation) dependent on actual output and
EBIT appetite ?
i. Analytical, historical and Monte Carlo Value at Risk can be quantified by understanding the
volumetric standard deviation of production patterns.
ii. To quantify volumetric risk and outage probability Monte Carlo methods can be used.
Summary of major risks
throughout the life cycle
These risks will present themselves differently
dependent on complexity of the project and
chosen organizational structure
Communicating possible impact
Summarizing and quantification of the individual components of the lifecycle can be
done in a tabular format identifying possible impact for each of the life cycle segments to
create an overall commercial understanding of the project
Risks Quantified VaR - 95% NPV Impact
a) The Business Case NO NO $0.0 M $0.0 M
b) Financial Pro forma YES NO $0.0 M $0.0 M
c) Pre - Construction YES YES $2.0 M $0.5 M
d) Construction YES YES $2.0 M $0.5 M
e) Commercial Operation YES YES $0.5 M $0.0 M
a) Risk to the business Case can only be quantified if a comparable benchmark has been established in the form of a
floating or fixed formula comparing the investment to an alternative investment. (renewable, conventional resource)
b) Risk to the financial pro forma can be quantified on behalf of the equity holder, PPA holder or/and debt holder
dependent on how the facility has been organized.
c) Pre - Construction risk can be quantified as the expected variability to contractual contingencies (market variables)
d) Construction risk can be quantified using Monte Carlo method for identified tasks subject to variability.
e) Commercial operation risk can be quantified as the market risk and other assumptions subject to variability through
Monte Carlo Methods.
• Bjornar Eide was the Director of Risk Management for Sempra Energy Utilities from September
2005 to January 2010. Bjornar oversaw the risk governance structure for San Diego Gas & Electric
and Southern California Gas Company. He was a member of the Risk Management Committee for
each of the utilities, which is responsible for managing each of the utility’s exposure to market,
credit, liquidity and operational risk. Bjornar has over 15 years of experience from energy markets,
serving in a variety of capacities in an international environment. Prior to joining Sempra Energy
Utilities, he worked as an independent strategic risk consultant for a variety of clients in Europe
and the US focusing on strategic risk management related issues and the design of risk assessment
capability. As a Director of Risk Management for NRG (from 2000 –2002) he built up the risk
management department and during his four year tenure with Statoil A/S as a portfolio manager,
he actively managed positions that involved petroleum products, crude, natural gas & electricity
including the build-up of the power marketing department. Eide holds an MBA in Finance from
San Francisco State University and a BA in Business Administration from California Lutheran