Ortech - Roeper - Managing Technical & Project Risks


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Managing Technical & Project Risks
Presented by Uwe Roeper of Ortech at the Green Energy Act Finance Forum on Friday January 29, 2010
For more information visit http://www.marsdd.com/greenenergyforum

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Ortech - Roeper - Managing Technical & Project Risks

  1. 1. Managing Technical & Project Risks on Small Renewable Energy Projects (>$20 million) Uwe Roeper, M.Sc. P.Eng. President, ORTECH Consulting Green Energy Act Finance Forum, 29-Jan-10
  2. 2. ORTECH Power •  40 staff •  Engineers & Consultants –  Technical Due Diligence / IE –  Wind resources assessment –  Plans & Permits –  Feasibility Analysis –  Operations Support
  3. 3. High Level Issues •  Legal and financing costs are too high for smaller projects •  Due diligence process is too time consuming and complicated •  Limited players in financing <$20M projects What is needed? A new financing process and fresh look at how to manage technical project risk.
  4. 4. What are the Technical Risks for Renewable Energy Projects (i.e. electricity)? Project Design Risk Construction Risk Operational Risks
  5. 5. Project Design Risk •  What is Design Risk? –  Technology, Fuel Supply, Permits, Grid Connection, PPA revenue. •  Likely not bankable due small size, complexity and risk profile. •  Requires Venture Capital financing.
  6. 6. Construction Risk •  What is Construction Risk? –  Budget, Schedule, Scope –  Complex contractual risks with complex IE duties. •  Likely not bankable on non-recourse project finance basis due to complexity; however, •  May be partially financeable as equipment lease, contractor credit line, 2nd mortgage without IE (finance less risky aspects of construction).
  7. 7. Operational Risks •  What is operational risk? –  Completeness, start up issues, warranty, output, operating costs, revenue defaults. •  Unavoidable risk that must be managed with: •  IE & legal due diligence to ensure project is sound. •  DSCR – debt service coverage ratio. •  Term – renewal conditions can be changed if project begins to under perform over time. •  Cross-security – either to multiple projects and/or other assets. •  How do you minimize transaction costs? •  IE and legal costs already low due to reduced due diligence scope. •  IE can be further reduced by following standard check lists and procedures (would have to be developed). •  IE and legal can be less detailed if DSCR and Cross-security reduce overall risk profile.
  8. 8. Operational Risks •  Who assumes laid off risk? •  Equity sponsor needs to assume a larger share of project risk on small projects. •  Likely requires higher IRR / ROE and/or need to spread return expectation risk to multiple smaller projects. •  Higher DSCR (less debt) means more equity and greater cash flow requirement for small projects (i.e. small projects require higher power price than large projects to work in different financing structure). •  Possible alternative: •  Building a large portfolio of small projects over time and then re-financing on more attractive terms.
  9. 9. Managing Risk on Large Projects Project Construction Operational Design Risk Risk Risks Large: Comprehensive IE and legal due diligence of all three risk area to support full non-recourse financing. Managing Risk on Small Projects Small: Simplified IE and legal due diligence of operational risk Operational combined with lower DSCR and Risks cross-security. Result: Higher risk / higher $/kWhr.
  10. 10. Questions? uroeper@ortech.ca 905 822 4120 x 248