ortech - roeper - managing technical & project risks

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

ORTECH Power

•  40 staff •  Engineers & Consultants

–  Technical Due Diligence / IE –  Wind resources assessment –  Plans & Permits –  Feasibility Analysis –  Operations Support

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.

What are the Technical Risks for Renewable Energy Projects (i.e. electricity)?

Project Design Risk

Operational Risks

Construction 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.

Project Design 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).

Construction Risk

•  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.

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.

Operational Risks

Managing Risk on Large Projects

Project Design Risk

Operational Risks

Construction Risk

Large: Comprehensive IE and legal due diligence of all three risk area to support full non-recourse financing.

Managing Risk on Small Projects

Operational Risks

Small: Simplified IE and legal due diligence of operational risk combined with lower DSCR and cross-security.

Result: Higher risk / higher $/kWhr.

Questions?

uroeper@ortech.ca 905 822 4120 x 248