How to identify risks in renewable projects
Assessing risk is an important part of planning a renewable energy project. One of those risks centres on how the project will be funded.
It’s not an easy market and projects need to have funding in mind right from the start. It’s no good risking time and money on planning and technical aspects unless you know where the money is coming from.
You only get one chance to make a first impression, so make yours count with a robust business plan as part of your funding application. This should include an executive summary (see Top tips for a good executive summary) so that anyone looking at the application can easily grasp what the project is, who is involved, what the projected returns are and over what timescale.
Insurance
Speak to your insurer at an early stage – most have become much more familiar with renewable energy issues and claims in the past few years, so they have a wealth of experience in measuring the risks.
Business interruption or loss of income protection cover is a must. For a 75kW turbine on a dairy farm, this would typically cost anywhere from £900-1,300 a year.
Suppliers
Research your supplier well – check their financial strength and track record. A key question is how your deposit will be protected. Members of the Renewable Energy Consumer Code sign up to a protocol on deposit protection.
Check warranty terms carefully – how long is it and what does it actually cover? Most funders prefer manufacturer-backed guarantees rather than installer or supplier guarantees.
Check also whether there is a service level agreement built into the contract or warranty – this would offer service at certain intervals –but check whether callouts, parts, travel, accommodation and other expenses are also covered.
It’s important to work on your own financial numbers – don’t rely on manufacturer, installer or supplier figures. Be conservative – for example a turbine will never be 100% on stream, so look at the numbers based on 90% and 95%.
Technical data and other risks
Wind speed data from DECC/NOABL should be sensitised so that you can see what happens to the figures if expected wind speeds do not materialise. Alternatively you can get a very robust Met Mast report from the Met Office for about £1,000.
Further risks include whether feedstock quality and supply can be guaranteed – issues with either can challenge the technology and make it operate less efficiently.
Are your professional advisers up to the task? What is the track record of any technical partners?
Top tips for a good executive summary
An executive summary of your financial plan should capture the key aspects of the project, including the risks. The influence of this discount on a credit manager cannot be overstated – a good summary can get you 80% of the way to an approval and should include:
- Project timescale
- Efficiency forecasts
- Sources of funding and the split between those sources
- Who/what owns project and when established
- Purpose of project
- Stage reached in planning process
- Total build costs including contingency fund
- Revenue in year one
- Net profit forecast year one
- Interest cover – how many times interest can be covered by first-year projected profit
- Debt service cover – how many times interest and capital repayment obligations are covered by first-year projected profit
- Return on investment
- Length of borrowing requirement
- Length of FiTs payments
- Workable life of project
- How much energy generated in first year
- How much carbon saved in first year
- What has been done to mitigate/address any particular project challenges
- Financial plans need to factor in that no FiTs payments will be made until the project is Ofgem-accredited.
Every funder has different due diligence requirements – these are the checks and balances lenders put in to ensure the project is robust.
For example, most lenders will only fund equipment that is on their approved list so you need to do your homework and find out what is acceptable. The funding plan also needs to acknowledge that capital requirements are likely to change from the original figures.
The figures should account for the fact that it could be six months or more before your project is accredited by Ofgem and you start getting an income, while the lender will still want paying in the interim.
Funders will assess not only the figures and the ability to repay borrowing but also:
- Your character
- Who else is involved in the project
- What the project is
- Level of engagement with and commitment to the project.
Mike Rowe has a banking background and works with solicitor Stephens Scown’s renewables team from its Exeter base