Assessing the Risks in Solar Project Development

Over the next four years, 5.7 GW of utility-scale solar PV projects is expected to be built in the U.S. and another 1.3 GW in Canada for a total of 7 GW. Both amounts represent a significantly larger volume than what has been installed to date and is expected to be the dominating type of solar installation for that period of time. Yet, 7 GW only represent a fraction of the total capacity of large-scale solar PV projects initiated and under development in the same period, illustrating that solar project development still is a high-risk undertaking.

The reasons so few projects materialize are many; ranging from inexperience at the hand of the developer, to site specific problems, technical issues, regulatory problems and permitting issues — all affect the financial and technical viability of a project. In the end, failure to develop projects at some point in the development process comes at considerable cost for the project developer as well as the solar industry as a whole.

The risks affecting solar projects appear throughout the entire project lifetime, but vary greatly in character. Here are some examples:

  • Construction risk: Risk of property damage or liability stemming from errors during the building of new projects.
  • Company risk: Risk affecting the viability of the project developer, for example, risks related to key personnel, financial solidity and technical ability to execute on plans.
  • Environmental risk: Risk of environmental damage caused by the solar park including any liability following such damage.
  • Financial risk: Risk of insufficient access to investment and operating capital.
  • Market risk: Risk of a cost increases for key input factors such as labor or modules, or rate decreases for electricity generated.
  • Operational risk: Risk of unscheduled plant closure due to the lack of resources, equipment damages or component failures.
  • Technology risk: Risk of components generating less electricity over time than expected.
  • Political and regulatory risk: Risk of a change in policy that may affect the profitability of the project, for example changes in levels of tax credit or RPS targets. Also, this includes changes in policy as related to permitting and interconnection.
  • Climate and weather risk: Risk of changes in electricity generation due to lack of sunshine or snow covering solar panels for long periods of time.
  • Sabotage, terrorism and theft risk: Risk that all or parts of the solar park will be subject to sabotage, terrorism or theft and thus generate less electricity than planned

The immediate impact of the presence of any of these risk factors is uncertainty around the revenue and profitability projections for the project and thus the financial viability of the project.

Many of the risks mentioned above can be managed through financial instruments and insurance products. For example, weather risks can be mitigated through weather futures and technology risks can be offset through warranties. However, for a relatively young industry such as solar, a lack of engineering studies for actuarial purposes often means that financial risk management products are badly re-purposed from other fields and prohibitively priced.

Advances in Risk Management

As with any new industry, the pace of innovation in utility-scale solar is high. Thankfully that also applies to the field of risk management for utility-scale solar projects. As the industry evolves, data around best practices have started to emerge — a number of which will be addressed by some of the industry’s leading minds during the Markets & Finance track of Solar Power-Gen 2012 (Long Beach, CA – February 14-16):

  • Marie Schnitzer, AWS Truepower will present on how to mitigate and reduce project uncertainty though resource and energy assessments (P50 and P90) including several case studies from US locations.
  • Jon Previtali, Black & Veatch will address the issue of snow and ice and their impact on performance tests and electricity generation as well as what mitigation strategies exists for developers — a topic that is certain to be of interest to the many developers about to build projects in Ontario.
  • Ben Compton, meteocontrol North America, will present on the technical certification rating of PV systems and how it informs the financial risk model.
  • Nick Ernst, Evolution Markets, Inc will address the issue of how to control weather risks that may impact renewable energy projects. Specifically his presentation will cover the latest development in weather derivatives and includes a case study showing how hedging has been used for solar projects.

I hope that you will join us for this and the other interesting sessions at the Solar Power-Gen conference in Long Beach, February 14-16. 

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Jon is the co-founder of ClearSky Advisors. He has more than 18 years of experience in the clean technology and IT industries. Jon has worked with clean technology companies operating in both North America and Europe and his experience includes strategic planning, marketing and branding, business development, start-up financing and international expansion. Prior experience includes 2 years as a management consultant with Riverdale Partners and six years working for research and advisory firm Gartner Inc in the UK, Germany, Canada and the USA, and seven years working in the software industry, including successful software start-ups. Jon holds a Master of Science in Media & Communication from London School of Economics and a Master of Science in Business and Economics from the Norwegian School of Management.

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