Renewable energy markets around the world are in flux; costs are being driven down, and as a result governments and consumers expect to see significant reductions in the financial support given to renewable energy projects. The increasing use of auction systems is having the most significant impact on costs, with positive results. This is setting the scene for this approach to be used more successfully in developing wind markets.

'Timing and approach is key'

It's important to exercise caution when developing and investing in such ventures, as there is considerable pressure on developers to win concessions for new projects to allow them to continue to operate and grow. Various projects around the world (Brazil is an example) serve as a reminder that unrealistic assumptions made to support aggressive auction bids can easily result in failed projects.

Combine this risk with the high degree of competition between investors seeking to buy into projects, and it is easy to see how investor risks can potentially increase, despite the overall maturity and reliability of wind energy technologies.

Therefore, while due diligence has always been a key tool of any investor, the approach to and timing of due diligence can make all the difference between a successful project and a failing one, and between an investment that achieves its return objectives and one which causes significant loss for unwary new entrants to the sector.

De-risking with developer due diligence

Due diligence is becoming a key development tool. With developers seeking an independent appraisal of their own project, this step not only identifies potential flaws in the design, contracts or performance assumptions, but also offers advice on alternative ways to optimise costs and performance, and remain competitive.  Pre-emptive due diligence does not have to be intensive or prolonged; a genuinely independent appraisal of a project at the right stage by the right people can, at a minimum, provide a developer with confidence that their winning auction price will support a financially successful project. It also gives the developer a chance to identify additional strategies for improving upside or further de-risking the project.

The developer of a project in Maharashtra, India engaged a specialist consultant to conduct due diligence on its project to assess the impact of foundation design defects.  The scope involved an on-site root cause analysis of turbine foundation design defects, the procurement for remediation works and responsibility for contracts, schedules and evaluation of prospective civil contractors. 

A balancing act

Successfully reducing costs without jeopardising financial viability can become complicated.  The challenge is balancing procurement strategy, contract negotiations, de-risking site conditions through engineering and technology selection, optimising yield production estimates against equipment capital and operating costs, and long term O&M assumptions. The optimised project also must comply with environmental and permitting requirements, or risk having the planning refused or the operation curtailed. Early involvement of due diligence and truly independent reviews can allow developers to get this balancing act right, without jeopardising its attraction or value to investors.

Maximizing margins

Since interest in well-developed projects and operational assets is very high, investors face pressure and fierce competition when developers seek to sell down their projects. As the cost of wind energy comes down, developers' targets for project margins are also declining. Add that to the competition between investors for a stake in a project, and it can be difficult for investors to find the expected margins needed to make the deal worthwhile.

In these instances, good due diligence is necessary to help reduce risks and conservatism to the safest lowest level. It's also increasingly about finding reliable and achievable upside potential in projects, to allow investors to bid for project stakes against strong competition while remaining confident that they can achieve the required target margins post-investment.

The ability to upgrade technology or improve reliability and production through better asset management and O&M strategies is becoming a common focus for due diligence and project evaluation. Taking a long-term view of asset ownership allows investors to not only identify but also subsequently achieve the improvements to project performance that are needed.

In the US, there will be a growing need for acquisition financing and due diligence for operating projects, particularly those with their PTC expiring. Independence will be a key factor here because successful projects and transactions rely on a true and balanced review.

With more and more new equity players entering wind markets around the globe, and debt being offered by alternative sources from the traditional project finance banks, it is easier and more worthwhile for developers to take a more aggressive approach to risk and performance assumptions.

Simon Luby is Head of Global Due Diligence at K2 Management. K2's global service offerings focused within wind project planning and management make it a unique wind project consultancy covering the entire value chain. Simon leads K2 Management's global due diligence service, specializing in leading acquisition and lender's technical advisor teams on major onshore and offshore mandates on behalf of sponsors and lenders.         

K2 Management | www.k2management.com