Renewable energy technology has continued to proliferate worldwide, such that wind and solar developments continue apace. However, the speed at which this proliferation has occurred has varied. The established markets in Europe and North America have benefited from a series of economic supports and technical expertise that have attracted significant investment. But as these markets mature, margins become tighter, leading investors to look to new and emerging markets in the search for more attractive risk-to-return ratios.
Amongst the emerging markets, those of Southeast Asia have caught the most attention, as a rise in energy demand and excellent resource availability in countries such as Thailand, Singapore, and Vietnam combine to entice investors. Nevertheless, despite these and other positives, securing the necessary financing to follow through with development remains a challenge for many prospective projects; many of those penciled in across the region have been deemed ‘unbankable’.
If projects are to prove acceptable to lenders and secure financing, two principal types of risk must be considered: sovereign risk and project bankability risk. As has become increasingly apparent to investors operating in the space, lenders will typically accept no more than a single major source of risk when assessing a project’s bankability.
This means, for instance, that if a project is to be developed in a market that leaves it exposed to the effects of political or economic risks, lenders will require that the project fundamentals are completely sound. They will also want to be confident that the project’s financial viability and performance is secure. In order to meet these expectations, and secure capital, investors and developers must do all they can to identify and mitigate project risk from the very earliest stages. These are the decisions that will have a significant impact on a project’s bankability as it progresses.
Bear in mind that there are a number of measures investors can take to enhance project bankability across the emerging markets. Vietnam’s strong economic growth along with its government’s commitment to decarbonizing power generation, make it an investor favorite. One key challenge has been to manage the high cost of capital – it’s best to hire a project manager with a detailed understanding of the local market dynamics, and how they can affect project development.
The construction phase is one of the most significant when mitigating project risk; any early-stage decision-making must include a comprehensive construction plan. In markets like Vietnam, investors will often look to displace risk onto a local engineering, procurement, and construction (EPC) contractor, particularly one that they may have worked with before. Unfortunately, this approach will often do little to lower a project’s risk profile, and can even do further harm by obscuring the project risks faced by investors. This is especially true when the EPC contractor lacks experience in the specific requirements of wind or solar farm construction. This problem is frequently exacerbated in emerging markets, and can serve to drive up the degree of project risk and lower the chances of securing financing.
To overcome a dearth of clean energy construction experience, investors may turn to an owner’s representative, using their own knowledge of project construction and contracting directly with suppliers and contractors. While some may be wary of an increase in the number of project interfaces, working with a competent owner’s representative – one with a keen grasp of both renewable energy construction and the local market – allows investors to reduce their capital expenditure costs while limiting the extent to which they are exposed to unnecessary risk.
In addition, a good project manager can appropriately portion out risk to the contractors best placed to deal with it. In allocating responsibility for logistics to the balance of plant contractor, for example, project managers can reduce the likelihood of plant availability delays. With the higher levels of risk present throughout the emerging renewables markets, being able to satisfy lenders that all project risks have been identified and accounted for can be crucial to securing project financing.
Given that these markets remain very much in an early-stage development phase, investors will find no substitute for experience as they look to capitalize on the significant potential for high returns in countries such as Vietnam, Thailand and the Philippines. For many investors, these markets will be new and unfamiliar environments; an experienced risk management team that is well versed in the local business culture, language, and relevant planning regulations will be an invaluable asset to ensure projects’ operational and financial performance.
Aaron Daniels is Managing Director at Modern Energy Management, which delivers project lifecycle certainty to renewable energy financiers, developers, operators and investors working in rapidly expanding emerging markets. He has managed the development and construction of 3GW (approximately $6bUSD) of wind projects globally. His wind project experience is almost exclusively in emerging markets.
Modern Energy Management | modernenergy.co.th