Risky business

An interesting report from the Economist Intelligence Unit (EIU) crossed our desk recently. The EIU spoke to 284 senior-level renewable energy executives about the risks in financing, constructing and operating renewable energy projects, as well as the risk management challenges that the renewable energy industry must confront.

The report concluded that the renewable energy sector needs to improve risk management and access alternative sources of capital, as operational risks rise and Governments cut funding due to the uncertain economic environment. And as we seem to be careering headlong towards a new recession, this conclusion will resonate with many in the renewable industry.

On top of this, cuts in Government expenditures within the sector call into question the sustainability of public financial support for renewable energy developments. For example, in Europe, recent cuts in solar PV feed-in tariffs have ranged from 15% in Germany to 70% in the UK. And investors in renewable energy are fearful that some of the other 100 or so Governments supporting clean-energy investments will cut this support as part of their own austerity measures, the report suggests. This current culture of incentive reduction in some countries flies in the face of many politicians' ‘green rhetoric’, and brings home the importance of good preparation and risk management.

The EIU's report – Managing the risk in renewable energy – shows that the sector may face an uncertain future if it fails to manage the growing risks associated with larger and more complex projects. For example a major issue in renewable energy projects is their costliness in the early stages. Projects are often capital-intensive and highly leveraged, with up to 70%-80% financed through debt. As companies seek to scale up investments, overcoming financial risks is one of the biggest challenges (so said 76% of the EIU's survey respondents).

Beyond financial risk, a significant concern for plant investors, owners and operators is political and regulatory risk (62%) – while weather-related volume risk comes in third for wind power producers (66%). These risks increase further as projects grow in scale and complexity.

This research should serve as a major warning, especially as wind power projects in particular are growing rapidly in size and scale.

NB: Over the past year we have run a series of articles on planning and building successful wind farms. You can get access to all these articles on our website. In light of the above report, it seems especially pertinent to include the links here – and if you are looking at the digital issue of the magazine you can click on these links below:

Part one: Windpower – from conception to reality
Part two: A plan to succeed for wind power (planning)
Part three: Spotlight on due diligence for wind power
Part four: Finance for wind farms
Part five: Building wind farm, part one and part two

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