Innovation in Global Power - Parsons Brinckerhoff

Renewables – The Risks, Concerns and Potential
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The project sponsors establish a special purpose company (the
“energy company”) that serves as the vehicle to take the project
forward. This company becomes the counter-party to the various
agreements for goods and services that essentially comprise the
project. The primary agreements for a typical renewable energy
project are similar to those for conventional projects. Their essential
elements are as follows:
• Fuel or feedstock supply. Agreements as to quantities, quality,
availability, price, and any related fees or conditions.
• Heat and electricity off-take. Usually a pro-forma agreement
with one or other of the generating companies (or perhaps
electricity supply companies) for a fixed term sometimes at a
premium price.
• Design and construction of the facility. A turnkey arrangement
that obliges the contractor to assume responsibility for completion
date, final cost and performance of the facility.
• Operation and maintenance. Agreement with the O&M
contractor as to the quality assurance system in place, audits,
and performance targets.
Secondary agreements cover the lease or sale of land; finance; statutory
consents, such as planning, integrated pollution control, consents to
build a power station, licence to generate electricity, etc.
The primary agreements are written such that each complements the
others. For example, the specification and quantity of feedstock
supplied corresponds with that required by the plant to be built
under the design and construction (D&C) contract to deliver the
electrical energy output specified in the electricity off-take contract.
At the same time, the obligations contained within the operation and
maintenance (O&M) contract require specific levels of fuel conversion
efficiency and plant availability to be attained by the operator in line
with the terms and conditions of the electricity off-take contract.
Risk and Critical Issues
The majority of risks associated with a given project (Table 1) can
be covered in the contractual arrangements described above.
Project financiers will wish to see a suitable spreading of risks and
mitigation of them (perhaps by insurance) over all the project
participants. It is highly unlikely that the lending banks will agree
to bear any of the risks.
Matters that would typically be regarded by lenders as representing
a potential risk include:
• Technology. Lenders will expect an independent engineer to
report on the technical specification for the plant and require
evaluation of the appropriateness and track record of the relevant
technology in the proposed application. Lenders will likely regard
untried features as unacceptable risk.
Table 1: Categories of Risk In a Typical Renewable Energy Project.
49 PB Network #68 / August 2008