Innovation in Global Power - Parsons Brinckerhoff

Renewables – The Risks, Concerns and Potential
• Contractors. Lenders will consider the reputations and
financial strength of the principal contractors when assessing
risk of default in relation to any function that is material
to the project’s success.
• Security of cash flow. Lenders will analyse all factors that
may have a bearing on the project’s ability to maintain a
comfortable cash flow beyond the prospective term of the
borrowing. Such factors include, for instance, the security
of the fuel supply and contingency arrangement for alternative
fuel
• Statutory authorizations. Lenders will check on all
factors affecting the consents and permits necessary for
the commencement and continuation of the project.
Success in structuring and obtaining finance is closely linked
with developers’ ability to identify risk, design technical solutions
and allocate contractual responsibility. Often developers
seek expert advice in each relevant field early on so that
there is a coherent strategy from an early stage.
Some of the relevant issues that relate to risk analysis include:
• Financial model. A crucial test is how the economics of
a project stand up to the perceived areas of risk. Any
prospective lender will want to see a financial model that
shows how the sensitivities of the various parameters at
risk affect the project economics.
• Contractual framework. The contractual framework will
need to take account of the risk factors that are relevant to
the specific features of the project. Setting up this framework
involves careful planning on the identity of the contracting
parties and assessment of their capacity to discharge their
obligations, the scope of the positive obligations under
each contract and the effect of limitations of liability.
• Financial structure. A detailed evaluation of the capital
requirement and the balance between equity or “risk” capital
and loans will be required. The proposed “gearing” will
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indicate the potential reward for the providers of equity
and be an important indication of the way in which the
developers have considered the allocation of risk. Lenders
gain confidence in developers if the proposed financial
structure takes them into account.
• Insurance. Lenders will require that the insurance cover
is planned for many of the areas of perceived risk with
reference to the specific detail of the project. Specialist
insurance brokers can assist in creating an effective
insurance programme.
Conclusions
Translating thermal conversion research into a full-scale,
practical, process plant in which technical risks are understood
and can be quantified is bound to be a difficult task, but
every new development has to start somewhere. The
commercial world of electricity supply, in which the thermal
conversion process hopes to find an application, is changing
rapidly, and the support and sustenance that prototype
processes might have received in years gone by from central
authorities are now vanishing. The requirements today are
generally for tried and tested, reliable and easily maintained
technology capable of providing a supply of electricity using
indigenous fuels. Advanced technologies, not long out of the
research stage, are unlikely to satisfy such demands.
The drive to use more non-fossil fuels in electricity production
to meet climate change accords is likely to change these
requirements, however, and provide the stimulus to technological
development of new thermal conversion processes. The
financing of such projects will require intensive analysis of
the intrinsic technical risks of the process. The satisfaction of
such a risk analysis will require the production of comprehensive
data (and its intensive scrutiny) on operational performance
and design, particularly in relation to scaling-up from the
test-bed to the turnkey, commercial, installation.
Ian Burdon is responsible for directing all activities within PB (Power) on sustainable energy developments, including renewable energy, energy from waste, advanced
energy technologies, such as gasification and pyrolysis, and low and zero-carbon “clean” energy technologies. He has had an involvement as either project manager or
project director on a wide variety of renewable, waste and other energy projects. Ian is active in the affairs of the Institution of Engineering and Technology, the
Institution of Mechanical Engineers, the Association for Consultancy and Engineering and the Environmental Services Association. He maintains close contacts with
developers and banks involved in energy projects for which he often acts as technical advisor.
Note: This article was based on a paper about thermal conversion technologies for use in waste management that was for presentation at the Chartered Institution of
Waste Management annual conference, Torbay, UK, June 2008. Copies are available from the author.
Acknowledgements: Thanks are due to the directors of PB’s power specialists for permission to publish this article. It is emphasized that the opinions expressed are
entirely those of the author and in no way reflect the corporate attitudes or views of PB.
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