Renewable Generators Need to Take Stock of Their Risk Mitigation Strategies

Over the last decade, energy markets have witnessed unprecedented growth in renewable energy investments and a proliferation of distributed energy resources (DER). Whether it is financial, operational, political, or regulatory risk—there is an impending need for power producers to evaluate their risk profile and understand steps to better manage the impact of these risks on their growth and profitability. Adverse weather conditions and market price volatility can exponentially increase the risk profile of these projects. Investment in renewable assets is a strategic priority across utilities and power producers. This brings risk considerations higher up on the agenda among investors and operators of renewable energy projects.

Regulatory Changes Have Renewable Producers Scrambling

Even though the tipping point for grid cost parity is not too far away, recent regulatory changes have caught renewable energy power producers off-guard. Austerity-driven government funding cuts across Europe and Asia have created a high level of uncertainty across renewable generators. In June, I wrote a blog on the mayhem associated with the Chinese subsidy cuts. Stories of sluggish demand across Chinese PV manufacturers show how the industry is struggling to recoup its ROI.

To avoid or at least minimize the impact of similar regulatory curve-balls, the sector can either lobby for an extension of subsidies with policymakers or accept these challenges and move ahead. It is flexible enough to adapt to changes and is prepared to mitigate risks associated with these changes. Stories across Europe are similar: cuts in solar feed-in tariffs have ranged from 15% in Germany to 70% in the UK.

Risk Mitigation Has a Broad Reach

Risk mitigation is not just limited to taking stock of regulatory and political changes. Financial and operational risks can adversely change profitability and viability of these investments. Early stages of renewable projects are capital intensive and debt-financed. Investments in insurance instruments can hedge some of these financial risks. However, with increase in scale, there is a greater need to manage risk profiles with the help of comprehensive risk mitigation plans.

Power producers are relying on one or more risk mitigation strategies to manage exposure associated with renewable power generation:

• Diversifying asset investment portfolios and geographical reach can help renewable developers tap into more supportive regulatory policies and favorable weather conditions.
• Coordinating efforts across stakeholder groups to set up benchmarks and supportive framework helps to deal with sudden subsidy cuts.
• Digitizing asset performance management optimizes operations with the help of technology accelerators.
• Aggregating business models for energy trading and self-consumption helps achieve economies of scale through virtual power plants and microgrids.
• Balancing asset portfolios while signing long-term power purchase agreements secures a fixed price for the power produced.
• Developing projects as part of a consortium or joint venture with other financial partners hedges risks.
• Investing in renewable power assets that are already fully operational and have met performance guarantees increases reliability.
• Ensuring there are no supply-chain bottle necks and transforming the procurement processes to meet any inventory shortages establishes efficiency.
• Investing in risk management technologies and tools including sophisticated hedging instruments and insurance packages creates a strong framework.

Technology platform providers that can track asset portfolios and analyze production benchmarks are a growing market segment. Companies like kWh Analytics offer risk management platforms such as Heliostats to track production and financial trends against underwriting model and quantify the impact of weather for every asset type.

Solar Risk Management Platform

(Source: Heliostats)

While technology solutions can measure risks across asset portfolios, it is only the first step to managing project risks. Renewable developers and investors with significant risk exposure need to take stock of their mitigation strategies and have a comprehensive action plan.