Risk Management of Wind Project

Risk Management of Wind Project

1.800.580.3765 WWW.TTECI.COM

Pramod Jain, Ph.D.

Presented to:

DFCC Bank and RERED Consortia Members

January 25 27, 2011 | Colombo, Sri Lanka

Agenda
What are the risks?
Revenue Capital costs Construction and commissioning Operating costs

How to mitigate risks? What is the associated uncertainty?

Project stages Reduction in uncertainty

Pramod Jain;Jan2627,2010

Module Objectives
Learning Objectives
Understand the various components of risk Understand the factors that influence risk Understand the impact of risk factors in project Understand P50, P84 and P90 metrics of project performance Understand how to aggregate risk and use risk assessment to compute valuation of a project

Risk and Uncertainty of Wind Projects

Revenue
Strength of grid: If there is a fault in grid, wind goes offline. These interruptions can add up Matching of production to load: If load is low, wind goes offline Weather and other events: Cyclones, wildfires, etc. Turbine repair: In remote locations, it may take weeks to get parts, equipment and manpower Delayed payments by utility

Cost
Currency risk Installation in remote areas (usually accounted):
Transportation of towers, blades & equipment Crane cost: 500 ton cranes are expensive to import/transport/rent Transmission lines Clearing of land, constructing roads

Other Issues
Environmental issues: Stopping of machines during migrating and breeding seasons Delay in projects due to land ownership issues Delay due to community opposition Delay due to other legal challenges All these delays can cause loss of revenue or deferred revenue

Depending on the situation revenue may be reduced by about 10%, or even higher

Recurring costs (usually not fully accounted):

Cost of insurance Cost of O&M

Pramod Jain;Jan2627,2010

Revenue Risk
How to measure it? Identify all the factors that impact revenue

Inability to sell energy Under performance of turbines Inability to produce energy

Bad weather, earthquake Equipment failure

Delayed payments Uncertainty of payments:

Cost of electricity Incentive payments Tax incentives

What is the impact? Perform studies to understand the impact Compute expected value and variance Objective based on data or subjective based on expert opinions Example: Inability to sell to grid.
How often is grid unavailable due to weather, scheduled repairs, unscheduled failure? Frequency issues

How to mitigate it?

Take-or-pay contract Maintenance contracts with high availability Insurance against damage to equipment and loss of production

Pramod Jain;Jan2627,2010

Capital Cost Risk

How to measure it?
Identify all the factors that impact capital cost Cost of turbine Cost of Construction, installation and commissioning Cost of Engineering Delays due to permits Delays due to safety issues

What is the impact?

Cost overruns Delay in project Fines Loss of investor confidence Lower return on investment

How to mitigate it?

Build an experienced team Avail of consultants that have knowledge of issues and pitfalls Strong project management Strong risk management

Critical Issues Analysis

Early Stage method to understand development risk Goal: Identify Siting Issues
Environmental/ landuse Transmission Property rights Engineering/ transportation/ constructability Public/government acceptability There is no one-sizefits-all analysis method

Impact on schedule and budget

Strategies to reduce impact

Cost of CIA is small and best incurred upfront Evaluates Issues Within Key Resource Areas Using Logical Step-Off Points Can be Used as Basis for Additional Analysis and studies to collect more data and evaluate alternatives

Accurate project budget and schedule Cost-effective and environmentally benign siting Expedited schedules and reasoned financing decisions Identifies Required Environmental Studies, Permits and Plans Provides a Strategy for Management of Critical Path Items

Source: How to Use Upfront Information to support financing and development of wind farms, A. Alberti, R. Cogen

Environmental & Landuse

Identify impact on Environmental, cultural & socioeconomic resources
Phase I: Desktop study with site visit Phase II: Detailed study with data collection and field inventory Phase III: Impact on environment & landuse Avoid subjective assessment; Rely on engineering assessments done by experts and based on data

Identify constraints
Setback from habited structures Setback from roads, property boundary, water bodies, transmission lines Wetlands Endangered species, migration paths, wildlife breeding and hatching areas Airspace Telecommunications: Microwave, TV, radio Culturally sensitive areas Geotechnical considerations Visually sensitive resources

Identify permitting requirements

Constraints are laid out on a map List of the permits, authorizations, and consultations required to construct and operate the wind farm. Each regulatory process should be described, including the application process, studies required, approval timeframe, and applicable fees.

Transmission Availability & Impact on Grid

Transmission availability Distance from wind farm Ownership of line Voltage and available capacity Competing projects for same transmission Impact on Grid System impact study required Fees and timeframe for study Interconnection requirements: Quality of power, use and supply of reactive power, LVRT, safety systems Upgrades to current grid, substations; cost-sharing

Property rights
Required property rights: Wind farm permanent: Foundation, underground and overhead transmission, O&M building, substation Temporary: Met-tower, Turbine laydown area, transportation of equipment on public roads Improvements to roads, if required Process Obtain maps and ownership information. Large number of small land parcels are not conducive Survey of land with overlay of requirements for entire project CIA should identify all the issues, processes, fees and timeframes for acquiring, leasing or licensing land

Engineering/ transportation/ constructability

Transportation of large turbine components, cranes and other construction equipment Port improvements to handle heavy and large parts Public road improvements Weight carrying capacity of bridges Availability of hauling equipment Remote areas with poor roads, steep slope with hairpin bends CIA must do a detailed map of route, identify these issues and accurately estimate cost of transportation Constructability Ridgeline projects may require significant earthmoving Steep slopes, rough terrain, unstable geotechnical conditions must be excluded Construction can be done anywhere with enough cost and money; Impact on cost must be computed Construction permits, storm water permits and others are required

Government & Public Acceptability

Factors to analyze PPA tariff Provisional, temporary and short-term permits/approvals Renewable energy policy statements/goals Apparent attitude of local population and officials Local economic climate Residential density Compatibility of surrounding land uses Proximity to important viewsheds, historical sites, or other culturally sensitive locations Proximity to rare, threatened or endangered wildlife Impact and Mitigation No PPA no financing High degree of uncertainty for financier Highest concerns are impact on property values, viewshed impacts, noise impacts, shadow flicker impacts, and avian/bat mortality Benefits to community are economic benefits, job creation, environmental benefits of green energy, homeland security benefits of green energy, consumer benefits of green energy, etc. The developer should plan for proactive outreach and adequate public & governmental relations effort throughout the development process.

Construction & Commissioning Risk

Accidents
Large and heavy components Working 300 ft from ground in high wind areas Working with high voltages

Damaged parts, incompatible components Poor quality engineering

Lower quality underground cables Poor soil conductivity Cracking of foundation Vibrations and fatigue cracking of blades, joints, towers, etc. Quality standards must be set for project Mandatory safety policies and training Subcontractors with experience & history of good past performance

Poor quality construction

Mitigation:

Equipment Risk: Turbine, Substation

Turbine cost is about 70% of total project cost, so there is a tendency to seek lower cost turbine
Turbines with gearbox: Failure of gearbox is a problem. Smaller generators. Overall cheaper turbine. Direct drive turbines: Power conversion units are the biggest source of failure. Generators are large. Higher efficiency turbines because of variable speed. Research the reliability of turbines Research manufacturer and depth of engineering, and R&D expertise Ensure turbine meets IEC standards and is certified Ensure correct class of turbine is selected for the project Ensure modification that are suitable for the site conditions have an IEC WT01 Design Evaluation certificate Ensure that all the engineering is done by experienced firms Civil, electrical components and electrical protection systems

Mitigation:

Recurring Cost Risk Most underestimated cost

3 to 5 years in the future Unrealistic expectations of cost and frequency of maintenance Repair cost can be high: Parts cost, installation cost can be high if cranes are required Often cascading failures: Gearbox, bearing and shaft Mitigation Long-term OEM maintenance contract (10+ years) Ample reserves for post OEM maintenance Buy equipment with condition monitoring Rely on SCADA systems to collect, analyze and predict problems Rely on experienced O&M contractors

Questions?

QUESTIONS?

Risk Assessment Model

Revenue uncertainty: Capital Cost Uncertainty Wind Resource: Mean=200GWh, Cost of turbine: Mean=$1200/kW, StdDev=12% StdDev=5% (exchange rate, transport costs, import duties) Inability to produce: Mean=50hrs/yr, Construction cost: Mean=$300/kW, StdDev=20hrs StdDev=12%. Cost of raw materials, Inability to feed the grid: Unexpected costs, Delays in Mean=100hrs/yr, StdDev=40hrs construction Tariff uncertainty: Mean=$54/MWh, Engineering cost: Mean=$X/kW, StdDev=2% StdDev=$y CER: Mean=$20/MWh, Recurring Cost Uncertainty StdDev=15% Years 1 to 5: Mean=$20/kW, Tax incentives: Mean=$26/MWh, StdDev=12% (insurance, personnel) StdDev=12% Years 6 to 20: Mean=$50/kW, Delayed payment: Av. delay=60 StdDev=30% days, interest on line of credit=8% All numbers above are for illustrative purposes

Aggregating Risk
Assumptions
Generic: Each risk is independent, so variances can be added as sum of squares

P50, P84, P90 estimates are computed

P90 is an Annual Energy Production number with the following property: There is a 90% likelihood (probability) that energy production will be at least P90.

Example
Mean AEP = 100 GWh Standard deviation of AEP = 10 GWh P50 estimate = 100GWh P84 estimate = 90 GWh P90 estimate = 87 GWh P99 estimate = 74.6 GWh

Illustration of P50, P84, P90

Implications: 1
Managing uncertainty is very important. Higher uncertainty => Higher standard deviation => Lower P84, Lower P90

Lower Pn => Lower valuation of project

P97 0 70 80

P84 90

P50 100 GWh

Conclusions
Expected returns is not the measure of good project; the variance around the expected return refers to risk It may be better to choose a project with lower expected return vs project with high expected return and high variance Project on a ridge and rough terrain Vs project in plains Fixed fee construction contracts and third party maintenance contracts tied to production are strategies to minimize risk Wind projects require a framework for risk management for:
Categorizing risk Quantifying risk Assessing impact of risk Strategies for mitigating risk

Risk management has to be a ongoing task along with project management