Best Practice Guidelines for Risk Identification, Assessment and Mitigation
Solar Bankability is an active quality management process where all stakeholders in the approval process of a PV project attempt to identify potential legal, technical and economic risks through the entire project lifecycle. These risks need to be quantitatively and qualitatively assessed, managed and controlled. Despite a wide overlap in this quality management process, the focus and the assessment criteria will vary depending on whether the stakeholder represents an investor, a bank, an insurance company or a regulatory body, as illustrated in Figure 1 below.
In the Solar Bankability project, we have developed a set of best-practice guidelines and useful tools which could serve two functions: first, as de-risking tools to reduce the risks associated with investments in PV projects, and second, as standardisation tools which serve as guidelines for common standards for professional risk assessment in the PV investment sector. These guidelines and tools are to assist stakeholders to develop their own individual risk management strategy along the lifecycle of a PV project through the following steps (Figure 2):
• Risk identification;
• Risk assessment;
• Risk management;
• Risk controlling.
These tools and guidelines were developed based on market data from historical due diligence, operation and maintenance records, as well as damage and claims reports. We have also engaged different relevant stakeholders in the PV industry for their inputs during this process. These stakeholders include financial market actors, valuation and standardisation entities, building and PV plant owners, component manufacturers, energy prosumers and policy makers.
In risk identification, we have compiled technical risks caused by incorrect technical assumptions in the calculation of the PV levelized cost of electricity (LCOE), and technical risks associated with PV plant failures. The LCOE technical assumption risks were obtained from gap analyses on the technical assumptions used in samples of present-day PV financial models and plant yield estimation reports. The plant technical risks were collected by going through databases of technical failures in samples of hundreds of MWp of PV plants and tabulating the different failures into a Risk Matrix organised by the project phases and plant components. Focus was placed on technical risks during planning and during operation and maintenance, and those risks which are relevant to the calculation of the PV LCOE. The results of the risk identification work are two tools – a list of top 20 LCOE technical risks and a technical Risk Matrix, which could be used by stakeholders such as PV plant component suppliers, EPC contractors, and O&M operators.
For risk assessment, we evaluated the risks in terms of how they impact i) the initial yield estimate (for risks from uncertainty during planning), ii) costs during operation and maintenance phase, and iii) PV LCOE. Three tools were developed for risk assessment: a new methodology (CPN methodology) which assigns a cost priority number (CPN) to each risk based on the associated economic impact on plant operation, an LCOE sensitivity analysis excel calculation tool, and cash flow risk categorisation. These tools will serve stakeholders in assessing the different technical risks and their impacts on the operation costs of their PV plants and what electricity cost should be set for profitable investment.
For risk management, a list of eight mitigation measures were put forward. Furthermore, the effectiveness of the mitigation measures was assessed by evaluating how their implementation changes the cost priority number and PV LCOE. Scenarios consisting of different mitigation measure combinations and market segments were studied and the mitigation measures were ranked based on their effectiveness in reducing the CPN and LCOE. For mitigation measures to reduce the uncertainty in the yield estimation, several scenarios on the P50 and P90 values were simulated. Since the suggested mitigation measures consist of solutions at different phases of PV project lifecycle, the analyses of their effectiveness also allow for assessing the best PV project phase for implementation, thus the risk management is achieved by transferring risk from one actor to another. The transfer of risks can help to allocate these risks to those parties, which have the best control of each risk. Finally, we have developed six best-practice checklists relevant for EPC and O&M contracting, and yield estimation. The list of mitigation measures and the six best-practice checklists will assist market actors from PV system designers to plant owner to lenders and investors in minimising risks due to improper yield estimation and improper settings of EPC and O&M contracts.
For risk controlling, new financial market regulations have been introduced after the 2008 financial crisis to improve the transparency and stability for institutional investors from the banking, insurance and investment fund sectors. These enhanced controlling and reporting requirements apply also to large-scale PV investments. The overview of these regulations is summarised and presented for informative purpose in the Solar Bankability project.