Case study: Successfully Managing Financial Risk

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Project description

As module prices have plummeted in solar projects, the non-module costs have assumed an ever rising slice of the overall project cost. Now, the cost of capital is the biggest cost of all: some 60-70% of cash flows are used for capital servicing. Investor returns depend in part on the amount of debt used to finance the plant – debt financing increases risks for equity investors. A recent study by Grant Thornton showed that at German renewables projects in 2017, levered discount rates (a proxy for the cost of capital) were about 30% higher than unlevered ones for solar PV, onshore and offshore wind projects. As a result, securing the best financing can have a huge impact on returns: investors will want to minimize these costs as far as possible.

Approach taken

Securing the best financing deal will depend on accurate record-keeping, attention to monitoring software and performance management from day one. In other words, this is a task that depends on sound asset management.When considering the refinancing of a renewable energy asset, a lender will shine a light on every dark corner of a project. Asset managers therefore need to be preparing for this moment years ahead: to consider what software systems are needed, and what first-class preventative maintenance the O&M should provide. All energy production data and warrantees must be centrally managed, to provide O&M records of how the plant has been maintained. Assets can only be refinanced if they are proven to be of higher-quality than what was expected at the onset of the project, often several years before.

Solutions achieved

Aquila Capital’s experience shows that as a result of refinancing, we can increase investor returns materially. Asset insurance and O&M expenses are two key areas where Aquila Capital can consistently deliver rate of return improvements. In this project the reduction of costs are expected to total up to EUR 4.5 million over the lifetime of the asset.

Insurance brokering – exploiting the portfolio effect

Aquila Capital approaches its insurance tenders in the same way as it analyses asset operations: it exploits the greater reliability of a portfolio and the benefits of scale to negotiate more advantageous terms. Besides resulting in an overall reduction of insurance premiums, this approach has yielded enhancements in insurance conditions for Aquila Capital’s portfolio of assets, for example a no-claims bonus, reductions in the retention of both total amounts and days and reductions in the overall administrative costs with regards to insurance management. All in all, inviting insurance bids for a pooled portfolio of assets has resulted in cost savings of around 20% on premiums.

O&M and components – stabilizing cash flows, sharing risk, and saving time and money on replacements

Aquila Capital’s management optimization approach also extends to O&M expenses. For example, Aquila Capital agreed with an O&M provider to share weather-related risks: the provider takes a part of the upside in exchange for covering part of the downside, thus enabling us to offer a more stable cash flow for the overall project as well as an enhanced relationship with the O&M operator. Aquila Capital’s management optimization approach also extends to O&M expenses. For example, Aquila Capital agreed with an O&M provider to share weather-related risks: the provider takes a part of the upside in exchange for covering part of the downside, thus enabling us to offer a more stable cash flow for the overall project as well as an enhanced relationship with the O&M operator.

Aquila Capital’s market intelligence and skills have also allowed us to reduce costs when it comes to the purchasing or substituting of components. Aquila Capital has been able to realize greater revenues in part because the market for components is relatively thin and illiquid. Aquila Capital turned this to an advantage because we understand better than others how to time our purchasing commitments, for example by obtaining a “fast track” for replacements. Given its size and collective experience as an asset manager, Aquila Capital also knows how to sign more attractive bilateral contracts than would be achievable by a smaller, less expert, less diversified player.


Article Credits: 2018 Aquila Capital

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