By Nicolas Rossel
Large-scale solar development is on the rise and investors new to this asset class are eager to dive in; but razor thin margins combined with increasingly complex Power Purchase Agreements (PPAs) and volatile financial markets mean investors need savvy industry partners to succeed. The U.S. is predicted to install nearly 100 GW of solar between 2021–2025, representing a 42 percent increase over the previous five years. Along with a greater number of projects to choose from, investors will also need to decide when to invest. Instead of the traditional entry on the date of commercial operation, investors are committing earlier in the development timeline with less visibility into the downstream implications. With all these added risks, how can investors be prepared to succeed?
The Challenge of Traditional Asset Management
Traditionally, asset managers were tasked with running a project’s back office, piecing together monthly financial and performance reports (more often than not on fragile spreadsheets), and overseeing the technical performance of a project. In today’s markets, as the entire country witnessed with the market meltdown in ERCOT, the financial impact of managing these market risks can turn a project’s fortunes on a dime due to natural disasters no one can predict. (At the time of writing, three energy companies in Texas have declared bankruptcy).
The days of 20-year busbar PPAs are largely over, replaced by complex hedge agreements and virtual/synthetic PPAs as well as fast-moving real-time and day-ahead merchant markets. These environments are rife with financial risks — project shape, basis, and economic curtailment just to name a few — that were not part of the renewable energy conversation just a few short years ago. As the complexity of an asset’s financial transaction increases, so should the sophistication of the asset managers that are responsible for them.
Asset management is no longer an after-the-fact exercise in project reporting, it is a here-and-now undertaking with real-time financial implications.
Aligning Finance and Field
While the financial operations of a project become more sophisticated, this does not preclude the need for operational excellence. Much to the contrary, as the renewable energy industry matures, excellence in operations and maintenance (O&M) needs to become industry standard rather than a gold standard. There is simply no longer any margin for misaligned incentives, communications lag, or ill-defined responsibilities. The combined focus of all personnel must be on extracting the maximum value of every MWh.
The clearest path to aligning asset managers and field operations personnel is by aligning their performance metrics. Rapid O&M response time does a project no favors in an instance of negative market pricing, and availability matters only insofar as it sets up a project for financial success.
The use of outdated performance metrics, like response times and time-based availability, set up the all-to-common scenario whereby O&M contractors clamor for performance bonuses in a year when a project missed debt service coverage ratios, or failed to make an expected shareholder disbursement.
In this new environment, commercial and financial savvy are just as relevant to a site manager as they are to a CFO or asset manager, just as safety needs to be a priority to any commercial or financial team.
By homing in on relevant and actionable metrics and aligning ALL personnel, an organization is best positioned to keep people safe and projects profitable.
Given the real-time nature of today’s energy markets and the premium on financial operations, projects no longer have room for communications lag time. Most asset management and O&M relationships are governed by agreements that allow for days or even weeks to pass before decisions are made. This lack of agility can leave valuable MWh and dollars on the table, and the misalignment can lead to finger pointing that is difficult to navigate… and entirely avoidable.
In addition to aligning metrics across departments, at EDF Renewables we have developed performance dashboards that give personnel real-time visibility and keep our teams focused on the same objectives. The Top three causes of project Operational Loss Factor (OLF) losses are reviewed on a weekly basis, and regional and fleet-wide reviews are conducted monthly to allow for best-practice sharing across the portfolio.
Despite these challenges, current market conditions have all the harbingers of success for solar investors — a favorable political climate, decreasing technology costs, finance incentives, and a slew of experienced firms boasting portfolios of developed, engineered, and constructed projects successfully operating for clients across the country. But life after commercial operation isn’t simple. As an asset owner-operator, EDF Renewables understands the risks investors are working to manage and applies those lessons daily to over 8 gigawatts (GW) of renewable energy projects in North America. Unlike other players in the market, we’ve evolved beyond the traditional asset management vs O&M model to an updated approach that combines financial, commercial, and technical know-how into a single operational workforce known as asset optimization.
And for investors new to the solar market, a unified approach to asset management and O&M provided by a single counterparty dedicated to the project’s financial and operational success is a model approach. With streamlined work processes, aligned incentives, and an empowered workforce, EDF Renewables’ asset optimization vision is the bedrock of a profitable operation.
Keys to Investor Success
When it comes to selecting the right partners, investors need to know what to look for and what questions to ask.
- Safety: Safety culture is the responsibility of an entire organization, from executive leaders to field personnel. Are safety metrics part of your service partner’s executive performance measurement?
- Market Risk Management: Complex offtake arrangements and sophisticated financial operations are the new norm for the renewable energy industry. Does your service provider have experience with your project’s specific market and offtake requirements?
- Incentive Alignment: Asset management and O&M personnel must be aligned and working towards the same objectives. What performance objectives does your service partner measure? Are asset management and O&M KPIs the same?
- Real-time Awareness: Energy markets are forward-looking, and today’s managers and operators need real-time visibility. What tools have your service partners developed and deployed?
- NERC Regulatory Compliance: The topic of another white paper, and an essential component of asset optimization. Does your service partner have an in-house regulatory team?
Nicolas Rossel is Senior Business Development Manager — Asset Optimization for EDF Renewables North America. He has worked for EDFR since 2016 and has negotiated over 1 GW of Asset Management and O&M service agreements. Contact: Nicolas.Rossel@edf-re.com.
This article is supported by EDF Renewables.