| Due diligence for renewable energy projects
By Steve L. Griller, CEO, Enertrix
Professionals in the renewable energy industry have long searched for a
simple way to evaluate energy assets in a way that makes it possible to
compare their operational performance assumptions with projects of similar
technologies. Comparative forensic benchmark factors (CFBF) provide one
solution to this challenge. CFBF enables one to evaluate and benchmark
projects on a comparative basis by using a specific project's installed
capacity and annual net generation, making it possible to compare similar
generation plants. It can also be an analytical tool that monitors a project
against actual or budgetary operational values as well.
CFBF can provide guidance during the technical evaluation process of new
projects and can continue to be used through operational monitoring using
actual and budget metrics in lieu of comparisons to industry correlations.
The philosophy behind this approach involves the ability to evaluate
operational cost assumptions by comparing them to other similar operating
plants with returns that represent unlevered IRR's greater than 15% and to
continually use the same methodology to analyze actual operational metrics
by comparing budgetary values to actual operating values.
Initially, this methodology can be used to integrate operational cost
assumptions during the technical due diligence process to compare it with
operating financial assumptions and then can be used to determine if the
operational cost drivers are meeting the project's forecasted financial
targets during operation. This will help one better understand how key
operating metrics are deviating from the budgetary plan and how they are
affecting the bottom line.
How to Determine a Comparative Forensic Benchmark Factor
Each operational cost variable has two forensic factor categories. The first
is calculated based on an installed capacity, and the second based on an
annual net production values.
As an example, if a comparative biomass renewable project has an installed
capacity of 20 Mwh and a $1,928,000 variable cost, the first comparative
forensic factor will be $96.40 $/kWh (1,928,000/20,000). If the comparison
biomass renewable project has capacity factor is 90 percent, the second
comparative forensic factor will be 157,680,000 kWh (20,000 x 8,760 x 0.90)
and will be 0.012 $/kWh (1,928,000/157,680,000}. Entering the forecasted,
budgeted, or actual variable and solving for the forensic factor establishes
the forensic factor for comparisons.
In terms of an equation, this relationship can be stated as:
Target Variable (Comparative Metric) = (Forensic Factor) x
Target Variable (Forecasted Budgeted or Actual Value)
Forensic Factor = Forensic Factor (Comparative Metric)/Target
Variable (Forecasted, Budget or Actual Value)
A forensic factor number for installed capacity or annual generation
value that equals 1.15 indicates a 15 percent higher variable operating cost
than a similar technology project.
The values of a specific project can be compared to similar projects if
variable cost assumptions are higher or lower than operating cost
assumptions. Deviation from the comparative metrics can easily verify if the
operating assumptions on new projects, and provide a way to monitor current
operations.
Benchmarking technical operating parameters can identify the drivers of
financial shortfalls, improve maintenance planning, reduce negative
surprises and provide rigorous justification for expenditures to asset
owners. Benchmarking can also help to reduce unnecessary spending, manage
risks on an enterprise-wide basis and drive corporate objectives throughout
the organization.
The following four ideas are at the heart of comparative forensic metrics:
1. Its primary goal is the alignment of operations with corporate financial
objectives to provide a structure for driving and integrating financial
expectations throughout an organization.
2. It links decision-making and action with information because decisions
are driven by the actual condition and performance of assets and can
facilitate the evaluation what operating risks are the driver's of financial
shortfalls.
3. It provides a buy-in and loyalty to a process that takes priority over
functional responsibilities and establishes a forensic baseline process that
is critically important to resolve the dilemma of standardization and
supports expense decisions to improve a specific operating cost value.
4. It helps companies deal with deviations of operating cost values from
forecasts in a practical way.
As a paradigm, CFBFs share many functional elements with traditional
evaluations. CFBFs take baseline operating variables from other projects of
the same technology or use a project's individual actual and budgeted values
into a comparative process so the forensic equivalency can be determined by
a metric comparison. Solving for the forensic factor results in a simple
value that reflects how well an operating variable is performing or how one
is deviating from original financial operating assumptions.
In practice, the forensic methodology involves the ability to determine how
an assumed operating variable, either an installed basis or an annual
generation basis, is representative to other similar projects of the same
renewable technology or how a project was envisioned to operate.
Benefits of CFBF can also be achieved by monitoring portfolio assets
analytically when they is applied to operating projects because they can
drive decisions based on actual operating or budgeting criteria. Specific
benefits include:
* Monitoring the current operating condition and performance of each asset
in terms of the initial pro forma assumptions and operating variables
* Linking each operational cost target to the original underwriting case pro
forma
* Reviewing improvements in forensic factors for a multiyear perspective
* asking reasonable "what if" questions to understand the consequences of
improved forensic factors to quickly see how changes affect operational
variables to drive returns higher
Steve Griller is CEO of Enertrix, LLC.
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