Until a few weeks ago, “disruption” was a more of a popular buzzword than an acute global reality. We thought of disruption in terms of disruptive technologies and business models that present opportunities for sustainable solutions and healthier and wealthier lives. Then came disruption like we’ve never seen before, as the novel Coronavirus (COVID-19) halted lives and businesses all over the globe. The impact of this disruption is incredibly far-reaching in terms of the severity, the reach, the pace and the uncertainty. The full effects of COVID-19 will not be known for a long time, and adapting to this new reality is daunting.
How do we adapt to a pandemic-disrupted world? The impacts are felt in our personal and professional lives as well as in our projects. Renewable energy projects in particular are facing broad uncertainty, as spending on innovative solutions may slow as governments and businesses shift focus toward crisis response. Regardless of the stage of a project – whether in planning, construction, or operations – it is important to consider the impacts of COVID-19 and to prioritize the safety and health of all involved.
The global growth of renewable energy projects has been significant in recent years. That means many projects are currently in the construction stage.
The biggest impact these projects are facing is the delay in construction timelines. This could include global supply chain disruptions; shortage of on-site labour; financing challenges; site access restrictions; availability of cranes, construction equipment or transportation; non-issuance of permits; delays in leases; etc. The project developers could be receiving force majeure notices. The original project economics could be changing substantially, such as through impacts to the Allowance for Funds During Construction (AFUDC) account. All these implications will likely change the project risk profile, causing concern to the project financiers.
For projects in the operations phase, key considerations for developers include:
- Review the details of all agreements — supply chain, financing, EPC, offtake etc.
- Consult with tax and legal experts, especially regarding the force majeure clauses in all contracts.
- A proactive approach will be appreciated. Create open and continuous communication with the financiers. Many projects are pursued through special purpose vehicles and the lenders are engaged during the construction stage, requiring information on progress and performance. Remain in compliance with the obligations. If the terms become challenging, negotiate terms and refinancing if required and possible.
- Reassess the project risks with the current information and monitor new developments. Recalculate the project economics with both current information and potential scenarios of extended project schedules.
- Consider the budgetary and schedule impacts of COVID-19 health and safety arrangements during project construction.
- Track the financial accounts like CWIP, AFUDC etc. and their variance to the estimates. Be mindful of foreign exchange fluctuations. Keep a pulse on budget thresholds and the approvals required from lenders for any budgetary changes. Consider financial scenarios or contingencies with less than effective quality controls and measures on the material and the work.
- As the delays increase, plan for refinancing and alternative procurement strategies.
- Pay attention to projects in countries with project tax credits or similar incentives in consideration of extensions or expirations.
Operating wind and solar farms could be particularly challenging during COVID-19 mitigation measures, as the restrictions to site visits continue. The financial impact to projects with power purchase agreements (PPA) may not be as severe as to those without PPAs.
Electricity demand is falling due to less activity in the economy, and the demand profiles are potentially also shifting considering the adjustments that everyone is making on how and where they work. These changes could potentially lead to curtailments and/or revenue shortfalls. Operational risks could increase with potential preventative and reactive maintenance delays. The inability to have on-site staff could result in reduced yield and in rare cases, no production. On the financial front, maintaining agreed-upon financial ratios and working capital could be a challenge. There could also be credit rating downgrades.
For projects in the operations phase, key considerations for developers include:
- Review the offtake agreements for the near-term impacts. Maintain open communication with all customers.
- Review the warranties/guarantees and operations & maintenance contracts for the impacted period.
- Review the insurance policies for coverages of these disruptions.
- Renegotiate all agreements where required and possible.
- Pursue performance analytics from remote locations.
- Depending on the location and jurisdictional guidance, plan for limited site visits and additional arrangements to ensure that the health and safety of workers is protected.
- Reassess risk and recalculate the project economics. Review alternative business models to improve the project economics.
- Monitor and communicate with lenders about repayment obligations and changes to other financing covenants.
While the sector is facing significant hardship now, the long-term growth projections for renewable power projects are still valid. Amidst COVID-19 disruption, there will likely be changes in how developers will conceptualize, plan and develop renewable projects. While the full impact may not be known for some time, developers need to continue to review and adjust plans for future developments. In fact, if there is a silver lining, this could be it: developers have been extremely busy in the last few years, bringing projects from conception to operation at a rapid pace. This pause provides opportunity to rethink how the projects are planned and developed.
The impacts of COVID-19 span all elements of planning. All project assumptions are highly uncertain, and there is uncertainty among all the players in the value chain of developing projects, including the suppliers, contractors, operators, customer, lenders and more. Operating, monitoring and evaluating procedures may be considerably different with requirements for more remote work. The lenders and the terms for lending are likely to be different. As the recovery period starts, there could be infrastructure stimulus funds available to kick-start the economy. However, there could be counter-forces in the markets too. For example, fossil fuels could be a significant competitor either due to falling prices or due to government policies. With all these implications, the risk profiles could be very different leading to challenging project economics.
For projects in the conceptualizing and planning phase, some of key considerations for the developers are:
- Review all the project assumptions.
- Rethink the supply chain strategies (eg. local vs global); contracting strategies (eg. terms for disruptions); operating and maintenance strategies (eg. multiple teams; in-house, augmented with external service providers); monitoring and evaluation strategies (on-site vs. remote), etc.
- Review instrumentation and other technologies that support remote monitoring and analytics.
- Review all means of financing projects. Maintain open communication with potential lenders and revisit the terms.
- Reassess the risk and recalculate the project feasibilities. Run numerous scenarios to understand the performance of the project in all potential situations.
- Redevelop the contingency plans and appropriate response strategies.
- As the recovery process begins, evaluate processes for rapid planning to construction to commissioning.
- Reassess the new landscape and scenarios. Pursue business development opportunities. Note the long-term growth opportunities for renewable power project will continue to be strong.
- Explore and position for potential infrastructure relief or stimulus funds.
- As the recovery process begins, evaluate processes for rapid planning from construction to commissioning.
- Be engaged with policy-makers through industry associations to encourage clean energy policies as an important step for economic recovery and meeting environmental objectives.
- Some valuable lessons are being learnt through the current experience. Give some consideration on how to prepare and plan for the next pandemic or similar disruption.
Resiliency like never before
It can be challenging to stay positive during these uncertain and difficult times. But resilient developers keep a line of sight toward the longer-term purpose. We can take encouragement that the long-term desire to reduce green gas-emissions will not change. In fact, there may be more impetus as we come out of this crisis, for an increased focus on Environmental, Social, and Governance (ESG) objectives and responsible investments. Clean energy investments play a significant role in contributing to these objectives.
We will recover, and there may be more interest than ever before in delivering renewable energy projects.