THOUGHT LEADERSHIP

Getting the answers you need: Technical due diligence for vendors, buyers, lenders or insurers of renewable energy projects

Technical due diligence (TDD) for a renewable energy project evaluates the risks and opportunities associated with the project to establish its technical and financial viability, compliance with regulations, and other factors influencing its value. TDD is fundamentally a well-understood risk assessment process, with practitioners typically having templates they can tailor to specific projects and client needs. However, different parties will have different objectives, different scope for TDD to cover, and different risk appetites.

Objectives

Vendor perspective: Do we have our house in order?

An owner (or vendor) is most likely to procure TDD to show the market and prospective buyers their project or portfolio of assets for sale. Engaging an ‘independent’ party to prepare a TDD report serves several purposes: it can facilitate a quicker sale process, enable the owner to anticipate a buyer’s questions, and allow the owner to take pre-emptive actions to mitigate perceived risks. This can give the owner greater control over the sale process or how the project is later structured. For example, in Australia, there is a trend of wind turbine suppliers (original equipment manufacturers, OEMs) getting involved early and developing the project around their specific wind turbine model, then selling the project while maintaining a strong interest as the OEM.

Buyer perspective: Is this project worth our investment?

A buyer conducts TDD to evaluate whether the project aligns with their investment goals, operational capabilities, and risk tolerance. They are interested in understanding the technical feasibility, potential challenges, and opportunities associated with the project. There is often a need for technical inputs to feed into a financial business case, such as CAPEX and OPEX estimates and estimates of energy yield.

Lender perspective: Will we get our money back?

Lenders, such as banks or funding agencies (e.g. Clean Energy Corporation, ARENA, World Bank, Asian Development Bank), conduct TDD to assess the project’s ‘bankability’. This involves evaluating whether the developer can fund the project and if the project can generate sufficient returns to repay loans. Lenders focus on mitigating financial risks and ensuring compliance with lending criteria and industry standards.

Insurer perspective: Is this project insurable, and at what cost?

A wide range of insurances may be in place during the construction and operation of a renewable energy project. Insurers will evaluate project risks and feasibility to determine insurability, the cost to insure, and how to manage potential claims effectively.

Scope

Vendor perspective: Help us prove to buyers that we’re transparent

A prudent vendor will try to anticipate everything buyers might want to know and present the project in the best possible light, ideally addressing information gaps and mitigating risks. The vendor will rely on the consultant’s independence for the TDD report to have value for potential buyers.

Buyer perspective: Tell us the risks – and if the project can be improved

A buyer may undertake TDD at any stage of the project life cycle, from conception to decommissioning, requiring a tailored scope of work. The buyer will focus on technical aspects impacting ownership and operational responsibilities, such as technology selection, construction feasibility, resource assessment, and operational performance expectations. Existing assets may also influence their priorities during TDD.

For example, a buyer who already operates a portfolio of wind farms will be much more comfortable with many of the typical risks of wind development in comparison to a buyer for whom the project is a first of its kind.

Owners will often employ a consulting business to undertake TDD alongside environmental, social and governance (ESG) due diligence, with legal and financial due diligence conducted by other specialist parties.

A good TDD for an owner will focus not only on risks, but also on opportunities for improving the project.

Lender perspective: Tell us everything!

Lenders sometimes directly engage a consultant for TDD; however, often the owner will manage the engagement of a ‘lender’s’ or ‘independent’ engineer for TDD, with the resulting TDD report provided to a bank or consortium of banks for their evaluation and questioning.

Lender’s TDD engagements typically have a broad scope, encompassing not only technical aspects but also financial, legal and regulatory considerations. They assess the project’s financial model, revenue projections, contractual agreements, insurance, permitting, and compliance with regulatory requirements. Lenders are interested in the capability and experience of key contractors, the robustness of contractual arrangements, and will look to TDD consultants for assurances that project schedules are achievable.

Lenders will have a particular interest in things like budget contingencies, and what contractual mechanisms offer assurances such as warranties and liquidated damages.

In practice, the TDD scope for a ‘shovel-ready’ project may be similar for a buyer and for a lender considering investment.

Insurer perspective: Is the technology mature, and what’s this we’ve heard about a flood zone?

Insurers assess risks, including vulnerabilities, operational disruptions, and compliance with industry standards. They are particularly interested in technology maturity and environmental risks that may lead to future insurance claims. For example, rapidly released new wind turbine models may increase the risk of failures, making insurers keenly interested in operational hours as a measure of a model’s proven reliability.

TDD is a core activity for insurance underwriters (those who evaluate and analyse the risk) and is not typically outsourced to consultants. But consultants can learn from the insurance industry, which deals in risk assessment every day.

Risk appetite

Vendor perspective: Help us show it’s a safe bet

Naturally, vendors will typically prefer to present risks as identified and under control. However, it is in their interest to present the project honestly. After all, many transactions have the vendor retaining a stake in the project.

Buyer perspective: Help us find a project with low risk and good returns

The buyer may be evaluating technical risks during project development, construction or long-term operation depending on the project status. In practice, the earlier in the project’s life cycle, the greater the risk, and, in theory, the greater potential financial return.

For example, a project claiming to be ‘shovel-ready’ should have all major planning permits in place, a confirmed grid connection, and technical studies completed (such as geotechnical investigations). The TDD assessment will review documentation to identify specific risks that might eventuate during construction and operation.

On the other hand, for a project in early development, the risks may be of a more generic nature and the buyer may need to accept that there are some unknowns. This is essentially greater risk but there is potential for greater rewards in the long run.

Lender perspective: We’re taking a lot of risk here, so has everyone done their homework?

A typical funding model is where a bank or syndicate of banks provides a loan to a project owner that is subsequently paid back via the revenue earned by the project. The loan is secured against the assets of the project, and the banks want to ensure they will be repaid. Lenders take on substantial risk; hence, during TDD they expect to see that projects are well-conceived and executed, and they will adopt relatively conservative views on issues such as expected energy yield.

Insurer perspective: What’s the right level/cost of cover?

Insurers have sophisticated risk modelling techniques and real-world experience of what is going wrong on projects and what it’s costing. Insurance is a global industry, and what happens overseas impacts the TDD that insurers do for Australian projects.

Decisions made by project owners can have a substantial impact on the cost of insurance, and in fact whether insurance is even obtainable. For example, if an owner selects a relatively new or untested wind turbine model, the cost of insurance may negate any intended savings.

In summary

While vendors, buyers, lenders and insurers conduct TDD to assess the feasibility and risks of a renewable energy project, their perspectives, objectives, scopes and decision-making criteria differ based on their roles and interests in the project. As technical consultants who conduct TDD, it’s our responsibility to understand these differences and tailor our TDD approach accordingly.

If you’d like to talk with our specialists about technical due diligence for a renewable energy project, contact Patrick Pease, Bunfu Yu or Shekhar Prince.

About the authors

Andrew Wright is Entura’s Senior Principal, Renewables and Energy Storage. He has more than 20 years of experience in the renewable energy sector spanning resource assessment, site identification, equipment selection (wind and solar), development of technical documentation and contractual agreements, operational assessments and owner’s/lender’s engineering services. Andrew has worked closely with Entura’s key clients and wind farm operators on operational projects, including analysing wind turbine performance data to identify reasons for wind farm underperformance and for estimates of long-term energy output. He has an in-depth understanding of the energy industry in Australia, while his international consulting experience includes New Zealand, China, India, Bhutan, Sri Lanka, the Philippines and Micronesia.

Brendon Bateman is a senior renewable energy engineer with more than 20 years of experience on renewable energy projects in Australia, New Zealand, Pacific islands, Philippines, China, India, Sri Lanka, North Korea and South Africa. Brendon is recognised as a technical expert for feasibility or due diligence of renewable energy projects with involvement in the assessment of over 10,000 MW of greenfield and operational projects, identifying key risks for developers, banks, equity funds and aid agencies looking to develop or invest in renewable energy projects. Brendon is highly experienced in the areas of resource assessment, energy estimates and their associated uncertainty, operational performance assessments, wind turbine due diligence and O&M practices.

July 23, 2024