All the pieces ‘must fit together’ to manage project finance risk

When it comes to managing financial risk for electric power infrastructure, a wide array of issues can pose obstacles for project developers, industry officials said during a POWER-GEN panel discussion on Dec. 13.

Risk management in modern project financing can be tough, advised Moxie Energy Vice President Kent Morton. Moxie has led development on a number of combined-cycle gas power plants in the Mid-Atlantic in recent years.

When modeling project expenses, “always assume that it is going to get worse,” Morton said.

“Don’t build a gas turbine that doesn’t have enough gas,” Morton said. “What are the banks going to want,” Morton said.

In addition, it’s important to ensure there are no thorny issues connected with title. Banks love to scrutinize real estate issues, Morton added.

While it is important to identify stakeholders early and identify potential energy project opponents, sometime it’s unwise for a project developer to become visible to the community too early, Morton said.

Most speakers on the panel seemed to agree that permitting risk is increasing these days.

Lenders also care about cost, schedule, performance and other types of risk said Hunton and Williams attorney Laurence Skinner. “Projects are complicated,” Skinner said. “Everything has to fit together.”

As for schedule, there has to be enough cushion in the planned schedule in case something slips, Skinner said.

Skinner and other speakers said the trend seems to be moving away from the traditional wrapped engineering, procurement and construction (EPC) contract. For example, sometimes the power island is excluded from the EPC contract, officials said.

Insurers and project developers typically like to have one unified insurance package for all the vendors on the property, rather than having everyone bring their own policy, said Paul Healy of Aon Risk Solutions. Insurers also typically want coverage from the time a project is zero percent complete to 100% complete, Healy said.

Some projects are also trying expedited dispute resolution, which can get issues resolved between 30 and 60 days, Healy said.

Safety culture of the companies involved should also be evaluated in the early stages said E3 Consulting President and CEO Paul Plath. The industry average for reported lost-time accidents is 2.1 per 1,000 workers, Plath said.

“How does the operator adopt the best practices in the industry,” Plath said.

Insurers will try to figure out what is a predictable loss for a planned project, said Daniel Mitas of HDR. Of course, every project is different, Mitas said.

Mitas explained that the owners engineer usually work with owners to ensure that a project can pass muster both technically and regulatory.

  

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.