To bid or not to bid on a wind or solar project? That is the question we will cover in this series of three blog posts that will focus on the renewable energy market and how technical analysis and energy assessments can assist investors in making intelligent buying decisions. Our first post will cover the useful life of renewable assets and the importance of technical analysis when making these investment decisions.
As more and more players come into the U.S. renewables market, investors bid aggressively, often without supporting engineering analysis to validate inputs to the financial model or quantify risks to asset performance and useful life. Value may be left on the table if an asset is not evaluated from a technical standpoint. Targeted, technical due diligence provides insight that empowers investors to bid intelligently, understand residual risks, and capture upside potential.
Emphasis on Energy
The profitability of renewable energy projects is directly tied to energy output, and a range of engineering analysis is available to refine projections and quantify uncertainties in support of an acquisition bid. For development-stage projects, critical review of existing energy assessments identifies gaps and questionable assumptions, and partial energy assessments based on a subset of data can deliver a second opinion on an accelerated timeline. Expectations for operational projects can be established based on operational history, with significant improvements on overall uncertainty, and the chance to identify upside potential in availability and turbine performance. Advanced energy assessment techniques also greatly improve production estimates for proposed repowering projects by incorporating the performance of the existing project. Finally, for portfolios of assets, a more certain range of expected portfolio production can be calculated in comparison to the sum of the individual projects. Accurate production estimates are the essential starting point for understanding the range of likely project profitability; bidders will do well to employ sound, targeted technical analysis in this regard.
Useful Life, Reconsidered
Useful life of wind and solar assets is among the common levers pulled when increasing asset valuation. Wind projects originally designed for 20 years of operation are commonly assumed suitable for 25 to 30 years; and solar projects designed for 25 years of operation for up to 40 years. Although this may be defensible in certain cases, blanket assumptions are blind to real engineering risks, which may significantly impact asset performance over time. On the other hand, evaluating projects based only on their design life may neglect reasonable potential for extended life operations and therefore undervalue the asset. For both wind and solar projects, the insights on useful life provided through technical analysis can provide context for the assumptions made, establish baseline cash flow projections, enable a bidder to quantify and mitigate residual risks, and inform sensitivity cases to test the robustness of the financial model.
Wind
The useful life of wind turbines is primarily linked to the fatigue loading on turbine structural components and foundations. Turbine certification generally considers fatigue loading based on a 20-year operating life under a generic set of wind conditions. Operation beyond the certified life is often possible, but the safety margins in the turbine design are increasingly eroded, and the incremental risk of costly structural failure will increase. Similarly, modern turbine foundations are designed to a specified useful life, and older foundation designs may not have adequately considered fatigue loading. Probability of fatigue failure increases non-linearly, and the loading experienced by turbines at the same project will be highly correlated to one another, creating potential inflection points in operating costs and revenues starting with the onset of fatigue failures in later years.
Engineering analysis can quantify these risks, but also uncover opportunities. Actual conditions experienced at the project site will differ from certification assumptions, and engineering analysis can identify the resulting impacts if assumptions are more aggressive or conservative than real world conditions. An engineering analysis of turbine structural components and foundations can also provide insight into design margins and deliver greater granularity. Finally, evaluation of sensor data provides further insight into loads experienced by individual turbines, and can identify signs of impending turbine or foundation failures.
Solar
The useful life of solar PV projects is no less important than it is for wind. However, given the modular design of solar projects, their economic life is governed largely by an ongoing cost-benefit analysis. Solar projects are typically designed for 25 to 30 years of operation, and commonly hold long-term warranties on PV modules. However, warranty claims are often difficult to press, and don’t cover full replacement costs. Further, module degradation is expected to accelerate after the module design life, impacting production if not accounted for via a replacement program. Inverter replacements should also be accounted for in maintenance budgets or reserves, and inverter operating strategies may be employed to extend the useful life.
Asset owners must also consider how they will secure spare parts, either through on-site stock or through commitments from the supplier. The impact of operational loads and corrosion on racking and trackers should be evaluated, and the robustness of foundation designs checked for suitability for extended operation.
Although individual repairs to an inverter or module may be inexpensive, repeating repairs hundreds of times across a solar project site may not prove to be economically feasible. Technical evaluation of these issues can guide cost assumptions for planned module replacement, inspections, and maintenance budget for extended operation, which are crucial to asset valuation.
As this blog series continues, we will further cover the technical assessments of wind and solar energy projects. Stay tuned for the next blog which will focus on repowering wind projects and O&M costs.
Read Part II of the blog series.
Read Part III of the blog series.
Questions? Contact Ken Elser to learn more or leave a comment below.
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