Technical Due Diligence Assessment and Bayesian Belief Networks Methodology for Wind Power Projects

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TECHNICAL DUE DILIGENCE ASSESSMENT AND BAYESIAN BELIEF NETWORKS METHODOLOGY FOR

WIND POWER PROJECTS A Thesis

by

BIBHASH DAS

Submitted to the Office of Graduate Studies of Uppsala University Campus Gotland

in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE IN WIND POWER PROJECT

MANAGEMENT Supervisor: 1. Assoc. Prof. Bahri Uzunoglu 2. Mr. Frank Roeloffzen Examiner: Prof. Jens Sørensen

Master of Science in Wind Power Project Management, Department of Earth Sciences,

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TECHNICAL DUE DILIGENCE ASSESSMENT AND BAYESIAN BELIEF NETWORKS METHODOLOGY FOR

WIND POWER PROJECTS A Thesis

by

BIBHASH DAS

Submitted to the Office of Graduate Studies of Uppsala University Campus Gotland

in partial fulfillment of the requirements for the degree of

MASTER OF SCIENCE IN WIND POWER PROJECT MANAGEMENT

Supervisor: 1. Assoc. Prof. Bahri Uzunoglu 2. Mr. Frank Roeloffzen Examiner: Prof. Jens Sørensen

SEPTEMBER 2013

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ABSTRACT

A Technical Due Diligence (TDD) investigation is an important step in the process of obtaining financing, or in mergers and acquisitions, for a wind power project. The investigation, the scope of which varies depending on the stage and nature of the project, involves reviewing important documentation relating to different aspects of the project, assessing potential risks in terms of the quality of the information available and suggesting mitigation or other risk management measures where required.

A TDD assessment can greatly benefit from increased objectivity in terms of the reviewed aspects as it enables a sharper focus on the important risk elements and also provides a better appreciation of the investigated parameters. This master’s thesis has been an attempt to introduce more objectivity in the technical due diligence process followed at the host company. Thereafter, a points-based scoring system was devised to quantify the answered questions. The different aspects under investigation have a complex interrelationship and the resulting risks can be viewed as an outcome of a causal framework.

To identify this causal framework the concept of Bayesian Belief Networks has been assessed. The resulting Bayesian Networks can be considered to provide a holistic framework for risk analysis within the TDD assessment process. The importance of accurate analysis of likelihood information for accurate analysis of Bayesian analysis has been identified. The statistical data set for the right framework needs to be generated to have the right correct setting for Bayesian analysis in the future studies.

The objectiveness of the TDD process can be further enhanced by taking into consideration the capability of the investing body to handle the identified risks and also benchmarking risky aspects with industry standards or historical precedence.

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DEDICATION

This thesis is dedicated to the following people/organizations:

1. To the Swedish Institute which provided an SI Study Scholarship that sponsored this Master’s programme.

2. To Mr. Eric Kamphues, Director of Mecal Independent eXperts (IX), B.V., The Netherlands, for giving me the opportunity to pursue this thesis with his organization.

3. To my thesis supervisors: Dr. Bahri Uzunoglu (Assoc. Professor, Uppsala University Gotland Campus) and Mr. Frank Roeloffzen (Project Manager, Mecal IX) for providing invaluable insights, support and guidance during the thesis period.

4. To all faculty members and fellow classmates of the M.Sc. in Wind Power Project Management Programme at Uppsala University Gotland Campus, for having provided invaluable knowledge and support during the past one year.

5. And finally, to my family for always being there and providing much needed emotional support.

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NOMENCLATURE

AEP : Annual Energy Production BBN : Bayesian Belief Networks CAPEX: Capital Expenditure

DD : Due Diligence

EPC : Engineering, Procurement & Construction FEED : Front End Engineering & Design

IRR : Internal Rate of Return

kW : kilowatt

kWh : kilowatt-hour

LCOE : Levelized Cost of Energy

MW : Megawatt

MWh : Megawatt-hour

NPT : Node Probability table O&M : Operation and Maintenance OPEX : Operational Expenses TDD : Technical Due Diligence.

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Chapter 1: Introduction

Technical Due Diligence (TDD) assessment is an important requirement for evaluating the suitability of a technology driven project or organization to receive investment from (or in mergers and acquisitions by) external funding sources. For a sound TDD assessment, the organizational process and assets have to be carefully scrutinized and evaluated. This evaluation includes identifying risks in the course of the investigation. These identified risks can be self-evident or implicit. However, they need to be quantified to identify their level of severity and possible ramifications.

Mecal Independent eXperts (IX) B.V., henceforth referred to as the host company, performs TDD investigations as an independent entity on behalf of investors on target wind power projects - both onshore and offshore. The TDD assessment process involves reviewing available documentation, performance records and data collected from meetings and interviews at the target wind farm within the broad areas of

 Project Management

 Permits Leases & Agreements

 Wind Resources

 Turbine

 Foundation & Civil Works

 Electrical

 Logistics

 Capital Expenditure (CAPEX)

 Operation & Maintenance (O&M) Strategy, and

 Operating Expenses (OPEX)

The reviewed documentation are evaluated on the basis of the level of information contained, identifying areas of potential risk and assessing the level of impact these risk items have on the project. The approach adopted is largely subjective in nature, wherein, the risks are categorized as High, Medium or Low based on expert judgment of the TDD team.

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1.1 Need for an objective methodology

The current approach for TDD assessment at the host company is quite extensive and detailed. Most of the reports cover the key issues thoroughly enough to get a comprehensive overview of the project specifics, their status and quality of documented information. However, from the point of view of an investor or the project manager, it is essential that the TDD assessment should focus on the areas that pose the greatest risk in terms of financial value. These risks, if managed well, may enable achieving of high profits.

However, if they are not managed well, they could result in severe financial losses and project credibility downfall.

It has been felt on an organizational level to improve the TDD assessment approach by reviewing the TDD framework. There are four drivers behind this need within the host company, which include:

 A Continuous Quality Improvement strategy

 Bettering client presentations methods

 Having a basis for objectively comparing projects, and

 Improving efficiency in the TDD assessment process 1.1.1 Problem Statement

The need for a model or framework to evaluate TDD objectively has formed the basis for this Master’s thesis. The Problem Statement of the thesis is, therefore, defined as follows:

1.2 Thesis Structure

The thesis is structured into five separate areas, which form Chapters 2 to 6.

To get an understanding of the topic of technical due diligence and identify methods of project risk management, an extensive literature review was made. The findings of the literature review are presented in Chapter 2.

A proposed methodology for objective assessment of technical due diligence of wind power projects - both onshore and offshore and across all stages - taking into account qualitative and quantitative risk analysis techniques and culminating in a holistic framework

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In Chapter 3, risks that apply to renewable energy projects across different stages of development and also mitigation strategies that are adopted to tackle these risks are presented. The list of risks is sourced exclusively from information available in the public domain.

The next task was to review the TDD assessment process at the host company. Several previous project reports formed the basis for this activity and a comprehensive list of questions was assimilated that represents the TDD investigation. Thereafter, a methodology was developed to quantify these questions, in the form of a points based scoring method. This methodology is presented in Chapter 4

Chapter 5 presents an advanced risk assessment method called Bayesian Belief Networks to illustrate the causal relationships between different focus areas pertaining to wind resources, capital expenditure, operating expenses and the project management Iron triangle.

In Chapter 6, possible theoretical improvements that could be made to further refine the TDD assessment framework are proposed. These proposed improvements can form the basis for further research.

Finally, with Chapter 7, the thesis concludes.

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Chapter 2: Technical Due Diligence

Due Diligence (DD) is a standard term used to refer to the process of investigating and evaluating a new business or investment opportunity. The key aspects of a DD process include¹:

i. What: DD is an investigation of all relevant aspects for investment or business acquisition- past, present and foreseeable future- of a target company or asset.

ii. Why: DD is performed to investigate the following:

 Is the business or asset actually performing as expected or is apparent?

 Are there issues that may potentially lead to significant gains or losses in future?

 Can the assets be valued to evaluate their usefulness, relevance and other associated legal and financial aspects (warranties, concessions etc.)?

 Ultimately it needs to be determined whether a project is worth investing in- whether it will be a worthwhile albeit risky venture, whether it meets the investing criteria of the investor or whether the business is headed in the right direction given the current state of affairs.

iii. Who: DD is usually conducted by third-party contractors specialized in this field. Sometimes, projects funded on balance sheet of an organization are evaluated by themselves, unless at some point external funding is required.

iv. When: DD is generally conducted when the investing body and the target business have agreed in principle for a deal but investigations are needed before signing a contract. This could happen at any stage in a project’s lifecycle.

v. How: At the very outset, a checklist is created by the DD team which includes lists of necessary information and key questions that need to be answered. The DD team then conducts site visits, evaluates all relevant

1 www.astutediligence.com

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business documents and conducts interviews with key personnel for clarifications and additional information. Often, the accumulated information is tested with market precedence and standards, which might involve additional information sources from key external (market) sources like customers, suppliers, industry experts, trade organizations, market research firms, etc.

vi. Scope: The scope of due diligence is dependent on many key factors like:

 Past experiences

 Size of the investment

 Success potential

 Risk tolerance level

 Time constraints

 Cost factors, and

 Resource availability, among others.

However, the DD process should be prioritized, conclusive and conducted expeditiously so that while its importance is being preserved, neither too much time and resources are utilized nor is there a possibility of financing getting delayed or cancelled due to inconclusive or doubtful evaluation. This calls for a limited yet all-encompassing scope of work for the DD team, the output of which is also efficient and implicitly actionable.

vii. Time: This varies depending on the scope of the DD assessment.

However, the time allotted to the DD effort should be optimum keeping in mind the urgency of the funding and project deliverables and deadlines. This calls for a judicious distribution of efforts for differentinvestigations. Most critical investigations (the ones that have an impact on the project completion) should be prioritized over others so that the project workflow does not get delayed due to the DD process.

viii. Confidentiality: Confidentiality should be maintained at all times so that key information of the target business does not get leaked out to external agents other than those involved in the DD process. Otherwise, this could result in serious legal or market-related ramifications.

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improves the latter’s success rate. Also, key issues that may have a bearing on the business’s fortunes may be identified to the benefit of the investor and the project owner/manager alike. Besides, a thorough DD improves the likelihood that a project will not be subject to crippling legal hassles in the course of time. Hence, it can be said that the outcomes of a DD process has implications that go beyond the initial investment considerations.

Due Diligence

What Investigation for investement soundness

Why Risky venture? If so, profitable or loss making

Who Usually third-party investigators When Any stage in project when

financing is required

How

Checklists creation, document evaluation, legal, market and standards validation

Scope

Limited but Adequate Time

Confidentiality To be maintained throughout

Benefits

Identify risks, improve success rate, reduce legal and financial hassles

Table 1: Due Diligence

2.1 Technical Due Diligence

Technical Due Diligence is the due diligence applied to technology driven businesses or organizations. Most technology organizations have a process driven set up. This can be considered as the technical system of the business.

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TDD involves analysis of this system and evaluating risks from the system analysis. So, essentially, TDD consists of the following steps²:

i. Technical Systems Analysis

 Determine the validity and market relevance of the technology used

 Determine validity of the operational process proposed in the business plan

 Determine status of relevant technologies used by existing and potential competitors

 Determine marketing and sales methods to be used to gain market penetration

 Determine pertinent legal issues like ownership of technology, facilities, marketing aids, permits, etc.

ii. Technical Risk Analysis

 Create an operational model: This is done based on the results and identified inter-relationships between different aspects from the previous stage.

 Create a pro forma: A pro forma is a set of criteria that define the minimum conformance criteria of a set of data to established standards. A pro forma should be created for the DD investigation that captures its essence in a quantifiable format.

 Evaluate the consequences of the pro forma: This essentially consists of the methodology to quantify the issues captured in the pro forma.

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Fig 1: Technical Due Diligence

An alternative to Technical Due Diligence is Technology Due Diligence, which involves evaluating key aspects pertaining to the defining technology (instead of the technical process) of a project or organization. Technology Due Diligence involves looking into the aspects highlighted in the table below³:

Technology Due Diligence

Right technology/market trajectory

The technology works?

The technology is scalable?

The technology is secure?

The technology is part of a larger trend?

Right infrastructure The technology adoption should require relatively little infrastructure modification Manageable within budget The technology costs should be acceptable

given the budget of the project

Have quantitative impacts

The impact of the technology on the project should be quantifiable. E.g. % change in performance output

3 Andriole, S.J., Technology Due Diligence: Best Practices for Chief Information Officers, Venture Capitalists, and Technology Vendors, IGI Global, 2009

TDD

Technical Systems Analysis - Technology market relevance + validity - Operational process validity

- Competing technologies - Market strategy

- Legal issues

Technical Risk Analysis - Create operational model from TSA - Create pro-forma

- Quantify pro-forma

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Brings no fundamental changes

The technology should work within the existing process of the organization without bringing about fundamental changes

Represent end-to-end solutions

The technology should provide an integrated set of solutions that solve problems across as many project verticals as possible

Have horizontal and vertical strategies

The technology should be horizontally and vertically flexible, adaptable and extensive Have high industry awareness or recognition

Have the right technology development, marketing and channel alliances and partnerships

Table 2: Technology Due Diligence

2.2 Project Risk Management

Perhaps the most important aspect of a technical due diligence assessment is determining all possible risks in a project and evaluating whether these risks can be managed. The Project Management Institute’s A Guide to the Project Management Body of Knowledge (PMBOK)⁴ defines risk management as

“The systematic process of identifying, analyzing, and responding to project risk. It includes maximizing the probability and consequences of positive events and minimizing the probability and consequences of adverse events to project objectives.”

The Project Risk Analysis and Management (PRAM)⁵ guide from the Association of Project Managers describes risk management as using the results of a risk analysis to take decisions that reduce risks where

4 PMI, A Guide to the Project Management Body of Knowledge, Project Management Institute, Inc., 2000

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advantageous and monitoring and managing the risks that remain. PRAM also highlights that risk management actually begins after a qualitative risk analysis is done and continues throughout the entire project lifecycle.

A project risk is usually an uncertain event or condition that occurs in the future and may affect scope, schedule, cost, performance and quality of a project. While the word risk surely conjures up events with negative implications, it is to be borne in mind that in project management terms, a risk can also be an event or occurrence with positive implications. For example, changes in national or regional policies may affect a project in either accelerating the realization of the project objectives or delaying (or even preventing) the same. But the policy change is something that may occur in the future and the nature of it is not known. Hence, it is an uncertain event with an impact on the project objectives and can be considered a risk.

Risks could be categorized into many different types. Some generic risk categories are mentioned in Table 3.⁶

Risk Category Example

Technological and Operational Lack of coordination, design flaws, quality issues

Financial and Economic

Changes in inflation or interest rates, changes in prices of raw materials and changes in exchange rates

Procurement and Contractual Market competition for resources, contractor reliability

Political Political instability, policy revisions, bureaucratic hurdles

Environmental Adverse weather conditions, pollution Social Cultural impacts, population displacements Regulatory and Legal Regulatory differences across countries,

litigation risks

Safety Natural disasters, security breaches Delay Project constraints, third-party delays

Table 3: Risk Categories

6 Murray, S.L., Grantham K., Damle, S.B. (2011) Development of a Generic Risk Matrix to Manage Project Risks. Journal of Industrial and Systems Engineering, 5(1):35-51

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The PMBOK further outlines several key processes in project risk management. These include the following:

i. Risk Management Planning

 Determining scope, costs, schedule, communications, responsibilities and other organizational factors

 Preparing a risk management plan describing how risk identification, qualitative and quantitative analysis, response planning, monitoring and control will be structured and performed during the project life cycle.

ii. Risk Identification

 This involves which risks may affect the project and documenting their characteristics. This is generally done through documentation reviews, information gathering, checklists, assumptions and diagrammatical representations. Some standard methods include Delphi Analysis, HAZOP (Hazards and Operability) Studies, Fault Trees, Event Tree logic diagrams and Failure Mode and Effect Analyses (FEMA).

 Participants could include project team, risk management team, subject matter experts, end users and other stakeholders.

iii. Qualitative Risk Analysis

 In this stage, risks are prioritized for further analysis or action by assessing and combining their probability of occurrence and impact, timeframe for response and the associated risk tolerance based on project cost, schedule, scope and quality.

 The outcome is a probability impact matrix that displays the probability of occurrence and level of impact of different risk items.

iv. Quantitative Risk Analysis

 This involves using techniques like Monte Carlo simulation and decision analysis to numerically analyze the effect of prioritized

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 The outcomes are a prioritized list of quantified risks, probabilistic analysis of the project in terms of cost and time objectives and trends in quantitative risk analysis results.

v. Risk Response Planning

 This is the process of developing options and determining actions to enhance opportunities and reduce threats to project objectives. It involves removing, avoiding, reducing, transferring or retaining risks based on findings of the risk analyses.

 A risk response plan is prepared to take into account strategies to deal with the risks, their ownership, responsibilities, contingencies and residual and secondary risks.

 The PRAM guide describes risk responses as either immediate (e.g.

alteration to a project plan) or contingency (e.g. provisions made in project plan to avert negative impacts from risk items in future).

vi. Risk Monitoring

 This involves implementing the risk response plans, tracking identified risks, monitoring residual risks, identifying new risks and maintaining and updating a comprehensive risk database

 Variance and trend analyses can be used for the purpose. Also a cross-impact analysis could be used to find out interaction between different risks, which can then be classified as proactive, interactive, independent or reactive.

Finally, clear communication and reporting at all stages is essential for successful project risk management.

2.2.1 Qualitative Risk Analysis

Qualitative risk analysis is carried out in general to identify risks with low, moderate or high significance for a given project and prepare information for subsequent stages of a risk assessment process.⁷

7 Korombel, A., Tworek, P. (2011) Qualitative Risk Analysis as a stage of risk management in investment projects: advantages and disadvantages of selected methods – theoretical approach. Ad-Alta: Journal of interdisciplinary Research, 01(02): Start page:51

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One of the most common approaches to Qualitative Risk Assessment is the Probability Impact (or P-I) Matrix. After risks have been identified, probabilities of occurrence of these risks and severity of their impacts are determined based on available information, historical precedence and expert judgment. A combined value obtained by multiplying the probability and the impact values gives a total risk value.

A matrix can be obtained by arranging the probabilities horizontally and the impacts vertically, whereby, the highest risk values appear on the top right corner (or red zone). The risks in this red zone are prioritized and are further analyzed.

Fig 2: P-I Matrix⁸

While P-I Matrices are useful in prioritizing different risks, they suffer from some fundamental flaws like⁹:

 Risks with low probability and high impact may end up being given equal or lower priority than risks with high probability but low impact.

 Root-causes, dependencies and relationships between risks are ignored

 Urgency or manageability of a risk may determine its priority over other factors, which is ignored in a P-I Matrix.

8http://projectmanager.com.au/wp-content/uploads/2011/05/risk-disaster_matrix.png

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 P-I assumptions are subject to lot of uncertainty as the figures are often obtained intuitively.

Another approach to qualitative risk analysis is a causal approach that identifies the effect of different events or components of a project leading to a risk event. Two commonly used causal risk analysis tools are:

i. Fishbone (or Ishikawa) Diagrams - used to identify causes that lead to a specific event.

Fig 3: Ishikawa Diagram¹⁰

ii. Fault-Tree (FTA) Analysis - uses Boolean logic to combine a series of lower level events to arrive at a resulting event that is deemed undesirable (risky).

10https://en.wikipedia.org/wiki/File:Ishikawa_Fishbone_Diagram.svg

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Fig 4: Fault-tree Analysis¹¹

2.2.2 Risk Assessment using Decision Analysis techniques The field of decision analysis can be used to combine qualitative and quantitative risks. A few widely used approaches include:

i. Bayesian Belief Networks (BBNs)

A BBN depicts the cause-effect relationship among the most important variables in a system of interest. The representation is based on the analysts’

‘belief’ in the cause and effect pathways.¹²

The system variables are called nodes and the dependencies are represented by arrows. The relationships are strictly one-way because they represent a continuous probability distribution that reflects the relative likelihood of each value of the child node (end of arrow) conditional on every possible

11http://www.syque.com/quality_tools/toolbook/FTA/example.htm

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combination of the parent nodes (start of each arrow). Hence, a node has a probability value based on the concept that the node will be in a particular state given the states of the connecting nodes.

This conditional probability is represented with the Bayes’ theorem:

Where:

P(A) = the probability of event A

P(A/B) = the probability of event A given event B has occurred.

In a BBN, the relationships are acyclic i.e. a path transverses a variable only once.

The last node (often the resulting node), therefore, represents a conditional probability based on any available information including experimental or field results, process-based models or judgmental values of experts or stakeholders.

Fig 12: A BBN for diagnosing car performance¹³

13http://www.norsys.com/netlibrary/index.htm

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Depending on the nature of the nodes, there can be different types of Bayesian Networks. The nodes can have discrete or continuous values and can be independent of or dependent on each other. For large or complex projects, a Bayesian Network can be constructed based on the principles of Object Oriented Programming, whereby objects are defined for smaller Bayesian networks. These objects (or even classes of objects) are further arranged in a Bayesian framework leading to Object Oriented Bayesian Networks.

BBNs have found application in wide ranging studies, especially when it comes to assessing risks of large engineering projects. Sand et al. have used a Bayesian framework for risk based asset management of an electrical distribution system with a view to improve maintenance and reinvestment decisions. Lee et al. have applied BBNs to the Korean ship-building industry to identify major risks for large-scale and medium-scale ship building companies. Zhang et al. have applied BBNs to analyze safety control of complex project environments. And Wilson et al. have applied a Bayesian Network based systems modeling approach to a marine renewable energy technology to reflect the impact of a whole set of probabilistic parameters on a final parameter for the levelized energy cost (LEC), as a justification for technical factors affecting electricity production at an economically feasible cost while maximizing return on investment.

In this thesis, Bayesian Networks have been applied using a software called AgenaRisk and the application is explained in detail in Chapter 5.

ii. Influence Diagrams

A generalization of Bayesian Networks is an Influence Diagram. An influence diagram is a visual representation of the essential elements, including decisions, uncertainties, and objectives of a project and how they influence each other. Influence Diagrams contain the following nodes:

Decision Node (Rectangular) - Represents a variable that can be modified directly by the decision-maker.

Chance Node (Circular) - Represents a variable with uncertainties resulting

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Objective Node (Hexagonal) - A node which measures satisfaction with possible outcomes based on maximizing expected value or expected utility based on risk preference.

General Node - Any other deterministic node.

Fig 13: Influence Diagram¹⁴

iii. Decision Trees

A Decision tree is a complementary version of an Influence Diagram in which the set of all alternative values for a decision or chance node are displayed as branching out of those nodes. The difference with influence diagrams is that decision trees do not show dependencies between different nodes in much detail but rather focuses on possible paths or sequences. Also, the values of the nodes in a decision tree need to be discrete. Decision trees are often used in cost risk analysis of projects.

14http://www.lumina.com/technology/influence-diagrams

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Fig 14: Decision Tree¹⁵

The field of decision analysis thus provides the flexibility to combine qualitative and quantitative risks into a causal framework. This provides a more informed basis for project management decisions, especially when subjective information like expert opinion and personal judgments or beliefs of analysts are to be taken into account.

However, the dependencies between the nodes (or ‘beliefs’) need to be constructed carefully as they play a critical role in the final outcome. For this, as much expert involvement in the design of the BBN needs to be made as possible.

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Chapter 3: Technical Due Diligence of Renewable Energy Projects

Renewable Energy projects have developed rapidly across the globe over the past several years. The drivers behind their development include achieving energy security through locally available resources, meeting increasing energy demands quickly and also reducing carbon dioxide emissions from the energy sector.

However, renewable energy projects require high capital investments and profits are based on intermittent energy resources like wind, solar radiation or biomass feedstock. To promote development of renewable energy projects, increased investment is needed and that means taking into account unique risks that come with developing such projects.

This chapter first takes into account the important risks that encounter most renewable energy projects. This is then followed by identifying ways of managing the risks, which forms the core aspect of a technical due diligence assessment. Finally, a commonly applied reporting structure of a TDD assessment is discussed.

3.1 Stages of a Renewable Energy Project

A renewable energy project - be it a solar, wind, biomass or tidal power project - is developed across several distinct stages. In each of these stages, different activities pertaining to the project are undertaken. These stages can broadly be summarized into four categories:

 Feasibility

 Planning

 Construction, and

 Operation

These four stages have further sub-divisions as shown in the tables below.¹⁶

16 https://www.eolien.qc.ca/en/eolien-in-quebec/wind-farm-development-stages.html

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Stage Definition Steps Undertaken Issues Addressed

Feasibility

Pre-feasibility analysis

A low-cost assessment of various potential sites for project development.

Pre-select sites

Site Selection Prepare a simplified design for the best sites

Choose the appropriate technology. Technology Selection Prepare preliminary cost estimates and draw up

financial summaries for the best sites Cost estimations Draft a pre-feasibility report.

Feasibility analysis Analysis is conducted in the field to confirm the preliminary information

Inspect the site

Site inspection Conduct an informal public consultation

Assess the site's energy generation potential in

a detailed and precise manner Resource Assessment Conduct a preliminary environmental

assessment EIA

Prepare a preliminary design for the project FEED Study Estimate costs and prepare a financial

summary Cost estimation

Draft a feasibility report Table 4: Feasibility Stage

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Planning

Development

If the conclusions drawn from the feasibility analysis are positive, the proponent decides to go ahead with project development.

Obtain permits and approvals (once proposal has

been accepted) Permits & Rights

Obtain land rights for the sites

Survey the site Surveys

Negotiate financing for the project's preliminary phases

Financing Negotiate financing for the project's development

phases

Negotiate an insurance contract Insurance Negotiate an engineering contract EPC Contract

Engineering

Planning all undertakings associated with the construction and operation of the project. The proponent chooses the sub-contractors that will be involved in the project

Choose final installation sites

EPC Design Design mechanical and electrical systems

Design civil engineering infrastructure Negotiate and conclude calls for tenders and

contracts with suppliers EPC Procurement

Plan maintenance of the project

EPC Management Plan management of the construction and

operation phases as well as the environmental monitoring and relevant activities required during those phases

Plan decommissioning Table 5: Planning Stage

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Construction

Construction

While construction is underway, the many contractors involved must be able to coordinate their work and all the equipment used.

Prepare construction and maintenance infrastructure EPC Infrastructure Perform civil engineering work

EPC Works Install machines

Install and connect electrical equipment

Commissioning

This involves verifying all the equipment and infrastructure that make up the project, and marks the beginning of the project's operation phase

Commission project Project Commissioning

Perform mechanical tests to ensure compliance with

manufacturer's specifications Mechanical tests Verify electrical and communication systems Electrical tests Restore condition of access roads and control erosion Restoration

Clean site Site cleaning

Commercial commissioning, official take-over Early use and take-over

Operation

Operation

Operation includes control, monitoring and maintenance activities that must be performed precisely to keep downtime to a minimum

Monitor daily operation Monitoring

Perform periodic maintenance Maintenance

Carry out the environmental follow-up program Environmental Compliance

Decommissioning

When the power station's activity ends, the developer must dismantle the facilities in an acceptable manner, in compliance with the agreements concluded during planning stage.

Dismantle machinery and other installations Dismantling Restore site to its original condition in

compliance with agreements concluded with

landowners and other stakeholders (ministries Restoration

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3.2 Risks involved in a Renewable Energy Project

Each of these stages has its own risks. However, the risks can be collectively categorized into six categories:

 Regulatory

 Policy

 Market/Commercial

 Financial

 Technical, and

 Legal

To identify some of the key risks that apply within these categories across different stages, extensive literature available in the public domain was reviewed and a comprehensive list of risks has been created, which is presented in Appendix I.

The risks are color coded based on their perceived risk value, which is often a combination of their likelihood of occurrence and severity of impact.

Hence, RED represents HIGH or MEDIUM-HIGH risks, ORANGE represents MEDIUM or LOW-MEDIUM risks and GREEN represents LOW risks.

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3.3 Technical Due Diligence of a Renewable Energy Project

Technical Due Diligence assessment of a renewable energy project involves an analysis of relevant project information to identify such potential risks and propose mitigation strategies if not already present.

The approach adopted in a TDD assessment can be reactive (analyzing risk mitigation strategies already in place) or proactive (suggesting/modifying risk mitigation strategies) or a combination of the two. It depends on several factors like:

 Level of information available about the project (including extent of access to the project data room)

 Scope of the TDD assessment (which may also depend on the requirements or priorities of the investor)

 Time frame and budget of the TDD assessment

 Capability of the TDD assessing body

Different issues that are commonly investigated in a Technical Due Diligence assessment are presented in Appendix II. The information is sourced exclusively from publicly available sources (mostly information available on the internet from organizational brochures and publications).

The stage in which the TDD assessment applies most is shown in the associated columns as follows:

 F - Feasibility

 P - Planning

 C - Construction

 O - Operation

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3.4 Reporting of a TDD Assessment

A TDD assessment can follow its own structure, whereby, issues relevant to particular focus areas of a project are evaluated (or presented in the final TDD assessment report) according to different project focus areas. These include:

i. Project Management: This covers aspects like-

 Soundness of the project organization, qualifications of personnel and appropriate number of staff

 Appropriateness of contractual arrangements between parties involved and the contract provisions

 Schedule of project works completion and evaluation of all possible factors that may cause delays

 Certifications and initial design considerations

ii. Permits, Leases and Agreements: This covers aspects like-

 Presence of all applicable permits or evidence of application for the same, including estimated time required to obtain them. Permits usually include environmental permits (EIA), permits for cabling and construction among others

 Lease Agreements with land owners and grid operators for usage of land and sale of electricity

 Other agreements specific to the project or the region or country

iii. Resource Assessment and Energy Yield: This covers aspects like-

 Suitability of the methods and duration of the measurements including site surveys

 Reliability of the available data

 Losses from wakes, availability constraints, electrical networks, downtimes and other possible factors

 Power Curve validation

 Accounting for all possible uncertainties

 Energy yield estimations available and calculated with appropriate software models

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iv. Technology Evaluation: This covers aspects like-

 Appropriateness of the technology used for the specific project and optimum usage capability of the available resources

 Reliability of the technology (whether it’s a proven technology) and, if new, important factory tests to prove the reliability

 Service and Warranty provisions and manufacturers’ guarantees

 Balance of Plant (BOP) evaluation, geotechnical investigations and others

 Grid Compliances and Certifications of key components

v. Logistics Evaluation: This covers aspects like-

 Contractual arrangements and agreements for a logistics hub or port

 Availability of access routes and permits for exclusive usage and temporary closure if required

 Availability of adequate transportation and installation infrastructure

vi. Capital Expenditures: This covers aspects like-

 The project financial model and its assumptions

 The different categories of capital expenditures and the appropriateness (e.g. market relevance) of their values

vii. Operation and Maintenance: This covers aspects like-

 O&M Strategy, its appropriateness (e.g. market relevance), requirements and provisions (e.g. service and warranty agreements)

 Operational Expenditures, the model used for calculations, its assumptions and reliability of inputs (e.g. availability issues, energy production estimates)

Since the host company for this thesis is specialized only in the Wind Energy industry, the issues that were covered under these different aspects were limited to one technology, viz. wind power.

In the next chapter a methodology is proposed to evaluate these issues objectively along with a points-based scoring system.