April 21, 2020

Five Tips to Maximize Renewable Energy Asset Profitability

by James Pagonis

In this current capital-intensive, competitive and global renewable energy market, keeping your asset performance highly competitive is critical to the success of your renewable energy portfolio.  

As industry margins shrink, renewable energy asset managers need to maximize the profitability of their projects. I know this sounds easier said than done. Today, I’m here to prove that wrong. I want to give you five tips that can prove maximizing profitability isn’t all that complicated.  

Let’s make this interesting. I want to set a theme first. How about: you must take a long-term view of your renewable energy assets. Smart asset managers can justify investing a bit more today to build a great project and guarantee fruitful returns later. This foresight is fundamental for the overall ROI of your project. 

Now that we’re agreed on the theme, let’s talk about the five tips to maximize the profitability of your renewable energy assets 

1. Let Your End-Goal Influence All Asset Management Decisions 

Every renewable energy project developer has various reasons for making certain decisions. Some people are building to flip at the NTP or COD stage while others are building to finance a longer-term investment. It’s imperative that your team is focused on your specific goal. 

The caveat of this post is that it’s mainly being written for asset management teams that are interested in the long term. The decisions you make at the onset—about equipment, site layout or performance assumptions—will impact your assets in, let’s say, about a decade. 

If you don’t plan to hold onto your project for that long, you probably don’t care about that decade-long outlook. However, if you do, then keep reading. 

2. Bypass Governments as The Power Source of Renewable Energy Projects 

Several years ago, government incentives had the power to make or break a market’s renewable energy capacity because they defined if a project could be profitable or not. Fast forward to today, renewable energy is now competitive enough to not let government policies define the rate of growth in this sector. 

Yes, government support is important. However, it’s about time we shed some light on the ‘invisible’ legacy restrictions in place by authorities. These thresholds sometimes act as disincentives for going green in various parts of the world.  

Take sunny Alabama, for example, where residential solar customers have to pay $5 (on top of their bill) per kilowatt produced to their utility. The cost was justified as a “capacity reservation charge,” to provide power to customers when their own panels weren’t producing any. 

This is just one example why I would argue that governments no longer need to incentivize projects. Our industry would be much happier if they focused on removing constraints instead. Let’s accept it: renewable energy developers are in a good place. They no longer need incentives from the government, they just need a level playing field

To maximize the profitability of future renewable energy assets, I would advise developers to wipe the map clean and start fresh before building new projects. They should stop using government incentives as a filter to choose which states and provinces to develop in. Instead, they should rely on long-term weather forecasts and asset performance predictions as better indicators for their next successful site. 

3. Involve Your Operations Team as Early as Possible 

The process of maximizing profitability and planning for optimal asset performance should begin as early as possible.  

It should inform decisions made about equipment. Moreover, it should affect how you plan the site layout, and the serviceability of your renewable assets. Above all, it should mean that you bring your O&M team into these early discussions.  

A surefire way to maximize renewable energy asset profitability is to tap into the wealth of insight at your organization. This means running your ideas by the team and taking their input before making any major decisions.  

While the operations team may be years away from actually managing the assets, they are uniquely experienced in maintaining and operating projects in the long term. Their perspective matters. After all, they are the ones who need to uphold promises made at the agreement or financing stages.  

It’s at this early stage that assumptions are made about the project, which in turn impact how performance is tracked. However, trust me, it’s a completely different ball game to implement these practices. It’s very common for the people who made the assumptions to be decoupled to the people who will manage them down the road.   

4. Reforecast Your Asset Performance Assumptions Frequently 

Maximizing asset profitability starts with your early assumptions about the project. If you’re making unreasonable assumptions that won’t be operationalized, your projects will be in trouble before a single panel or wind turbine gets to the site.  

Let’s say you make unrealistic assumptions about the timeline to replace equipment or the cost of O&M. Once production starts and asset performance is not where it should be, you reduce O&M expenses by another quarter to increase your margins. Suddenly, your O&M numbers are more harmful than they are helpful. 

The most successful renewable energy companies I know reforecast religiously.  

They don’t take their early assumptions at face value. Instead, they continuously ask: how is the current financial reality going to impact the future of this project? It’s an interesting idea to not have a static model that you’re measuring against—because the reality is, our entire industry is weather (and climate change) dependent. Factors vary.  

While they may have great initial assumptions that are built upon a sophisticated algorithm, the outcome won’t be exactly what they believed. So, on an ongoing basis (sometimes, every month) they reforecast. And it’s through this repeated exercise that they are better able to react to roadblocks in asset performance.

5. Invest Heavily in Project Design 

Some people see the design and development stages of a renewable energy project as a heavy investment. The way I see it, most projects actually aren’t investing ENOUGH. 

A trap that keeps people from maximizing the profitability of their projects is making money-saving decisions in these early stages. They pick a certain panel or inverter because it costs a bit less. They make their roads smaller so they can densely pack wind turbines together. To be fair, it’s pretty easy to save money when designing a project—but in the long-term, it will do you a disservice.  

What happens when the cheaper panels break down at a faster rate in a few years? How do you complete maintenance of the wind turbines if the O&M provider’s truck can’t safely access the site? What do you do if you can’t get the spare parts you need because the less-reputable company that supplied your equipment went under?  

You’ll suddenly find yourself spending more money on the project to fix things, which is far more expensive because it impacts production. The result? Asset performance won’t meet expectations and your project will be in jeopardy. 

Final Word 

Every manager and developer wants to maximize profitability. Since we consider ourselves our clients’ partners here at PowerHub, I’ll let you in on a 2-step shortcut.

The easiest way to get the most out of your projects is to design the best possible site, first and foremost. Next, keep a bird’s eye view on your OPEX – reduce it successfully and voila, you’ve streamlined your renewable energy asset portfolio.  

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