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Risk Management

Risk Management

Manage the Risks of Renewable Energy and Resilient Water and Mitigate those of Business-as-Usual Procurement

A major hurdle in the renewable energy and resilient water procurement process is obtaining sign-off from risk-averse economic decision makers, who often consider technologies such as wind power, solar power, and water resiliency solutions to be inherently more risky than traditional energy and water sources.

Acknowledging that there is risk inherent to any large-scale operation changes, it is critical to understand that business-as-usual procurement is inherently risky from both a price and resiliency standpoint. Procuring renewable energy and water can help mitigate these existing risks.

Implementing an expertly managed renewable energy portfolio allows electricity end-users to lock in long-term, fixed price contract(s), ultimately reducing risk as compared to business-as-usual procurement. Similarly, water resiliency projects reduce the financial and operational risks associated with water supply and demand. To achieve these results for our clients, CFR leverages sophisticated industry knowledge along with available market data to analyze trends, generate forecasts, and ultimately ensure that each client’s solution(s) meets pre-determined risk-return standards.

Risk identification and mitigation is a constant thread through each client engagement. Our activities during each stage include:

During strategy

Strategy:

Assess the client’s business-as-usual (BAU) energy or water supply to identify existing risks, understand the client’s desired risk-return profile and develop a potential portfolio of renewable energy or water solutions that best addresses them.

During implementation

Implementation:

Conduct in-depth financial, technical and market risk analysis including supply and demand modeling, transmission and congestion study assessment and pressure tests of assumptions via probabilistic and sensitivity analyses. Evaluate non-price factors such as developer and financial counterparty track record and support contract negotiations, ensuring clients receive the best value deal and no unforeseen development setbacks occur.

during optimization

Optimization:

Monitor ongoing project performance and take actions to reduce financial risk and volatility.

Mitigating Risk with Renewable Energy

When considering the benefits of Large Scale Renewable Energy (LSRE) solutions, risk mitigation is a key component of the value proposition. But what does it actually mean?
The most obvious reference is to manage future price risk associated with energy procurement.

The cost of electricity for commercial and industrial consumers over the last 40 years, with data from the Bureau of Labor Statistics has grown 3.4% and 4.1% per year respectively. While price growth has slowed over the past few years, this rising trend is likely to resume.

Long Term Pricing Risk

By hedging against future price growth with an attractive price from an LSRE project now, organizations can lock in a price and realize significant long term upside when the market rebounds.

Short Term Pricing Risk

Organizations can benefit in the short term, too, as cost predictability from an LSRE project serves to mitigate daily and short term volatility in energy markets.

Other Cost Reductions

Energy costs are not the only component of your electric bill that LSRE can address, however. Depending on where a renewable project is located, it may receive capacity revenue, which is paid to electricity generators as a way to ensure future demand can be adequately met.

If contractually arranged, as off-taker from a LSRE project, you will receive and be able to monetize its capacity value. This stream of revenue can then help offset demand charges and hedge capacity charges on your electric bills now and into the future. In the event that carbon pricing (like recently announced to be extended to all provinces in Canada) is implemented in the U.S., organizations stand to save considerably on compliance costs by switching all or some of their electric load to a renewable source.

FaQ

Wouldn't it be easier to access large scale renewables from my local utility or power marketer?

Utilities’ and power marketers’ missions, customer orientation and incentives are different than CFR’s – their primary focus is on earning a return on physical assets, protecting their legacy supply positions, and/or maximizing margin on resold power. This makes it extremely difficult, if not impossible, for them to match CFR’s customer-first value proposition. We focus on maximizing savings and minimizing risks, and helping customers establish solutions that capture as much of the value created as possible.

Who else does what CFR offers?

Energy consultants and brokers are most often mentioned as organizations that offer CFR-like services. However, when you look behind the curtain, they are missing one or more of the elements that make CFR’s client service offering distinctive.

CFR’s values, offerings and its business model have been purposely designed to achieve a distinctive mission: Help large end-users achieve their energy aspirations with tailored, economically attractive renewable supply solutions that produce the benefits of ownership without the hassle. While consultants can try to do what we do, they generally don’t have the breadth or depth of experience to implement solutions nor the tools and skills required to deliver breakthrough results.

For brokers, their primary focus is on closing deals–any deal–and getting their commission with one eye already on the next deal. With CFR, you get a knowledgeable and experienced partner who will work with you every step of the way. We put your interests first from strategy through establishing all of the mechanisms required to deliver reliable low-cost power over the life of the solution contract.

Why work with CFR when I could pursue the same goals on my own?

Most organizations view energy supply development and management as a procurement function outside their core business focus. CFR is set up to deliver economically attractive solutions in an efficient and effective way with the right capabilities (e.g., proven approaches, tools, skills, industry relationships and access) required to deliver on the improvement expectations discussed at the outset of an engagement.

In addition, CFR also brings the benefits of being tapped into the larger renewables industry on an ongoing basis and thus having extensive and current knowledge of suppliers, lenders, investors and other players in the industry that a company would not want to replicate on its own. Finally, a key value add is securing a long-term locked-in contract that doesn’t vary over time. Building an internal team of experienced professionals to execute a custom and complex 20-25 year project generally doesn’t make economic sense.

Can I trust CFR to look out for my interests?

Like our name suggests, CFR was built from the ground up to put the interest of our customers first. We believe that a singular focus on delighting customers and adding value well beyond what they could achieve on their own – or with others – is the key to also making CFR successful. Our mission and values were patterned after leading professional service firms that successfully built high-impact long-term relationships, and our incentives ensure we focus on maximizing value by being tied primarily to a successful project that delivers significant cost savings and risk mitigation.

All income streams to CFR are discussed and agreed at the outset of every engagement. We have no financial interests or ties in any partner company, project or technology. We are agnostic on the components of any solution, as long as they work for you. In addition to working for the customer and sitting on your side of the table, our fees are primarily tied to project success to align our incentives.

Why now?

Acting sooner rather than later will likely produce better outcomes. Current market conditions make the cost of many large scale renewables lower today than they will be as the economy rebounds and federal tax incentives expire.

In addition, as energy costs go up with increased economic activity, the cost savings potential of CFR projects also improve. We complete robust economic analysis, including sensitivities for a broad range of future outcomes, to help customers understand the risks and rewards of each potential solution. This builds confidence to move forward.

Who owns the renewable generating capacity?

CFR works with each customer to explore a wide range of structural options, including project ownership. Ultimately, the customer decides on the structure that makes the most sense for them. For some, this means entering into a power purchase agreement (PPA), where the project developer or a third party investor owns the asset. For others, they are attracted to additional financial and operational control that comes with ownership.

Either way, CFR minimizes the hassle of pursuing projects so that the customer can continue focusing on its core business. Customers contract for the amount of generation (MWh) that meets their needs over the life of the project and receive the operational and economic benefits of the underlying assets.

What operational risks may alter the expected value from the solution?

The answer to this depends on the contract structured and negotiated for the client. Most CFR clients are interested in entering into power purchase agreements (PPAs) where ownership rests with someone else. In this case, the project developer/owner is paid only when the renewable asset is generating power, which means the lion’s share of operating risk for the asset resides with them.

To mitigate the risk of variable supply to the customer, CFR establishes mechanisms that allow the customer’s total power needs to be met at least at the same level of reliability experienced today and at a lower overall price risk. For customers who decide to own the project, the capacity factor of the generating assets (i.e., actual MWh output relative to theoretical maximum) is the biggest risk factor. CFR makes conservative operating assumptions and ensures they’re transparent to customers. Depending on risk tolerance, we can also deploy strategies that help mitigate operational risks.

Won't some of CFR's smaller, inside the fence options be uneconomic?

CFR’s mission is focused on identifying and pursuing value-creating projects that move the needle for the customer and the renewable energy industry. In general, this means we shy away from smaller projects that have less scale and higher costs per unit of electricity produced and search for larger ones that can create more value for customers.

What happens if CFR changes hands or goes out of business sometime during the contract period?

Since CFR does not take ownership interests in projects or become the power seller unless the customer requests it, the long-term focus should be on the wherewithal of the renewable energy supplier. CFR performs extensive vetting of project finalists to help inform the customer’s decision and also negotiates strong credit backing as appropriate.

Typically, these are large organizations with many years of experience who make good long-term partners. If the contracted supplier goes out of business or is acquired, the underlying physical assets also have a long expected life and the customer retains their interests and rights to those assets for the agreed duration of the project. If CFR is contracted to support the customer’s ongoing interests in the project, our operational incentives are designed to maximize the benefits of those assets over the life of the contract and would be contractually assumed by any CFR successor.

Can I step away from the contract during its long-term time frame?

Yes, with some limitations. The contract that CFR establishes for each customer provides a long-term commitment on a specified amount of physical generating capacity. These contracts typically include a provision for the customer to buy out the project (if it is accessed through a PPA) and immediately resell it to another customer at a fair market value price. In addition, these contracts can typically be valued and assigned to other qualified purchasers at any point during the duration of the contract. Finally, we anticipate that the liquidity of these contracts will increase over time as more end-users become aware of the benefits of making long-term commitments to renewables.

How long will it take before my renewable power supply becomes operational?

Assuming that the customer prefers securing new renewable solutions, initial strategy development through contracting and commercial operation can take two to three years to complete. This schedule can be streamlined, depending on the renewable technology selected and how far along the site is in the development process prior to the customer becoming involved. In many cases we can also shorten the normal development cycle through our negotiations with developers. For customers who are less interested in having new capacity built and are open to already operating projects, the time frame can be reduced to months rather than a year or more.

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