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What it takes to put a renewable greenfield energy project together
There are four main elements required to put together a renewable greenfield energy project:
First, it requires an endowment of nature that permits the generation of energy, namely a location that is either particularly windy, sunny or that has geothermal power, etc. Precise measurements must be made and documented, usually over a protracted period of time, to show that there is a consistent and sustainable source of energy.
Second, it requires a plant using one or more technologies, that converts the energy into electricity, heat, or another other source of energy that may be used by one or more end users.
Third, it requires a connection to the electricity grid or to the user(s). While some installations might be “captive” (e.g. a factory might create its own energy source), more often than not, there will be an off-take agreement, which sets out the terms and conditions of the energy purchases on an arms-length basis. This is often an off-take agreement for selling electricity onto the grid.
Fourth, it often requires a subsidy to be commercially viable. This may be in the form of a high purchase price (e.g. when an electricity distributor purchases electricity for the grid).
Finding investors will usually require a business plan which sets out the above information, calculates cash flows and financial performance (e.g. payback period, internal return on investment, etc.)
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Why renewable energy has been all the rage
The European Union, as well as various governments, have established aggressive targets with respect to renewable energy. For example, the European Union has set an objective of obtaining 20 percent of its energy requirements from renewable sources by the year 2020. This creates huge impetus for new projects, usually backed by EU or government funds or subsidies.
Incumbent electricity providers will often pay a substantial premium for renewable energy projects, as it bolsters their green credentials and is considered “sexy”.
Entrepreneurs respond to the signals given by governments. In Spain, for example, the private sector has responded so overwhelmingly to government incentives to install wind generation capacity, that the windier parts of the country are carpeted by windmills, to the point where the government’s budget is under strain to honour its long-term commitment to subsidize the wind generation sector.
For the entrepreneur, bringing a project into operation is often an opportunity to create serious wealth. The entrepreneur need not even build out the project (which often requires many millions of euro in investment). There is a ready market not just for built renewable projects, but also for ready-to-build projects, where the feasibility of the project has been established and all permits are in place.
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Why greenfield projects are so challenging
There are challenges at each stage of the development process. The entrepreneur must invest into studies that establish the feasibility of the project (e.g. to determine that there is sufficient and sustainable wind at a particular location). The energy source may not materialize, as predicted in the study (e.g. less wind than predicted). The entrepreneur must also purchase or tie-up the land on which the project will be located (e.g. for construction of the windmills). He or she must invest into obtaining the myriad of permits required to build the project. There may be a technological risk associated with the technology used for generating energy. Often there is an off-take agreement to negotiate. Incumbents have often been resistant to negotiate agreements for connecting to the grid—renewable energy makes their life more complex and costly. There may also be a cost involved in building transmission wires to the grid, as well as connecting to the grid. If the entrepreneur stumbles on any single permit or other aspect of the project, total investment in the project may be lost. In other words, there is substantial risk.
Another challenge is that governments have discovered that they wield considerable power in issuing permits. The issuance of permits decides who will be the winners and losers. Governments (including their various agencies and bodies) have been known to favour their friends, or to use the granting of permits to extract commitments for campaign financing, or to put it bluntly, the power of issuing permits also creates an opportunity for blatant corruption.
There are hundreds, if not thousands of renewable energy projects to be developed being shopped throughout Central Europe today. Due to the aforementioned risks, probably not more than a fraction of these will ever be built.
