Distributed Energy Resources, Industrial, Solar - October 26, 2020 - By Jay Paidipati, IBM
IBM's DER Project Risk Evaluation Framework
IBM has adopted distributed energy resources (DERs) for a variety of use cases in many of our worldwide locations and we expect to scale up our participation in such projects and programs. Our current DER use examples include:
- On-site solar in Colorado and Belgium.
- Hundreds of energy storage systems- in the form of uninterruptable power supplies (UPSs) and on-site diesel generation - across our data center fleet.
- A fuel cell at our Southbury, Connecticut facility.
- Global participation in Demand Response programs.
- Combined Heat and Power (CHP) facilities at large campuses.
In looking for frameworks to assess DER project risks, we found that articles and conference presentations on the topic focused more on financial exposure. While a project’s financial impact is very important to IBM, we need to assess a DER project’s impact on operations, the likelihood that it will get built, and to consider how external factors might impact the project. As a result, we have developed our own framework which we are sharing in the interest of exchanging best practices and benchmarking. The table below summarizes the categories of risk we assess and the questions we ask before signing contracts:
Category | Questions We Consider | Background |
Construction/Execution | Can the project partners complete the project on time and on budget? Do they have a track record of successful projects? | Schedule risk is significant, especially when working with enterprise-scale owners. We need to work with developers that have a track record of developing realistic schedules and sticking to them. |
Availability | Do the project owners have an appropriate O&M budget to maintain system availability? Do they have a good track record of maintaining high availability? | Under budgeting for O&M can help a project look economically attractive but will likely reduce availability in the long term and hurt project returns. |
Interconnection | Will interconnection costs and timeline be as expected? Will costs be too high for the project to be profitable? | Interconnection costs can be difficult to quantify. Therefore, it is important to evaluate these costs upfront to establish a clear understanding of which party will own that risk. |
Permitting | Can parties get the right permits? | Despite the experience of the developer, local municipalities can have very specific and/or unique requirements. Does the developer have a full understanding of permitting requirements? |
Contractual and Legal | Do the contract terms of the project adequately address potential risks? | When contract terms presented by the developer do not align with our expectations, reconciling them can be time-consuming |
Safety | Does the project have any safety risks? | Like many companies, IBM puts safety first and will only work with technologies that have a strong safety record. |
Financing | Can the parties obtain construction and project financing to build and run the project? | We have seen projects with very attractive returns not be able to obtain financing because the project economics were not robust enough for banks and equity providers. |
Resource | If applicable - how well-characterized are variations in the renewable energy resource (wind, hydro, geo, and solar) or how secure is supply (biomass/biogas)? | For wind and solar, we like to see at least three years of data from a high-quality data source. For other resources, we prefer a third-party study of resource quality and consistency. |
Reputation | Do any public relations or reputational risk for IBM exist in working on the project with regards to technology, counterparties, etc.? | IBM conducts itself high the highest ethical standard and has a longstanding reputation of environmental leadership. We strive to engage with like-minded and like-principled partners. |
Counter Party | How creditworthy are all the parties involved in the project? | We assess creditworthiness as part of our project due diligence. |
Technology | Have the underlying technologies been deployed for full-scale production? Will the technology become obsolete over the course of the project? | We are typically only interested in technologies that have already been commercially deployed and can respond to changes in tariffs, power market rules, etc. over the course of the project. |
Economic/Financial | Do the project's business terms create unacceptable financial risks? What if underlying power market fundamentals change? | We are cautious when it comes to taking on power market risk. |
Reliability and Power Quality | Will the project impact our power quality or reliability? | Most of IBM’s largest power loads involve data centers and we cannot compromise power quality or reliability. |
Site Operations | Will construction or operation of the project interrupt operations at a site? | It is important that all potential disruptions to our normal site operations are identified, evaluated, and planned for to ensure business continuity at our locations during construction and operations of the DER plant. |
Policy | Is the project's business case dependent upon local or national energy policies? | We operate globally and see energy policies constantly changing. If a project’s economics are dependent upon a government policy, we will assess the likelihood and impact of the policy changing. |
Regulatory | Is the project's business case dependent upon local or national regulations? Will hosting the project create new regulatory compliance requirements for IBM? | Similar to policy, we assess the likelihood and impact of regulations changing. Under certain scenarios, IBM may become a regulated entity by hosting the project, which may affect its economic feasibility and may require additional resources to ensure compliance. |
After answering these questions, we typically categorize each risk as high, medium, or low and, if we decide to pursue the project, then work to either reduce or eliminate those risks. IBM organizations involved in conducting our assessment include finance, accounting, risk, procurement, legal, facilities operations, real estate, tenant IBM organizations, and corporate environmental affairs.
In summary, this framework provides visibility into multiple aspects that may impact the success of your organization’s DER strategy and looks beyond just financial exposure. This framework represents IBM’s experience in working in the field though may be applicable to other companies to varying degrees, depending on their size, type, and location of operations. We hope this list of questions will be helpful in your pursuit of DER and help you and your organization find the best projects to invest in.
Jay Paidipati is Global Energy Manager, IBM, where he leads IBM's Global Energy Center of Excellence within Global Real Estate. which manages the company's energy usage, tracking and reporting, conservation efforts, supply, and renewable energy procurement. His team works on strategic planning, project implementation, and operations for all aspects of IBM's energy usage around the world.
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