Portfolio management can help hedge against challenges
Authors: Ray O’Neill and John Harney
As global pressure mounts to accelerate the build-out of renewable energy, some new challenges are starting to appear. Inflation, greenflation, supply chain issues and permitting are some of the trends that can be difficult to mitigate for portfolio owners.
As no one can predict how long these trends will continue to impact the renewables market, it’s crucial for those both developing assets and managing operating assets, albeit different challenges, to do even more to create sustainable value and reduce risk.
Developers can hedge inflation, avoid overpaying for projects by syncing M&A models with actual costs and performance of similar projects. They can also manage their portfolios better, applying techniques like earned value analysis (EVA) to risk weight decisions against expected returns.
Asset owners can focus on cash more. Investor confidence is based around cash coverage, cash forecasting and accurate timely consolidated reporting. Confidence is also built on sound cash management and compliance that prevents any surprises such as unauthorized money flows, fines or banking covenant breaches. Owners can apply technology and seek out specialist outsourced providers to enhance their capabilities, especially in a labor constrained economy. With new technology comes the ability to budget more accurately, benchmark suppliers, spot potential issues in the accounting throughout the year without an audit and drive every piece of financial data back to a contract or invoice for full traceability.
SkySpecs recently partnered with A Word About Wind to have a deeper discussion with industry leaders to get their take on the issues impacting O&M costs in European Asset Management.
Industry growing pains
We also talked with Ray O’Neill and John Harney, the founders of Fincovi, which was acquired by SkySpecs in 2021, about additional challenges facing a fast maturing renewables industry. Here are a few of the additional challenges we talked about.
Can we treat renewables like any other trading business and use the same financial management approach?
“In short, the industry does but it’s a mistake. If we compare renewables to commercial property or aviation, asset classes where the assets are housed in SPVs, highly leveraged and yield producing, we can learn a lot. Those industries went through a maturity curve from the 60s and now both are very tightly managed from a financial control and risk point of view. We’re still in the first 15 years of the renewable energy industry so we’re going to go through a similar maturity curve, adopting more efficient processes, renewable specific accounting platforms with specific renewable energy reporting capabilities and, lastly, expert outsourced providers who can get economies of scale with the benefit of lower price, lower risk and higher quality outputs.”- says Ray O’Neill, co-founder of Fincovi and Chief Operating Officer of SkySpecs.
Can the industry just adapt an existing ERP or accounting platform?
“Developers are developers, they’re not accountants. What they really enjoy doing is finding new assets and trying to develop them. They don’t want to do financial management, they want to stay specialized in one thing and they’re very good at it. This suits an outsourced model and a platform where they can light touch get the information they need. They also don’t want to get bogged down in managing lots of people and have big finance teams, nor do they want to have loads of different systems. What I think we will see going forward is more specialism in the industry. We have too many generic service providers and generic systems in the industry but to drive performance we need specialism in both. Yes, you can go to a big accounting firm and they’ll do your accounts, but they don’t do it every day of the week, they don’t do it fast enough, and they don’t have a system that does it. And the cost won’t scale, making it very, very prohibitive to apply across a big portfolio.
To further bring down the overall cost and make the whole system efficient, the digital links between players and technology in the industry also need to evolve. An industry cloud so to speak.” – Ray O’Neill
Is capital an issue or financial products?
“Based on the conversations we had at the Wind Energy Boardroom conference, it appears that most people are saying a lack of projects is one of the biggest issues. They have ample amount of cash, but they have a lack of projects.
We can’t solve that problem, but what we can do is ensure that once they do acquire the projects, they can accurately report on those projects and understand the return on their investments in those assets, and track the assets as they are moving through the pre-development and construction phases so that they can make accurate decisions on whether or not they progress with the project, kill the project, or try and off-load the project at various times.
In time, just like in commercial property and aviation we think the industry will evolve to use different types of financial products to create liquidity in the market but we are a few years away from that yet. To create liquidity a better understanding of the asset class is required, something SkySpecs is always looking to do. Understand the biggest hardest issues and solve them from the ground up.”- says John Harney, co-founder of Fincovi and Vice President of Finance Products at SkySpecs.
Know the Health of the assets in your portfolio for accurate ROI
In such a competitive market, you need to know what you’re buying and what you might be on the hook for as far as future repair costs. However, this is something that is easily overlooked or ignored when acquiring assets.
For example, when acquiring a Wind Farm, ask for the blade inspections data. Knowing how old each turbine is, what the condition of the blades are in, what major damages need repairs, knowing the general health of the farm, and using predictive maintenance technology will help you better understand the overall value of the assets, and potential costs of keeping it up and running. This data can also be helpful when negotiating purchase prices.
These are just a few of the top challenges facing the renewables market. While some of them are out of our control, we can help mitigate some of them. SkySpecs offers several options to help you understand and manage your assets as a whole. We offer autonomous drone inspections, Blade Asset Management and Fleet software to help you identify, understand, track and manage repair campaigns across your fleet, and Financial Asset Management software and services to help scale and optimize your portfolios. Whether you’re interested in outsourcing asset management, or utilizing our purpose built Horizon Finance platform to manage your portfolios, we can help. Reach out to us here to start a conversation about your specific needs