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 Once a theoretically viable opportunity has been identified, then the next challenge for any consumer considering investing in its own assets is whether to build the asset themselves or to buy a scheme from a specialist developer. The ‘make’ decision leaves you with the capital costs, construction risks and operational risks, however you retain all of the upside of the project. The ‘buy’ decision requires you to make a 10 or 20 year commitment to buying electricity on a fixed price or RPI indexed basis but removes the need for access to capital and operations and maintenance risk.
The ‘make’ decisions would be driven by the following factors: - Access to capital with a low enough hurdle rate
- Ability to enter into projects with a 5 to 7 year simple payback
- Access to internal project management resource
- Access to contractors for the build process
- Resources for ongoing operations and maintenance
- Retention of all risk and reward associated with the project
The factors that would drive a ‘buy’ decision can be summarised as: - No access to capital required
- Commitment to buy power at prices that are initially below market but that may ultimately be above market
- Sharing of rewards
- Removal of construction and operational risks
It is perfectly possible to risk manage your return on investment in these projects. This is effectively done by forward selling a proportion of the long term expected revenue to be generated now (the initial hedge ratio) so that you lock in a minimum return on investment. Depending on how the market evolves, you simply adjust the hedge ratio up or down to ensure you continue to participate in market upside whilst protecting your return on investment if prices fall.
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