Why do developers and engineers need to understand project finance models? Part 2

Anyone making project development, design and investment decisions must understand models to make smart choices and spend their time wisely.

Our EPC contractor quit on us four days before financial close.

It’s a story I tell often during our Renewable Energy Project Finance Modelling courses. And yes, it really did happen.

Monday before a Friday close. An unexpected phone call. Sudden panic.

What do you do about something you never could have predicted?

Let’s consider the options.

Meeting, choosing, and negotiating a contract with a new EPC would take weeks, maybe months. With a PPA in-service deadline looming on the horizon – and costly delay penalties if we didn’t meet it – that was time we didn’t have.

Alternatively, we could ask an EPC that we already knew to step into the existing contract. But with less than a week to sign and mobilise, any new EPC would barely have time to read the contract, let alone negotiate anything in it. Surely even the friendliest of contractors would require significant change order flexibility to do that. So much for our fixed construction price.

Neither option was good, but we had to pick one.

The math seemed simple. Which was likely to cost more: months of liquidated damages, or unknown quantities of change orders? At least we could estimate the LDs – that was the choice, right?

Or was it? Change orders might be costly, but at least the project would be built and start operating on time. If we missed our COD deadline under the PPA, we’d not only start to pay LDs, but we’d also effectively shorter our PPA tenor and lose contracted revenue under that contract. We would incur additional site lease costs during construction. Operational contracts like O&M and asset management were signed and set to start regardless of our COD date. Plus, pushing back the construction timeline risked work dragging into winter months when conditions might be tricky.

Suddenly, the math wasn’t so simple after all.

The only way to make the right choice was to turn to our financial model. With the flexibility to run sensitivities on any number of inputs, including construction costs and timing delays, we were able to evaluate the true costs and risks of pushing back the project’s clock. After fully considering all the pieces, we realised that the change order risk was likely to cost us less after all.

Fast-forward a few months: the project was built on-time and just ever-so-slightly over-budget, with financing successfully closed. Not bad.

Hopefully your EPC will never leave you at the altar, but no project succeeds without overcoming its share of hiccups and hurdles. Decision-makers from executives to engineers to developers need to understand how to use and understand financial models if they hope to make the right choices when adversity strikes.

PIvotal180 Training 

Pivotal180’s project finance modelling courses are designed to familiarise anyone from analysts to the C-suite with the knowledge and skills to build, analyse and communicate clearly about project finance models:

• Renewable Energy Project Finance Modelling
• Intro to Project Finance Modelling

Course participants will learn how risk is allocated between lenders and sponsors, understand the structure and drivers of project finance transactions, and gain the necessary skills to run and evaluate operational or financing scenarios required to identify the most substantial risks and opportunities for any deal.

Find all of our upcoming and available Australia and APAC courses, including Advanced Debt and Battery Storage programmes, HERE. Contact [email protected] for more info and pricing.

Come model with us!