This article was co-authored by Constantinos Peonides, Senior Vice President of Europe at Skyfri, and Casper Wuite, Senior Manager in the Compliance, Risk and Diligence practice at Kroll.
What we see, is that something as operational and technical as intelligent monitoring of the assets may have a direct impact on the fair market value of the solar asset. This connection, between a highly operational matter and the financial gain both during ownership and at exit, is a connection that not all asset owners have fully understood the significance of yet. The simple yet complex reason for this is that the solar industry is still a nascent industry and the asset class in itself has still to establish itself towards a wider investment audience. So how does one overcome this challenge?
Having the right set of data, with insights on the historical performance of operational assets as well as predictions for the future, not only on generation but the actual performance of the asset (down to individual equipment level) will make M&A much more transparent, efficient and faster, and the evaluation more reliable. Artificial intelligence and machine learning technologies need to be deployed in a much larger scale and at a much faster pace to accelerate the energy transition from fossil fuels to sustainable energy sources. Without real-time data, advanced statistical analysis and automation, managing renewable energy assets will be more complex and perhaps impossible going forward.
The need to limit climate change has accelerated the transition to clean energy—replacing fossil fuels with low-carbon energy sources, such as wind, solar and hydro power. Continuing technology advances and rapid deployment of many renewable energy technologies over the past decade have amply demonstrated its potential. In Europe alone, the European Commission has announced plans to double its renewable energy capacity over the next six years, requiring huge investments in renewable energy infrastructure.
Larger investors who have operated in traditional energy markets often have an established financial risk posture and matching internal procedures when it comes to investments in renewable energy infrastructure, while new investors’ approach is often, and understandably, less defined when it comes to due diligence. To enable investors to navigate risks related to renewable energy investments, due diligence is a central part of any investment process. But what exactly should this look like, how is it conducted and how can it help improve investment decisions?
A buyer in Europe wanted to acquire a solar power company with an operational site. The buyer instructed Kroll to verify the entity’s shareholding structure and conduct reputational due diligence on the entity, as well as the key principals associated with the entity’s operations.
After conducting discreet inquiries with well-placed sources, including solar power industry veterans, former employees and business partners of the company, Kroll ascertained that the solar power company was in financial difficulty, contrary to what the buyer was told. The company was cutting costs and requesting extensions on loans and was in the process of selling its assets. Furthermore, research identified several historic and ongoing lawsuits, posing further financial risks to the future viability of the business.
In addition to conducting integrity due diligence, the buyer conducted technical due diligence on the operational site as part of the investment process. To evaluate the past performance of the asset, the buyer needed easy access to monitoring reports to share data across its workgroups, manage contractual obligations, and identify and diagnose performance issues of the assets on the operational site. The target company did not have the correct technical data on its renewable energy assets because it did not have a proper monitoring solution.
Therefore, the data presented to the buyer was incomplete, lacking detail and relying on assumptions.
Inquiries into the reputation of the company and an evaluation of the technical data of the target company’s renewable energy assets helped this buyer determine that the risk presented was too high and that it did not want to proceed with the deal. Conducting appropriate reputational and technical due diligence up front helped the buyer avoid further risk and financial concerns and allowed it to refocus on identifying a more appropriate acquisition.
The accelerated global energy transformation has attracted many investors. As new entries in a fast-growing market, they face considerable risks. Investors in traditional energy markets have learned to conduct a thorough review of prospective acquisition targets or business partners before concluding a transaction. Ordinarily, such transactional due diligence includes a commercial, financial, integrity and legal assessment of any potential risks related to the transaction. This helps investors pay a fair price and maximize the return on investment for investors by addressing any risks beforehand.
Integrity due diligence typically focuses on understanding with whom the investor is dealing, with regulators increasingly having held the purchaser financial liable for the target’s past actions. As a result, investors more and more often commission business integrity and ESG assessments, which focus on potential integrity risks associated with the transaction. These risks are multiple and can be significant, leading to costly legal action, reputational damage or non-completion or mismanagement of the project. For example, sanctions exposure can lead to unforeseen restrictions on the operations of a renewable energy asset; bribery allegations related to the license award process could lead to penalties; money-laundering risks in the ownership structure could lead to enforcement action, including asset seizures by authorities; and human rights violations could lead to considerable reputational damage.
To identify any such risks before completing an investment, investors often identify, review and benchmark opportunities, verifying the existing asset, such as land ownership; reviewing the license award process to check for concerns or untoward links to public officials; and understanding the reputational risks of a particular subsequent transaction, including bribery, corruption, an opaque ownership structure or sanctions exposure.
As renewable energy technology is becoming increasingly complex, there is a growing need to conduct technical due diligence to ensure that the risks affiliated with operating an asset such as a solar power plant are addressed beforehand, and a plant performs optimally.
In order to do this, assets need to be equipped with the right tools, such as an asset management and performance monitoring solution, as well as registering activities like preventive and corrective maintenance and parts usage. Additionally, one functionality that is often overlooked is the ability to predict future performance based on historical activity and
output, especially relevant as assets are ageing. These systems allow the asset managers to act upon them imminently, thus maintaining the assets peak performance.
Increasingly, buyers are tasking consultants to conduct technical due diligence as well, often as early as from the procurement phase, to safeguard the quality and integration of the components, avoid communication errors in the asset’s control systems that would hamper the identification of any potential technical problems, enable the extraction of accurate and reliable data, vet external service providers and, ultimately, enable asset managers to maximize the performance of their portfolio.
A marked acceleration in investments in renewable energy infrastructure is creating changes in the industry’s risk landscape. In order for the market to reach its full potential, appropriate integrity and technical due diligence is a central part of any investment and can help investors navigate risks beforehand in order to maximize the performance of their potential new assets.