Risks in Renewable Energy Projects

4. Market risks

• A renewable energy investment which utilizes free resources like wind or solar
irradiation is not exposed to any market risk.

• In contrast, a biomass project in an electric utility is exposed to market risks on the fuel
side and the electricity side.
 4. Market risks
4.1. Fuel market risks

o Biomass and biogas power stations rely on the supply of biomass as feedstock. The
availability and price of the feedstock is essential for any biomass project.

o The idea for a biomass or biogas project is developed based on the demand for
electricity or heat, or on the availability of the fuel in a specific region. In the first case,
appropriate sources of biomass have to be identified; in the second case, the demand for
electricity and heat as well as the possibility for grid connection have to be identified.
 4. Market risks
4.1. Fuel market risks

o It is important to notice that the demand for biomass is not only driven by the energy
sector. Wood and wood waste are also used in the paper industry as well as in the
chipboard industry.

o In the case of corn as typical feedstock for biogas plants, alternative uses of the crop in
the food industry have to be considered. In general, there is competition for agricultural
land and therefore increasing prices for agricultural products like wheat will influence
the availability and price for biomass grown for biogas plants.
 4. Market risks
4.1. Fuel market risks

The means for mitigating fuel market risks are as follows:

 Site selection: Besides grid access and heat demand, the local fuel market are
important considerations when selecting a site for a biomass or biogas plant. It is
important to ensure a robust fuel chain for the fuel to the power station by road or ship.
To access international fuel markets, a location at the sea near a harbor is advisable
because typical road transport distances are generally restricted to 100 to 200 km due to
high transportation costs.
 4. Market risks
4.1. Fuel market risks

Fuel flexibility: Biomass power plants and biogas reactors are designed for a specific
fuel spectrum. In order to reduce construction costs, often biomass power plants are
designed for a relatively narrow fuel spectrum. As demand patterns for biomass change
over time, it is advisable to design a biomass power station flexible enough to handle a
broad range of fuels available in the region.
 4. Market risks
4.1. Fuel market risks

Long-term fuel supply contracts: If possible, fuel price and quantity risk should be
mitigated by long-term fuel supply contracts. However, in general, it is not possible to
obtain contracts for the complete technical lifetime of a biomass power plant or a biogas
reactor of approximately 20 years. Moreover, often long-term contracts can be cancelled
or renegotiated when market conditions change.
 4. Market risks
4.1. Fuel market risks

Fuel storage: For increasing flexibility, a fuel storage facility should be set up at the site
of the power station with a capacity of at least 2 to 4 weeks’ usage. However, it is
important to notice that the biomass feedstock can only be stored for a limited amount of
time without adverse effects on its quality. For example, the calorific value of the
biomass in the storage can decrease over time.
 4. Market risks
4.2. Electricity market risks

o In cases where no fixed long-term state-guaranteed off-take contracts for renewable

electricity exist, a renewable energy project is exposed to market risks like any other
generation facility. To mitigate market risks, long-term fixed-price off-take contracts
with a utility company, an electricity trading company or a consumer, ideally with a
premium for the renewable quality of the electricity should be considered.
 Risks in Renewable Energy Projects
5. Resource risks

o Wind speeds, solar irradiation and water flows in rivers are weather dependent. Natural
fluctuations apply. Therefore, it is crucial to assess the resource availability for any
project thoroughly.

o It is common to hire external consultants for resource assessments. Every investor

should be aware of the fact that resource assessments always contain uncertainties.
Consequently, ordering more than one resource assessment can be advisable.
 Risks in Renewable Energy Projects
5. Resource risks
o Most wind resource assessments include estimates of the uncertainty in the form of
confidence intervals. The expected value of the wind yield is called P50, i.e., yield is
exceeded with a 50% probability. The yield exceeded with 75% probability is called
P75.

oThe risk mitigation potential is limited with respect to resource risk. An investor will
have to live with the inherent risk of resource-dependent energy yields. One should not
rely on a single resource assessment, but rather on several, and use scenario analysis.
Furthermore, diversification of investments in different regions and technologies reduces
the risk of a portfolio of investments in renewable energies.