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Project Risk Profile
As you consider entering the renewable / alternative energy arena, you are bombarded with a myriad of opportunities. In some cases, these opportunities are require large capital investments, in some cases they involve substantial changes to the core operations of your business, and in other cases they may represent minimal risk opportunities. Nonetheless, your individual situation and your individual risk tolerance level is different. It is important for you -- the agriculture business operator -- to assess your own interests, own strengths and your own business and personal strategies prior to embarking on substantial energy initiatives.
To help you in that process, we have developed a few self-assessment tools that we believe will help to guide you as you investigate a variety of energy initiatives. We believe that this process is a mandatory pre-requisite before the business plan for the project is developed. Furthermore, completing this same self assessment after the draft business plan is completed, will ensure that the business opportunity still complies with your overall business strategy and your desires and interests.
The self-assessment tool will help you understand your risk profile in three different, but inter-related areas:
Project Risk Profile
The renewable/alternative energy sector in agriculture is diverse, both in terms of project scale, project technologies, customer and market risk etc. As such, it is unlikely that any two renewable / alternative energy projects bear the same risk profile.
As an agriculture producer or processor it is important for you to review your potential renewable energy project from a higher – or big picture perspective – before beginning the project. This will help to ensure that you consider the overall project risk prior to undertaking a substantial amount of effort and expense on the project.
- Establishment Risk:
This is the risk associated with establishing the renewable / alternative energy project in terms of approvals required, grid connections required, technological certainty, environmental assessments, etc. – for instance a small wind turbine operating ‘behind the fence’ may be low risk with an established technology provider, however a 10MW project requiring municipal, environmental, grid approvals with unproven technology supplier may represent high risk.
- Input Risks:
This is the risk associated with the consistency, availability, quality, and pricing of any required input into the renewable / alternative energy system – for instance wind has no daily input required, hence low risk; however, biodiesel requires a number of inputs, hence higher risk profile.
- Process Risks:
This is the risk associated with the energy production process which converts the input into energy – for instance a biomass Combined Heat Power plant is likely a more simplified production process and hence lower risk than is an anaerobic digester, which is a ‘living’ process, and hence may represent more risk.
- Product Market Risks:
This is the risk associated with the output of the energy production process and the marketing of that product. For instance, a project that is marketing electricity into the Ontario Standard Offer program with a 20 year pricing mechanism represents less risk than does a project that is selling biodiesel on the spot energy market.
- Conclusion:
By aggregating these project inherent risks, you can determine the overall nature of the investment that you are about to undertake. As you are developing your business plan, it will assist you to determine strategies to mitigate the risks you have identified, as well as the severity of any negative impacts. As an agriculture producer or processor it is important for you to review this overall project risk before you begin the business plan process.
Business Investment Horizon
Your next stage on this self assessment discovery path is to review your desired and ideal investment horizon. Most existing resources for reviewing the possibility of renewable / alternative energy has focused on the establishment of the renewable / alternative energy project – and not enough focus is placed on maintaining and caring for this long-term investment and the impact that this renewable / alternative energies investment may have on you and your core business over both the short and the long term.
- Business Longevity:
This question is aimed at helping you to determine the ‘expected’ life of your business. For example, if the main business is a hog finishing complex – and the main barn is 7 years old – it is reasonable to expect another 13-18 more productive years from the premises. However, if the main barn is already 15 years old, the reasonable life expectancy is maybe less than 10 years. This is relevant if you are considering an investment in a 20 year anaerobic digester.
- Expectations of Current Business Ownership:
This question is aimed at the existing ownership group of the main business. For example, if you are a dairy farmer and you are planning to retire in the next 5 years, will the addition of a wind turbine on the farm property make it easier or more difficult for you to sell your property in five years?
- Conclusion:
The investment horizon for renewable / alternative energies projects are most likely long term– i.e. 20 years. As such, this project could have an impact on, or be directly impacted by, the business longevity and the investment horizon regarding the core business.
Strategic Fit & Human Resources
The last stage of the self assessment is focused on determining the fit between the renewable / alternative energies project and the business strategy and business resources currently existing within the core business.
- Strategic Fit:
Does the renewable / alternative energies project support the existing business strategy? For example, if your core business is a meat processing business that is seeking to diversify and if the renewable or alternative energy opportunity is based on the waste stream from the processing plant, then your business has increased its dependence on meat processing. However, as a meat processor if you invest a similar amount of resources in a wind turbine that is 100 miles away, your business would be more diversified, however, it would not be leveraging a potential synergy in the waste stream and its not part of your current core business.
- Human Resources Fit:
What about the human resources that you will require for the successful management of the renewable / alternative energies project? Do you already have the necessary human resources and skills within your business, or can they be easily added -- or trained -- into the organization. If the renewable / alternative energies project requires a completely different skill set and management requirements than the existing core business this may be an added risk factor to the project.
- Implied Project Risk:
Congratulations on completing the Risk Assessment Tool. Hopefully, this tool has helped you to consider a number of risks before you begin a renewable / alternative energies project. The risks outlined here are by no means comprehensive, they are not static, nor are they insurmountable. Each of you has a different Risk Tolerance level as well. As an agriculture business you know that Risk is inherent in everything you do. This assessment tool was designed to assist you as you consider a renewable / alternative energies investment opportunity.
Complete your Risk Self Assessment.
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