Estimating Conditions, Fines To Calculate RiskWed, 02/22/2017 - 10:00
Q: What is the purpose of the risk measurement program developed by Athena Consulting?
A: With the Reform, renewable-energy generating companies that participate in auctions must commit to producing a certain number of CELs each year. If they do not reach this number because the energy generation conditions were not ideal, the wind was not strong enough or the sunlight was poor, they may end up paying high fines. These fines depend, in a nonlinear way, on the number of missing CELs and on how many times in the past the company has failed to reach its committed production target. Among other things, our program enables those companies to estimate the distribution of those fines. The yearly production of electricity is estimated by specialized consultants who measure the wind in the area and give an estimate to the company. They evaluate wind force and consider the probabilities of a change in conditions in the area through scientific techniques. Those estimates, combined with the existing structure of fines, form the basis of Athena Consulting’s risk model. We can calculate the fines a company will have to pay according to the conditions of the area and its number of committed CELs. We estimate the distribution of fines during the 20-year life span of the project. In the first years, typically firms will have to pay no fine at all, while the fine paid in the final year can be quite considerable. This information is useful both for banks as for the individual firms.
Q: How can this program help upcoming participants establish a more precise bid?
A: It could help them decide what is the most convenient bid to make. For example, if there is a company offering a wind park of 1GW per year and offering 700 CELs, they are making a conservative offer and it is very possible they will not have to pay any fines. If the bid is reasonable the number of fines will be too, therefore there is no reason why a bank should reject the project. However, if a company wants to go into the auction with an aggressive offer and take the risk to win, this might not convince the bank to lend them money. Through the risk measurement program the bank can have an idea if a company will be able to cover the loan or not.
Q: What benefits can banks get from applying this program?
A: We handle the fines from the missing CELs but when companies do not reach their required energy, they must buy it from the spot market, which is the source of yet another loss that we included in the program. With this calculation we can give banks a very precise estimation of the profitability of the projects. We can also help banks establish the right amount for the security deposit they need from the company. Banks always ask for this to cover any potential losses but companies, understandably, always want to leave less money in the bank. With our program, we can also calculate the appropriate deposit the bank should ask for to have its required security and make it affordable for the company.
Q: Who are your main clients? Do you prefer advising banks, governments or auction participants?
A: Banks are one of our main targets but it is very difficult to reach them. We have contacted several banks interested in financing renewable energy projects and we hope to secure a contract with at least one of them. Also, we have worked with both sides in the auctions, the institutions that hold them and the companies that participate in them. It is very interesting to work with the government but the experience is not always positive. Ministries open a tender for consultants to apply for the design of an auction but it is very difficult to win those contracts. That is why I prefer to work with private companies to help them optimize their offers.
Q: Where do you see Athena Consulting in five years?
A: In five years, we expect to have enough clients and ambitious contracts to make the business stable and a bigger staff to reach more projects. We are very aware of the downside risk: if the new US government renegotiates NAFTA, it could push Mexico into a recession.