When I was competing for the NEFC (National Energy Finance Competition) at University of Texas, one of the key aspect, which I focused on was about - How to Quantify the risk?
An objective modeling of risk in terms of putting $value to the risk and the probability of that risk is normally, what expert financial planners do. However, the variation across industries is so much that it is literally impossible for an outsider to do such an objective modeling in an unbiased manner. The problem with outsiders is that they get biased with the DPR, Social Risk Assessment reports, which are prepared for say a consulting company as a specific assignment for that project.
Conflicts of Interests
There are inherent conflicts of interests in the DPR's and the other reports as they are being paid by the developer and which developer will not want an aggressive assessment of his project
How to quantify the parameters
First of all, bucketing of risk has to be done. For hydro, risks are classified as under
- Financial risk - sponsor or lender need to have access to patient capital
- Construction risk - EPC contractor need to have the relevant experience
- Equipment Risk - Similar to BTG in Thermal, Turbine and Generator selection plays a big role in reducing other risks during construction as well as during operations
- Environmental & Social risk - Issues such as resettlement or impact on communities are key once we enter into the real mud with the shovel
- Regulatory - Regulations related to Construction (labor cess etc) can have deep impact on cost matrix
- Political risk - Local political stability and the liaison with the political setup becomes important if we are operating with unstable provincial governments
- Technical Risk - Important for big projects
Hydro projects have be executed in-situ and all local stakeholders automatically become party to the development.
Technical Risk
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What if the the tunnel has to be changed due to hard rock or if the there is some hidden geological crack found in between such as the famous Serei Nala in Rohtang tunnel changed its course during the construction of tunnel phase.
Who bears Which Risk
Since, Hydro projects have to be executed in-situ, surprises keep on popping, every now and then. At times, it is very difficult to draw a line between who bears which risk. Consider the case
- Equipment Suppliers says he want higher rating of the bridges, on the way, to send their equipment
- Power Transmission Company says they are back on schedule to connect the evacuation Point
