Risk treatment for renewable energy developers

Risk treatment is the process of selecting and implementing measures to modify risk. This article will describe risk treatment in the energy sector and analyze the benefits and challenges that it may present. The risk treatment measure includes retaining risk, avoiding risk as well as optimizing risk. Risk management is an important and crucial part of project, program and portfolio management. There are currently a lot of changes and innovation in the energy sector now, and several companies push for sustainable energy. This will include a lot of risks, and how they manage these risks could be of a great importance for the feasibility of the green transition. This article will focus on the treatment of risks for renewable energy projects. Firstly, risk treatment and its role in a risk management process is explained, thereafter the article focuses on aspects and characteristics that may be unique for projects in the renewable energy sector.

Risk Treatment in Risk Management Process

Risk is defined as an uncertain event or condition that, if it occurs has a positive or negative effect on a project's objectives. In every project the Risk Management Process (RPM) is essential to keep control, reduce cost, and using resources as efficient as possible. An important task for the project management is to try to mitigate the negative effects and benefit from the positive outcomes. RPM consists of 5 steps that are used throughout the project life cycle. The 5 steps are as follows:

1. Step 1 - Establish context
2. Step 2 - Identify risks
3. Step 3 - Analyse risks
4. Step 4 - Evaluate risks
5. Step 5 - Treat risks

Risks and risk management will vary a lot in projects due to every project being unique. Both risks and projects varies a lot in importance and threat throughout the project life cycle. Therefore, standardization of risk treatment is almost impossible. This article will mainly focus on the treatment of risks, and highlight some of the characteristics that renewable energy developers might face in renewable energy projects. Even though risks vary form project to project, the process of identifying, assessing, and controlling risks is standard for almost every project. Risk treatment is the final step in risk management, and therefore a vital step for the project manager in order to efficiently handle risks that are identified.

Risk Treatment and Control

Risk treatment can be defined as the process of selecting and implementing measures to modify risk. When analyzing the risks and measures to modify them, every risk should be measured and considered based on a cost-benefit analysis. The cost-benefit analysis is done during the first steps of the RPM. If this analysis is done thoroughly and every direct or indirect costs whether substantial or theoretical, and estimated either monetary or other terms, the risk treatment will be done better and more efficiently. Risks can have both negative and positive outcomes, by identifying the potential outcome of each risks, the treatment of these risks are handled similarly, although interpreted differently. Risks that have potential positive outcomes are likely to get the management to start or continuing an activity that is likely to create or maintain this positive outcome. Management would like to avoid risks with possible negative outcomes by stopping or reducing activities that can cause this risk.

There are in general four different strategies to controlling negative risk. These four are also most used strategies in energy projects. The strategies are as follows:

1. Avoid
2. Mitigate
3. Transfer/share
4. Acceptance

These strategies and what they imply is described further on in this section.

Avoid

The strategy of eliminating activities that can harm or influence the project in a negative matter, is called risk avoidance. Although complete elimination is almost impossible, the strategy aims to deflect or reduce as many threats as possible. When performing a risk avoidance, the strategy is an intentional tactic, therefore not the same as ignoring the risk or failing to identifying the risk. Even though this strategy may be the most desirable risk treatment strategy, it is important to analyze the strategy with the cost-benefit analysis, and how it may affect the entire project. An example in energy projects is to use well known materials in the construction, instead of new materials that only has performed at specific conditions. The cost risk of the untested material will usually outweigh the benefits it may present. This strategy has several advantages, such as the strategy could eliminate the risk completely. The strategy could also generate higher confidence from the organization that the project will continue to operate due to the risk being avoided, and therefore do not have to plan for the negative consequences the risk might present. The disadvantage with this strategy is that it could slow the project down, as employees and other stakeholders must follow the rules of what the risk avoidance strategy may present. It could also limit opportunities for positive outcomes of risks, and stop innovation for future projects.

Mitigate

The strategy of mitigating risks, is to lessen the negative effects. It is similar to risk avoidance, but rather than aiming for avoiding the risk completely, the goal in mitigating is to reduce the negative impacts. Risk avoidance is therefore often used when the consequences are too high to justify the cost of mitigating the risk. The strategy is also used as a strategy for increasing the probability for benefiting of a positive outcome of an identified positive risk. Mitigating risks is the process of preparing project management for all potential risks, and therefore it is common to establish a mitigation plan. This is to plan ahead of the possible negative outcomes the risks may present. A good mitigation plan should ensure that the strategy is feasible and that the resources, both financial and manpower, are less than the potential outcome of the risk.

Transfer/share

Risk transfer and sharing is a strategy to shift the risk to another party, and sharing the risk with another party, respectively. When transferring the risk, it is usually done by purchasing insurance on certain items. Thereby transferring the risk from the project to the insurance company. This is often used in certain aspects of a project that is outside of the projects control, such as weather and political unrest. Another way of shifting some of the risk is by sharing the risk with another group or company. This is common in international projects where another company may have more experience in managing risks in the country where the project is being constructed. In that way, the project management reduces the possibility of unknown risks that they do not have the experience or knowledge of handling, affecting the project. Sharing risks is also a strategy that project managers could use to attract more investors. It can be attractive for investors knowing that the project management has partnered up with a company with better knowledge in the technical department, or a better capitalized company.

Acceptance

Risk acceptance is a passive risk strategy. The strategy is to intentionally retain an identified risk where the management considers that the project could handle the potential outcomes effectively. The risk is not to be forgotten and the choice to accept the risk might alter throughout the project life-cycle. These types of risks usually are small risks that the management considers not to be worth spending time and resources resolving it. It could also be risks where the consequences are so huge that insuring against it would not be feasible due to the costs it may present.

Risk Treatment in Energy Projects

What categorizes risks in energy projects and how could risk treatment improve mitigating risks and benefit the opportunities it may present

Limitations

Limitations of risk treatment and how that may affect energy projects