Risk Management

Risk management is a continuous process running through the lifetime of the Program. In the GET FiT risk management matrix risks are identified, categorized and measures to reduce or eliminate the risks are outlined. Risks are categorized according to the risk assessment table below. Probability of the risk occurring on the x-axis (low, medium of high probability) and level of potential (negative) impact on the y-axis combined determine the risk category: a) acceptable risks; b) ensure follow-up of risk; or c) reduce the risk.  
 

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The full updated risk matrix for GET FiT after the recent monitoring round is found in Appendix A. The program risk assessment is subject to regular review and update. In 2014, some new risks emerged and some were re-categorized due to new information or contextual changes. The following risks have been added and/or re-assessed over the past year:

 

1. Interconnection risk (Category C). In order to mitigate risks related to insufficient grid capacity for interconnection and integration of GET FiT projects, the mentioned Joint Task Force was established to study the GET FiT project pipeline’s implications for the existing grid, and to identify the required grid reinforcements and extensions to ensure timely interconnection and viable power evacuation for all new generators. Based on these findings a Project Design Report was prepared by the Implementation Consultant which further outlines required interventions, their cost, implementation timeline, financing mechanism and management structure. The Joint Task Force will play the key role in coordinating implementation of the necessary infrastructure investments on time and ensuring a high level of coordination throughout.

In addition to supporting the Joint Task Force on a day-to-day basis, the GET FiT Secretariat will continuously monitor the progress on all relevant efforts through:

  • Support to GoU in solicitation of funding from GET FiT donors for specific grid investments
     
  • Participation in regular Joint Task Force meetings
     
  • General support to ERA in facilitation of the JTF
     
  • Utilization of the GET FiT Project Tracker tool to ensure alignment and coordination with GET FiT portfolio
     
  • Close and proactive communication with all stakeholders

 

2. Exchange rate risk (new risk – Category B). As outlined in Chapter 4.1, the significant depreciation of the EUR relative to the USD in late 2014 and early 2015 will, if maintained, have a significant impact on the funds available for GET FiT premium payments. This is due to the premium payment amount being calculated in USD, but being paid in EUR at the applicable rate upon signing of the Developer Finance Agreement.  Projections indicate that should the current exchange rate level be sustained, targeted GET FiT portfolio capacity may need to be reduced by approximately 12 %. This would result in a portfolio target of some 150 MW installed capacity and a corresponding annual generation of about 730 GWh.  Available funds are also affected, although to a more limited extent, by the rates of NOK and GBP, in which the funds from Norway and UK are disbursed to the Program, respectively. Hence, while the risks related to exchange rate are complex and beyond our influence, continuous efforts are being made by KfW and the Secretariat to ensure that the funds are fully utilized in order to maximize the Program’s impact. A range of scenarios are being projected and frequently updated based on current standing of available funds with respect to exchange rate levels, and the status and progress of the GET FiT project pipeline.  

 

3. Changes in Legal/ Regulatory and Framework (new risk – Category B). While the first project specific PPA and IAs have been approved and the uncertainties with regard to the taxation have been largely resolved, it became apparent over the last months that there remains a certain risk with regard to changes in framework conditions for private renewable energy projects. A stable and predictable as well as well-balanced legal, regulatory and political framework is the key to attracting private investments into the energy sector. KfW and GET FiT Secretariat will continue to monitor this closely and where necessary facilitate dialogue between developers and public stakeholders to reach mutually acceptable agreements.

 

4. Capacity gaps of developers on IFC environmental and social standards (Category C). This risk element was increased from the original assessment (rated A), in particular due to the low scores on E&S assessments. Several developers and/or major shareholders lack competence regarding IFC environmental and social performance standards. To address this risk, developers need to achieve a minimum score on these issues in the appraisal process. Nevertheless this risk element remains to a certain degree, particularly with respect to IFC standards. GET FiT has taken an active approach to support developers in meeting IFC standards (see Chapter 2.6). However, experience from the past months shows that certain developers and their consultants are in need of more support than GET FiT can reasonably provide within the existing budget and project concept. A decision will need to be made on a case by case basis whether to exclude certain projects/ developers if they continue to fail the set standards. This would increase the available funding for projects successfully applying under RfP Round 3. 

 

5. Political and cross-border risks (Category B). This risk has been increased from the original assessment (rated A) as one of the largest projects in the GET FiT portfolio (Kikigati SHP) has over the past year been plagued by critical “external” risks that threaten its viability as eventual GET FiT supported project. Given Kikigati’s capacity of 16 MW, this poses a risk for the portfolio and eventual results. While no decisions has been made yet, it is in the view of the Secretariat very likely that Kikigati will not be implemented in the short to medium team  which will lead to an increased funding envelope available for the ongoing RfP Round 3.

 

6. Low number of sufficiently developed projects applies for support (Category B). The slight downward trend between Round 1 and Round 2 applications, both in terms of quantity and quality raised some concern. In order to have a realistic opportunity to achieve the overarching targets, the Program is dependent upon a successful and expected final RFP Round 3 – targeting some 40 MW. To the degree that project funding commitments from previous rounds (due to failure to meet deadlines) are made available for Round 3, this ambition level will be increased. As a response to the concerns regarding the number of applicants, and the quality of submitted bids, the current tender was launched a full year after Round 2 (instead of 7 months), in November 2014. This decision now appears to have paid off, with 18 hydropower project developers applying for support under RfP Round 3 in late January 2015. However, no bids to develop bagasse or biomass projects were received. 

 

7. Project-level risks. With the Implementation Consultant mobilized and routines for supervision visits established and implemented, the technical risks and key follow-up points for each project, including e.g. Environmental & Social and interconnection, are being tracked and managed. The Secretariat has developed a comprehensive Project-tracker tool utilized also by KfW and ERA and GoU staff which allows for continuous monitoring of critical issues for each project. This provides an opportunity to identify early on key challenges within all applicant or approved projects, and to monitor their progress throughout. 

 

8.   Delayed implementation of projects. As outlined in this report, individual projects are facing delays when it comes to reaching financial close and construction start. Reasons for these delays are only partly the responsibility of developers (i.e. failure to meet IFC Performance Standards), others are related to the legal, regulatory and political framework. In addition, energy generation projects are generally prone to delays during construction. This can be due to capacity and financial constraints of the developer, inadequate planning, but also adverse conditions outside of the control of the developer. Through the portfolio approach the impact of these issues on GET FiT is to some extent mitigated, but serious risks remain: Delays in commissioning of the individual projects will negatively affect the time bound objectives of GET FiT. On a financial management level, it will result in either a temporary build-up of cash and/or project-level disbursement beyond 2023. In the worst case, projects are not able to meet the required deadlines, as set out by either their award letter or their DFA and a decision is made to retract the funding commitment.