Managing the New Risk Profile of Energy Transition Projects

Mickey Reeves, TritenIAG’s VP of Project Development, shares the expertise gained from over 30 years in the capital projects industry. In this article, he examines the changing risk profile of energy transition projects like renewable diesel, advanced recycling, and more.

For my high school science fair project back in the ‘70s, I asked to study the process of turning garbage into fuel. My teacher rejected the idea as “too far-fetched.” When I started my career some years later, I never dreamed that one day I’d work on projects that do just that: convert animal fats and vegetable oils into renewable products such as diesel and jet fuels.

Now, decades later, we are in the era of energy transition. Carbon emissions reduction, recycling, and reuse are integral to the vision for most capital projects. Experts predict that 44 percent of our energy mix will be non-fossil by 2050. Meanwhile, consumers want green transportation fuels and biodegradable products. The time is ripe to realize the vision of a clean energy future. However, that future comes with new risks.

In the old era of vertical energy integration, a few companies controlled the value chain — from crude oil to product retail. Major energy companies owned the oil and gas in the ground and their own processing technologies, and they exerted major influence over the government regulatory process. They had a balance sheet to pay for their projects, worked with their favorite EPC firms, and owned the retail organization to distribute product to consumers.

Our new value chain is comprised of stakeholders that historically didn't work together. Instead of crude oil, feedstocks are sourced from nature, agriculture, and waste management companies. Each of these processes requires novel and adapted technologies, offered by different vendors with competing guarantees. Early economic incentives exist, via the renewable fuel standard market program, low carbon fuel standard credits, and the Inflation Reduction Act; but the legislative environment fluctuates. Developers with little experience in major complex projects must now navigate financing challenges, conflicting EPC approaches, and entrenched product retailers (i.e., the “offtake companies” depicted in the accompanying value chain graphics).

All these factors add up to a new project risk profile. As leaders in energy transition projects, we’ve identified the three most critical areas in a project: 1) Project Definition, 2) Technology Selection, and 3) Stakeholder Requirements.

‍1) Project Definition

‍Projects in the new value chain need to optimize three inputs in project definition: business model, financing strategy, and viable technology. Aligning only two of these inputs will not result in a successful project.

First, a sound business model must be established. In addition to balancing feedstock and the product market, a sound business model requires favorable yield structures, balanced operating costs, and a realistic total installed cost. And to wrap it all up, the money must be available to pay for the project, whether it is debt, equity, cash flow, or a combination of all three. Alignment of these three inputs is required whether we’re talking renewable fuels, plastic recycling, or wood to liquids.

A few pieces of advice about project definition:

• Take the time to define your project up front – Set the design basis and get sign-off from all pertinent parties. An ever-changing design basis results in never-ending engineering and construction — and never-ending explanations about why the costs are going up and the project is taking longer to complete.
• Set and understand the consequences of the location – Sustainable projects depend on consistent and reliable rail and truck access, so make sure you have this covered from the outset.
• Define outside battery limits (OSBL) – Early in project development, clearly define OSBL such as utilities and common equipment. OSBL can be 50 percent of inside battery limits costs like equipment and piping, but it is often overlooked in early project phases.
• Define, understand, and validate your business case – Project execution only succeeds if it has a supporting business case. Run sensitivity cases to understand best and worst case scenarios.

2) Technology Selection

‍Project definition will drive technology selection; and the chosen technology path will impact carbon intensity. There are many technology choices and competing technologies may meet the same project goals. For example, at least four competing hydro-processing-based technologies produce renewable diesel from vegetable oils and animal fats, and there are at least three feed pre-treatment options. Similarly, multiple paths exist for plastic recycling — both mechanical and chemical processes such as pyrolysis. Technology selection is a key part of project development, with the right choice leading to success and the wrong choice leading to failure.

As with anything untried, novel technologies introduce risk. Yet with risk comes the potential for reward. Conducting detailed due diligence, taking the time to understand technology, and negotiating guarantees will mitigate some of this risk.

3) Stakeholder Requirements

‍Today’s sustainable projects have new stakeholders that may have never executed a complex project: financial institutions, project developers, and start-ups. These stakeholders may lack a nuanced knowledge of technology, schedule, or escalating costs — which means risk. With risk comes the need for guarantees from the technology provider and EPC firms. These can be guaranteed lump sum pricing or an overall financial and technical wrap. This passes risk on to the EPCs, who are not always willing to accept the risk; other stakeholders, including banks and owners, may have to contribute more equity.

Stakeholders need to understand the importance of efficient execution and achievable schedules in meeting deadline-critical government incentives. The historical project scheme may not be acceptable in today’s world, where time to market is critical. Compressed engineering schedules can shorten the engineering time and help identify long lead equipment early in the design engineering phase. A fast-track project will require overlap in the FEL-2 and FEL-3 phases and in detailed design and construction.

Conclusion


As a whole, energy transition projects have a fragmented value chain, competing and new stakeholders, and a complex technology selection process. Project risk can be reduced and ROI maximized with accurate project definition, optimized delivery schedules, and expert management.

Two essential factors drive energy transition projects:

• Owner Integration – Projects must be developed and executed with all stakeholders aligned behind the asset owner’s business goals, objectives, and priorities. The best way to accomplish this is through a project leadership team deeply integrated with the owner, working as one team, helping to build the project organization in alignment with owner goals. Traditional and non-traditional stakeholders and the integrated project management team (IPMT, as we call it) must work together, seamlessly. We’ve seen these IPMTs achieve remarkable project success, and we expect that success to continue globally.
• Expertise – Project leadership teams must be composed of highly experienced, multi-disciplined project professionals who can address the nuanced complexities of a project — in essence, providing the right people at the right time. Key decisions need to be made in a timely manner. Setting the design basis, understanding the technology and its requirements, and managing the supply chain are key.

We closely adhere to these principles and practices — the intelligent foundation on which successful capital projects are built — and will continue to apply them to the sustainable projects of today’s evolving market. And we believe that others who plan a mindful overlap of business model, financing strategy, and viable technology also will enjoy the "sweet spot" of project success.

Mickey Reeves originally covered this topic as a key presenter at ABLCNEXT 2022 on October 27 in San Francisco, CA. Each year, ABLCNEXT brings industry leaders from around the globe together to discuss achievements in the field of advanced biofuels. Click here to view the original presentation.