"The skillset and the tools required to do business in renewables are totally different now."
Marion Calcine, Chief Investment Officer at Ardian Infrastructure, is discussing the fundamental changes in renewable energy over the last decade. Costs of wind and solar power have fallen dramatically, and more countries have phased out subsidies for new projects. As a result, she believes that new skills and systems are needed to win in post-subsidy markets.
In this article, we hear from Calcine about how Ardian’s approach to managing wind and solar assets is changing as a result of renewables coming off subsidy and becoming exposed to electricity market prices. She also talks about how Ardian works with Greenbyte and Pexapark to manage the new risks the company faces as a result of high demand for assets, pressure on profit margins and more power price risk.
Ardian has $114bn of assets under management worldwide and has a network of 15 offices. Its assets include 3.5GW of installed renewables capacity.
Calcine has worked at Ardian for 15 years on a wide range of infrastructure assets, from transportation and gas distribution to renewables. She is notably in charge of Ardian’s renewable investments in Italy. This role has exposed her to rapid changes in the global energy market.
During her time, Ardian has evolved from mainly investing in renewables as minority shareholder alongside an industrial partner to now investing on its own. It has grown geographically, from Italy and France initially to now include Germany, Spain, the US and the Nordics. Calcine says the deal types it gets involved with have changed too, as a result of falling technology costs and regulatory changes in its core markets.
She explains: “Ten years ago, when we were investing in renewables, they were fully subsidized for 10-15 years. Now we are investing in renewables that are either not subsidized, because the cost of technology is so low, or where only an initial part of the production is covered by a power purchase agreement [PPA] or is otherwise hedged.”
Growing exposure to volatility in the ‘merchant’ power market is driving a major shift in the way Ardian manages its portfolio for investors.
On one hand, it needs to place greater emphasis on optimizing production to extract as many megawatt hours of clean power from its assets as possible. On the other, it must build energy sales and risk management expertise to control and hedge its financial exposure and stay on top of market dynamics to capture the best windows of opportunity at its assets. Digital innovation is central to these changes.
This means that Ardian is having to change its approach to asset management, both its mindset and systems. The company now has a dedicated Digital and Data Science Team and its asset management strategy involves improving the digital capabilities of its assets. It believes that digitalization is a vital pillar of the technological improvement and innovation that will deliver the Paris Agreement’s carbon reduction targets.
We have invested a lot in our team – in people who are able to operate plants more efficiently – and in digital tools to accompany us through this transition.
Renewables investment has remained strong despite the global uncertainty caused by Covid-19. Calcine has seen an acceleration in renewables investment in the last 18 months, notably by utilities and oil & gas companies, which has driven up the prices of assets. But acceleration of renewables deployment means new risks, which have to be managed.
This includes risks caused by intermittent production and fluctuating merchant power prices, both of which affect power prices and project returns. Calcine says it is crucial for firms such as Ardian to understand these risks: “You have to be able to measure them, assess them and take them into account in your profitability assessment.”
Ardian needs to understand how much electricity its assets produce and when; how much it can sell that power for; and how it can manage these evolving risks. This is where Calcine believes that digital tools can help Ardian - in two ways.
“This is a project that has two legs,” she says. “We have an operational tool, which is Greenbyte. We have rolled this out to most of our portfolio companies. This helps our management teams analyze the availability and technical performance of our assets.”
“The second tool is for energy risk management, which is where Pexapark comes into play,” she says. “We don’t do energy management internally and we don’t take trading risk, but we want to ensure that energy risks are properly measured and monitored on a portfolio basis and apply state-of-the art analytics to hedging decisions.”
We will now look at each of these in turn.
Ardian uses Greenbyte to monitor the technical performance and production profile of its assets. This enables Ardian to look at technical performance on a portfolio or project level, while also being able to look in detail at individual components.
By integrating Greenbyte’s asset monitoring and management platform, the Ardian infrastructure team can oversee and benchmark technical performance across its portfolio covering three markets in Europe, five in the US and two in Latin America. Jonas Corné, CEO, Greenbyte, explains why this is so powerful.
“Full transparency on asset performance is a hugely powerful tool, and Greenbyte gives Ardian and its management teams a means of creating accountability, not only with its own investors, but also with regional operations and maintenance (O&M) teams and original equipment manufacturers (OEMs).
“This data helps Ardian incentivize technical performance and value creation activities across the portfolio, as well as hold other parties to account during contractual negotiations,“ says Corné.
Calcine says this helps Ardian find technical performance problems and identify patterns: “We are analyzing the deviations of all of our wind farms from a theoretical power curve, to identify common patterns across the portfolio,” she says. This enables Ardian and its portfolio companies to access insights from assets across the entire portfolio, and not just in their individual assets. This gives them access to insights that they otherwise wouldn’t be get due to their limited geographical spread.
“With some OEMs or in some geographies, our managers locally cannot see [these broader trends] because they operate in one single geography. This information can help drive adjustments and improve the performance and predictability of assets.”
For example, Calcine says a 1% production uplift at an individual project is significant in a sector where variable cost is nil, and it is important to gain these benefits in a sector where asset prices are high.
“We are not paid more than €100 any more for each megawatt hour we put into the grid,” she says.
"We have to make sure our assets are performing the best they can and at the lowest cost to be competitive versus other energy sources."
By having the data consolidated and harmonized in Greenbyte, Ardian is able to easily share data with other stakeholders in the value chain that add value in other ways. Such stakeholders include operators, power off-takers and other software providers.
Greenbyte helps Ardian to make technical improvements that boost profitability – but, in a market without centrally-set feed-in tariffs, that is just one part of the answer.
Energy risk management
Calcine says the other important change that Ardian is making is how it can measure, monitor and manage exposure to price risk. This is where Pexapark comes in.
For the European portfolio, production data from Greenbyte feeds directly into Pexapark’s ‘operating system’, allowing Pexapark to provide a comprehensive and transparent view on the realized market value of Ardian’s renewables assets in Europe. In addition, Pexapark’s risk engine is constantly assessing the long-term value of its electricity production, market risk and performance across the entire portfolio, including the value of each energy sales contract.
This enables Ardian infrastructure team to undertake portfolio-wide analysis, including a target of ‘revenue-based availability’ calculations that will be used to optimize and schedule maintenance programs for periods of low production and low prices.
In the longer-term, it will help the team build a renewables portfolio that is optimized to manage the full range of market risks in the ‘new world’ of renewable operations.
Luca Pedretti, COO, Pexapark, explains it:
Ardian Infrastructure’s pioneering approach to building its arsenal of digital tools for post-subsidy energy sales and risk management is quickly setting it apart in the market.
"The Ardian team shows that, with the right ‘operating system’ in place, nimble renewable energy funds can reimagine their models to rival even the traditional utilities who benefit from decades of energy trading expertise.”
Ardian’s portfolio is still mostly subsidized assets, which has insulated it from recent power price swings, before and during the Covid crisis. Calcine argues the biggest issue in renewables today is that wind and solar farms are still perceived as stable assets and attract large amounts of debt, but the volatility involved with selling the electricity from these assets on the open market is, and has always been, considerable.
“The Covid crisis, with all these swings in the market, sheds light on the fact that you need tools to better analyze short-term and long-term merchant risk in the context of increasing price volatility,” she says. While Covid may not actually have caused higher volatility than would have been experienced otherwise, this has added to the pressure companies are facing to ensure they have digital tools in place to help stabilize their power price income.
Calcine says Pexapark has worked with the management teams of its renewables assets to help them transition from a fully-subsidized to a merchant environment. In practice, there are two areas where it focuses to manage these risks.
“At an asset level, we want the most adaptive tools to arbitrate between keeping merchant exposure or hedging price levels with PPAs. We also want to have a view on our merchant exposure overall, a long-term revenue-at-risk calculation, in order to inform how we choose to navigate and construct our portfolio,” she explains.
She adds that one key benefit of Pexapark’s system is that Ardian can model the potential impacts of a new asset on the portfolio.
“One functionality of Pexapark that is extremely important for us is the additionality. Every time you add in another asset, you have the possibility to see how it impacts your overall Value at Risk,” she says. This is important for companies like Ardian that look to hold onto their assets for the longer term.
Renewables investors and operators face slimmer profit margins and higher levels of merchant power price risk. As a result, it will be increasingly important for them to get a deep understanding of how to manage technical and financial risks at their assets.
Calcine says this can only happen if systems like Greenbyte’s and Pexapark’s are closely integrated. And, if it is done successfully, it can form the basis of a cultural shift in terms of risk management. Success relies on cooperation from the asset management teams.
“They need to perceive that these tools are going to be useful for them even prior to being useful to Ardian,” she says. Ultimately, she says that digital systems will play a vital role as investors and operators seek to negotiate a changing market.
“Companies that can cope with merchant risk effectively are most likely to succeed” she says. Digital systems will form the basis of such an approach.