November/December 2008 / Cover Story
Energy Projects are Risky and Expensive
There are numerous obstacles to the development of energy projects, the author says. Air, noise and water permits are required, with the critical item usually being the air permit. Acquiring it can take from one to two years, even when there is little opposition. The economics often depend on tax incentives, and they can change. A significant capital investment is necessary – $10 million for a small refurbished biomass power facility, $10 billion for a large nuclear facility.
Initially, the developer needs funding to pay for land options, feasibility studies, preliminary regulatory work, and negotiation and execution of key project documents. These funds typically come from the development partners’ and sponsors’ own accounts, not from a lender. At the early stages, the project is too unpredictable for finance. The sponsors, therefore, run up a large tab before permanent financing is in place. Any energy facility will need to operate successfully for several years before it makes enough money to overcome the initial sunk costs, which compounds the problem.
While the need to update and expand our current energy infrastructure is obvious, the development of energy generation assets is a risky business. Until regulators and legislators develop a system with some predictability, the development of new energy assets will continue to be slow. Meanwhile, our dependence on and consumption of energy continues to increase.
