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Risk Management in Renewable Energy Projects

23.09.2017 — 0

What are the risks arising in renewable energy projects? What are the mechanisms to control or mitigate those risks? This article explains in brief.

Risk Management: Organizing Uncertainty

Risk management refers to the practice of identification, assessment, and prioritization of risks, defined as the effect of uncertainty on objectives, according to the standard definition provided in the ISO 31000 standard. Risk management in that sense is usually followed and complemented by a disciplined and coordinated application of resources to minimize or mitigate, monitor, and control the probability and the potential impact of the future events. The purpose of risk management is to organize uncertainty, that is, to make sure it does not deflect the business from achieving its economic objectives.

Sometimes risk is contrasted to uncertainty, whereby the former is understood as an event or a hazard of known (and measurable) probability, while the latter refers to “unknown unknowns”, unmeasurable in principle. As the former U.S. Defense Secretary Donald Rumsfeld once put it,

There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. These are thing we don’t know we don’t know.

Insurance industry and engineering have been the historical strongholds of risk management thinking, and financial economics developed many quantitative tools for risk assessment, understood as both positive and negative volatility in outcomes of financial market transactions. However, since the 1990s, risk management has become a world in itself, as the LSE scholar Michael Power put it in his book Organized Uncertainty: Designing the World of Risk Management.**Power argues that risk management has gradually transformed itself into a generic template of organizational governance. Contemporary organizations, regardless of the sector or the industry in which they operate, have to abide to certain standards of risk management to acquire the necessary legitimacy in the eyes of the public, the state, and other stakeholders.

In particular, this transformation of risk management means that even if the risks are not directly expressible in quantitative terms, one must do one’s best to envision them, map them out, and think of the ways of preventing these hazardous events from occurring. Another academic source puts it the following way:

Can we know the risks we face, now and in the future? No, we cannot: but yes, we must act as if we do.

Fortunately, there are many instruments available to help decision makers to envision the risks and act as if the unknown unknowns were, indeed, known. One of such tools is the risk matrix, and it is especially useful in the field of renewable energy projects.

Renewable Energy Projects Risk Matrix: Risk Objects and Stakes

Many of the risks that renewable energy projects face are common and known beyond this business. Regardless of the specific industry, the size, and the financial structure of the project, proper risk management requires all the risks to be allocated to the appropriate parties.

The risks of renewable energy projects can be broken down in several categories. Each category can be further detailed in terms of what is at stake, and what are the specific risk events expected to occur. The following table summarizes the most common risks categories associated with renewable energy projects.

Renewable Energy Projects Risk Matrix: Control Mechanisms and Allocation of Risks

The most important part starts once risks have been identified and assessed. At this stage, it is important to find out what are the mitigation and control mechanisms, and who these risks must be allocated to. Here’s how it’s done. Let’s look at the other side of the risk matrix!

Read our next posts to find out how Solar DAO manages these risks, and how the picture changes with the introduction of cryptocurrencies and Blockchain! Stay tuned with Solar DAO.

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