Managing the Development Process

By Peter J. Rae

By understanding the breadth and scope of the work to be completed in developing a new hydroelectric project, developers can manage the process concurrently instead of in series. This management strategy can minimize the amount of time needed for development and maximize return from the project.

The work involved in developing a new hydroelectric facility begins with identifying the initial need for the plant and ends with successful operation. In between, there is typically significant expenditure of capital but no revenue from the project. Thus, the development process should be as short as possible, to minimize the funds expended and the associated interest costs, and to advance the realization of revenues. A short development period can significantly increase the overall return on investment for a hydro project.

However, in reality, development periods for hydro projects can be quite protracted. Delays can arise as a result of regulatory requirements, environmental or social issues, financing difficulties, or construction problems. Examining these problems can reveal that, rather than being random or uncontrollable events, these issues often are evident at the outset of the process. While events can conspire to extend even the best development program, it should be possible to manage a hydro project development in a way that reduces both the time to implementation and the cost of the project.

A professional management approach requires early recognition of the breadth of issues to be considered and the planning needed to achieve the required outcomes in a timely manner. Fundamentally, development should be about mitigating risks that can delay implementation of a project or increase its cost to the point that investor returns are damaged.

A properly staged development program allows identification and management of risks before making a final commitment to invest. As part of the development process, it is important to recognize that not all projects are feasible. At each stage of development, investors must have the information needed to make accurate decisions regarding whether to continue or abandon projects.

The central party in development of a hydro project is the owner, which is often an amalgam of project promoter, a development company, and investors. The promoter identifies the project and proves its initial value. At this point, a developer normally enters the process, with resources available to move toward construction. Investors often have little interest in early stage (and high-risk) development activities but high interest in well-defined projects with a high probability of success.

Other parties in a hydro project development include regulators, the energy purchaser, financiers, a consulting engineer, and constructors. The role of the regulator, which is normally a public entity, is important to establish the framework in which the project must exist. The energy purchaser is fundamental to the commercial benefits of the development. The purchaser must confirm the market and help set the value of the electricity produced. Financiers have a key role in mobilizing the funds needed for development, and their perceptions of risk can decide the viability of a project. Engineering input is provided using conventional consulting arrangements, although the scope of work varies significantly depending on the stage of development. Constructors generally enter the process at the latter stages, when many of the characteristics of the risk profile have been fixed.

Keys to effective management

There are six factors that are key to the effective management of the development process for hydro projects:

  1. Appreciation of the breadth of activities required to advance a project through the development cycle;
  2. Understanding of the uncertainties inherent in the development process;
  3. Ability to recognize critical risks at each stage and to devise a strategy to mitigate the risk;
  4. Realistic valuation of the project at each stage;
  5. A ruthless approach to forego development if the project does not appear viable at any stage; and
  6. A broad skill set including engineering, social, environment, legal, financing, and contracting.

Appreciation of breadth required

Hydropower development involves management of a set of inter-related project elements, each of which could delay or derail the process if not dealt with quickly and properly.

In the past, expansion of generating capabilities by public or publicly regulated utilities was managed largely as an engineering and construction process. Other activities were dealt with as required to meet the on-line date for the project. Today, project development has become a more complex process involving several parallel activities that must be dealt with at each phase of the cycle. The scope of the work at each phase will depend on the project role, its physical characteristics, environmental and social effects, the regulatory environment, and financing requirements.

Essential elements of the development process include:

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