Brazil has recently experienced a growing movement in the M&A (mergers and acquisitions) market for energy generation assets, especially in the photovoltaic sector. With this market increasingly booming these days, it is essential that investors have the security that the parks acquired will guarantee the expected return.
Due Diligence is a detailed investigation and audit process that aims to evaluate the financial, legal, operational and commercial aspects of a company or asset before a transaction, such as an acquisition or merger.
In the world of photovoltaic systems, this process aims to ensure that the project in which one wishes to invest provides the expected return to the investor. In other words, it serves to whether it is technically viable, financially sustainable and safe from a regulatory point of view.
In this process, the evaluation of the technical aspects of a plant ends up being based on several analyses, from the project planning stages to the operation and maintenance of the plant in question. In an interview with Canal Solar, Geraldo Silveira, Engineering Manager at CS Consulting, explained how Due Diligence work works and answered important questions on the subject.
Canal Solar: Who performs Due Diligence and when is it mandatory?
Geraldo Silveira: This is a very important issue. When we want to make an acquisition, especially of a photovoltaic plant or even another type of asset under construction, Due Diligence is essential.
This process is most common in acquisitions, because when acquiring an asset, we need to know its true value and how much it costs. Due Diligence helps us determine this value and ensure that we are making an appropriate investment decision.
Due Diligence is not mandatory by law, but it is an essential tool for those investing in the acquisition of a generation asset, helping to mitigate risks, validating the real chances of the asset returning the expected value, providing greater security for the investor. In fact, it is already widely used by the financial market, given the risks present in operations of this type.
This is a thorough inspection that takes place at the plant, covering various aspects, such as technical, financial, regulatory (legal and tax) and environmental. The objective is to ensure that there are no risks that could compromise the return on investment.
What documents are required for Due Diligence?
To perform a Due Diligence, initial planning is essential. A specific checklist is normally used for the assets under analysis, for both the technical, financial and regulatory aspects. This checklist must be very well structured to ensure that all necessary checks are carried out.
All plant designs are analyzed to their correspondence with the asset that is operating and its compliance with technical standards and good engineering practices.
In addition, O&M (operation and maintenance) plans are evaluated, as the project may have been well done, but if there are maintenance failures, it may present defects that may already be occurring or that may manifest in the future.
Another important analysis is the verification of the plant's generation data, generally done using data from the plant's SCADA (Supervisory and Data Acquisition Systems) system. This makes it possible to define the PR (performance ratio), which is one of the main indicators of the generation plant's efficiency.
Still on the technical side, it is highly recommended to visit the plant to perform a complete inspection, including tests to assess proper functioning and performance. During the Due Diligence process, it is common to come across cases where we identify defects that are impacting the plant's generation.
This ends up being an opportunity for improvement that the current owner was not even seeing. Thus, the investor who is acquiring the asset can have an even better financial result, after correcting these defects identified in the analysis process.
With these analyses, we can whether the asset was well designed, well built, operated correctly and whether the generation and performance of the plant are in line with expectations. In addition, other analyses are carried out to cover financial, regulatory and environmental aspects, ensuring that there are no hidden risks.
What are the most common risks identified in Due Diligence?
The most common technical risks involve plant performance and weak points that could lead to future losses. Sometimes you are purchasing a plant that is not operating properly due to technical issues, such as lack of proper maintenance or a chronic problem that needs to be corrected.
You may also be purchasing a plant that is performing well, but due to a design or execution error, it has a weak link that is on the verge of causing some damage to its operation.
This causes the plant to have a lower market value than expected, representing a technical risk for the investment. A regulatory risk can occur when there is a possible change in legislation that could affect the operation of the business, such as the sale of energy or the introduction of new taxes.
Financial risk, in turn, is closely linked to the plant's technical performance. You need to analyze all generation data to see the financial return and compare it with the conditions negotiated in the asset lease or any other business modality chosen in the negotiation.
Questions such as 'How will I trade this asset and its end product?' and 'What type of contract will it be?' are key to assessing the return on investment. Finally, environmental risk involves ensuring that the plant is not in breach of any regulatory body, such as being located in a conservation area or any other environmental impediment.
Normally, plants that are being acquired already have this environmental part regularized, but, in the case of a plant under construction, additional costs or environmental obstacles may arise.
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