PrintOperational Risk: Operational Risk "summarizes the uncertainties and hazards a company faces when it attempts to do its day-to-day business activities within a given field or industry." A type of business risk, it can result from breakdowns in internal procedures, people, and systems. (Investopedia.com).
There are two specific types of operational risk that should accounted for in your project or in an energy enterprise: Production Risk and Expense Risk.
Production Risk
Production risk is the uncertainty associated with the energy production of your project. In renewable energy projects like wind and solar projects, the variability and intermittency of wind and sunlight can significantly affect the amount of energy produced. In oil and gas production, hydrocarbon reservoirs can produce more or less petroleum than expected. These uncertainties create uncertainty in the revenue profile for the project. If revenue is uncertain, then returns will be as well.
The operational risk faced by projects due to the uncertainty of the intermittent resource is significant, and without understanding and accounting for this risk, project stakeholders will not invest in the project. To account for the variation in the resource, the industry utilizes a probabilistic approach. The analyst cannot predict with 100% certainty what the output will be. The analyst can, however, use past data to predict with a level of certainty that an array will produce at least a certain amount of power. The analyst does this by developing P-values. For instance, a P50 value is that level of production that would expect to be exceeded annually at least 50% of the time. For a P90 value, we have a level of production that we expect to exceed 90% of the time or 9 out of 10 years.
Typically, lenders are interested in P90 or P95 values because they want to make sure that the debt payment will be made without interruption every year that the loan is outstanding. Developer and equity investors tend to look at the rosier P50 values, as these values are what should give the best estimates for equity returns.
For a really great exposition of how to account for variation in the solar resource, please read the blog by Solar GIS entitled How to Calculate P90 (or Other Pxx) PV Energy Yield Estimates, where there are a number of techniques to develop Pxx values discussed.
Expense Risk
Expense risk is the risk that input values like fuel or maintenance costs will be different than projected. Obviously, unexpected increases in expenses will put pressure on the returns of a project.