Monday, August 4, 2014
The Project Developer and the Statistician: A Lesson in Probabilities
As the green energy movement advances and more project developers are join the hunt for the perfect combination of feedstock, location and technology that can tame the wild west of waste-to-energy, it’s easy to get swept up in the excitement. Developers can fall in love quickly when they see the dollar signs emanating from a new opportunities and oftentimes dedicate years of their lives trying to make it work. But just like a person’s first love that burns brightly with promises of forever and then languishes on far too long as both parties cling desperately to a fizzling romance, Better BTU has seen far too many project developers hold on to dying projects long after numbers show they don’t work. We advise developers remove the rose-colored glasses and take a look at projects with a statisticians’ eye.
One of our members likes to illustrate the phenomena of developers being blinded by the potential dollar signs they see in a project through a story about a project developer and his wife, a statistician.
One day, the project developer comes home from a long day at work bursting with good news from his wife.
“I’ve almost got this project nailed down!” the developer boasts to his wife, thinking she’d be giddy with the lap of luxury lifestyle they would almost certainly be leading once this project was secured.
“Oh, really?” she asks nonchalantly while beginning to prepare dinner. She’s hopeful for her husband but she’s seem him get excited before.
“It’s practically a done deal,” he assures her. “I’ve got a 90% chance of getting the PPA signed and a 90% chance that I’ve secured the feedstock, a 90% chance the county will approve the land I’ve selected for the facility and a 90% chance that the funding will come through. I’m about 90% sure the technology I’ve selected will work with the feedstock and about 90% sure that I can get an air permit for it,” the project developer beams. “Shall we go out and celebrate tonight?”
The statistician wife puts the casserole in the oven and pulls out a piece of paper.
“Honey, I love you,” she says, “but math has never been your strong suit.” She writes out each of the factors he listed along with the probability they would get accomplished. After listing six factors, she writes 54% at the top of the page and circles it.
“In statistics, you multiply the probabilities of success,” she reminds him. “If each of these things have a 90% chance of happening, then you’ve only got a 54% chance that ALL of them happen.”
The purpose of this story isn’t to discourage developers, but instead to caution them against getting too attached to any one project. Sometimes, developers will run into a problem on a certain facet of the project, and not wanting to scrap the project altogether, they move on to another area with plans to solve problems later.
This is frequently the case when it comes to funding. Finding funding is oftentimes the hardest aspect of a project, and one that gets kicked further down the road. Securing a site and getting a PPA are important steps but can easily make one feel like they are farther down the road than they are. Better BTU recommends project developers order their objectives and push funding and emissions (air permitting) towards the front of the list. We suggest finding out the criteria for a successful project in a region and then working multiple opportunities in that region. And like you eventually did with your first love, if the project doesn’t work in one area, move on. You’ll be heartbroken at first, but it will save you valuable time and effort (not to mention money) in the long run.