Currency Challenges in the Renewable Energy Sector
The renewable and clean energy sector has experienced significant expansion in recent years, driven by the growing awareness of environmental sustainability and the shift towards clean energy sources. As companies in this sector continue to expand into international markets to seize opportunities for growth, they encounter unique challenges that can have implications for their financial stability and profitability.
One of the foremost obstacles they face is foreign exchange (FX) risk, which stems from the volatility of currency exchange rates.
To navigate these risks effectively, businesses should adopt comprehensive strategies to mitigate currency volatility and safeguard their financial performance.
Some of the currency risks that renewable energy companies face are below.
Projects
Renewable energy companies can be exposed to transactional currency exposures where they often undertake projects in different countries, involving contracts with suppliers, contractors, and subcontractors. Currency fluctuations can affect the cost of equipment, materials, and services, impacting the overall project budget and profitability. If the domestic currency weakens against the currency of project expenses, the company may face higher costs, potentially leading to reduced project profitability or delays.
Stage and milestone payments can be particularly susceptible to currency risk. For instance, if a payment milestone is triggered when the domestic currency is weaker than when the project commenced, the company may need to allocate more funds to fulfil its payment obligations. This can strain the project's financial resources, disrupt cash flow management, and impact overall profitability.
Supplier Payments
Renewable energy companies rely on manufacturers and suppliers located in different countries for equipment and components such as solar panels, wind turbines, and energy storage systems. Currency fluctuations can impact the cost of purchasing or importing these materials. A change in exchange rates can increase the costs of manufacturing equipment or sourcing components from foreign suppliers, affecting the company's profitability and competitiveness.
Financing
Businesses may engage in financing activities that expose them to currency risk. This includes borrowing funds in foreign currencies to finance their operations, projects, or acquisitions. Fluctuations in exchange rates can affect the value of loan repayments, interest payments, and debt servicing, potentially creating financial challenges and impacting the company's financial stability.
Translation
Companies may have subsidiaries or operations in different countries, which generate revenue and incur expenses in various currencies. Fluctuations in exchange rates can affect the translation of foreign currency-denominated financial statements into the company's reporting currency. This can lead to fluctuations in reported revenues, expenses, and profitability, making financial analysis and decision-making more challenging for investors and stakeholders.
Ways to Mitigate Risks
To mitigate the potential negative impacts of currency fluctuations, renewable energy companies can implement various strategies that involve currency hedging. For companies with overseas projects, utilising forward contracts can help mitigate currency volatility. Forward contracts allow companies to secure the exchange rate for the project duration, offering stability and predictability. Additionally, for projects with milestone payments, flexible forward contracts enable companies to lock in the exchange rate and use portions of the contract as milestone payment dates occur. Implementing risk management strategies, can help businesses can safeguard their financial stability.
Download our renewable energy guide for more information below.
Contact Us
Centura FX has strong experience in supporting renewable energy companies and devising and implementing successful approaches to managing currency fluctuations. As a foreign exchange specialist, we can provide a wide array of solutions and products to help alleviate the risks associated with currency fluctuations.
You can arrange a call with one of our specialists or contact us directly by calling 0203 871 9830.