What to Pay vs. When to Pay: The Hidden Drivers in Supplier Selection
Introduction
Selecting the right supplier for renewable energy projects is one of many critical decisions a developer will make. While OEMs compete fiercely on price and margins, developers who focus solely on Capex, risk overlooking crucial factors like technology, yield, timing, and financial exposure. In a landscape shaped by uncertainty, whether around permitting, grid connection, or offtake agreements, financial modelling becomes more than a tool. It becomes a strategic compass.
This article series explores how financial modelling can support developers in making confident, value-driven decisions at every stage of procurement. From early-stage benchmarking to late-stage investment analysis, the right model at the right time can reveal the true economic impact of supplier choices.
But modelling is not just about the output of numbers from a preferred metric, it’s about navigating complexity. Each part of this series addresses a different dimension of that challenge:
- Part I: Focused on choosing the right financial metric; CAPEX, LCOE, or IRR based on project maturity and data availability.
- Part II: Explores the concept of time value of money and how payment schedules, bond structures, and cancellation risks shape supplier attractiveness.
- Part III: We explore how indexation modelling can be used not just to compare offers, but to steer procurement strategy and how prices evolve over time.
Throughout the series, we explore how financial modelling can help developers navigate complexity, informing decisions on cash commitment timing, bond exposure, and long-term risk, by translating commercial terms into quantifiable outcomes.
By moving beyond price alone, developers can better align their investments with project performance, market dynamics, and risk tolerance, ultimately securing more reliable returns over the project’s lifetime. And just as importantly, robust modelling helps avoid two common pitfalls: prematurely dismissing a supplier based on overly simplistic analysis or falling into the sunk cost fallacy when more advanced modelling reveals a mismatch between expectations and reality.
Part II of III: Time value of money
The time value of money is a well-established principle in financial theory and is embedded in most investment modelling frameworks. It plays a central role in metrics like Levelized Cost of Energy (LCOE) and Internal Rate of Return (IRR), where future costs and revenues are discounted to reflect their present value. However, in the context of infrastructure procurement, particularly in early-stage renewable energy projects, the practical implications of this concept reach beyond financial theory, shaping real-world decisions about timing and exposure of significant investments.
One of the most tangible applications of time value of money in procurement arises when the actual payment schedule is introduced. While initial comparisons between suppliers may be based on headline CAPEX figures allocated linearly across a procurement timeline, the timing of those payments can significantly influence the financial attractiveness of each offer. In some cases, a supplier with a higher total CAPEX may become the preferred choice once the payment structure is modelled, especially if it reduces early cash exposure by backloading key payments. Figure 1 is an illustrated example of two actual offers where the picture changed after a payment schedule was introduced.
Figure 1: Actual example of a situation where the introduction of payment schedules changed the picture. Offer is indexed to 1000 EURk/MW for simplicity.
The figure shows two indexed offers from an actual tender process. At face value, Offer 2 has the lower CAPEX, with a contractual amount of 1,000 EURk/MW compared with Offer 1 at 1,018 EURk/MW. However, once the time value of money is taken into account, Offer 1 becomes more attractive, with an NPV of 731 EURk/MW versus 749 EURk/MW for Offer 2. This reversal occurs because Offer 2 has more front-loaded payments, increasing the relative value of the payments in terms of present value; leading directly to an uplift in the business case on IRR level.
Importantly, time value of money in real assets development is not just a quantitative concept, it has a strategic and qualitative dimension. When capital is committed to a project, it is not only subject to financial opportunity cost, but also to the risk that the project may not materialize as planned. Developers often face uncertainty around permitting, grid connection, or offtake agreements, and committing significant capital in such conditions can expose them to unnecessary risk. This is where financial modelling must go beyond theoretical constructs and support real-world decision-making.
At Blue Power Partners, we introduce modelling tools that bring clarity and structure to the financial exposure created during procurement. One example is through cash commitment curves combined with cancellation cost modelling, which illustrates when capital becomes committed, how much is at risk at different stages, and what the financial implications are if a project is paused or cancelled. This helps developers and financiers assess whether payment schedules are aligned with the maturity of the project and the likelihood that key conditions will be met on time.
In practical terms, this highlights periods where large payments may be required before essential risks such as permits, financing, or grid access have been resolved. By identifying these pressure points, we can structure payment terms that reduce early capital exposure and increase flexibility. This is especially important in early-stage projects, where uncertainty is high and capital discipline matters. The aim is to give developers a clear view of how to protect their investments, avoid premature commitments, and maintain strategic optionality as the project evolves.
Alongside this, bond exposure modelling provides a transparent view of the net financial exposure at any point in the construction timeline. Payments to suppliers usually begin long before tangible assets are delivered or title is transferred, which creates a window of vulnerability. By comparing payments made, the value of assets received, and the protection offered by financial guarantees such as advance payment bonds, performance bonds, and warranty bonds, we can show how well the developer’s capital is protected at each stage.
Figure 2: Illustrative figure of cash commitments, cancellation cost and different bonds active.
Figure 2 brings these elements together. It shows how cash exposure evolves across milestones such as LNTP, NTP, and access to site, and how payments, cancellation cost, and bond coverage interact over time. Understanding this interaction is essential because it reveals not only when capital is committed, but also how well that capital is protected.
he cancellation cost curve indicates what the developer must pay if the project is terminated at a given point. Early in the timeline, cancellation costs start low because the supplier has not yet incurred meaningful production or procurement costs. If the project stops at this stage, only limited compensation is payable. In other words, the developer has committed cash to start the process, but not exposure (A).
As manufacturing begins, the cancellation cost rises and eventually exceeds the payments made. This reflects the supplier’s actual committed costs, such as long-lead items or production activities. If the project is cancelled at this stage, the developer must compensate the supplier for these real costs. Whether this is risky, however, depends far less on the size of the payment than on the project’s maturity. If essential conditions, for example a building permit, are still outstanding, any commitment made before those conditions are resolved is inherently risky, even if the amounts are small. Once those conditions are met, much larger commitments can be made with significantly lower risk.
This is precisely where the modelling adds value. If a building permit is expected on 1 January, the structure of the contract should be so that cancellation costs only begin to ramp up after that date. Although higher amounts may be committed at that stage, the underlying project risk has fallen, meaning the exposure is substantially lower. The aim is not to avoid commitment altogether, but to ensure commitments occur only after key uncertainties have been removed. When these curves are viewed together, as in Figure 2, the developer gains a complete picture of when capital is committed, when it is protected, and where exposure peaks. Eventually, the project is mature and closer to completion, the cancellation costs are not very relevant anymore, and the cost of cancelling the project converges to the actual amount paid (B).
Two offers with identical CAPEX, can therefore carry very different risk profiles depending on how payment timing, cancellation rights, and bond activation interact. Modelling these interactions helps developers negotiate terms that reflect the project’s risk maturity, avoid expensive early commitments, and structure procurement in a way that is both safer and strategically more flexible.
Figure 3. Bond exposure ramp-up and down
Figure 3 illustrates how bond structures typically ramp up and later step down across the construction timeline, and how these movements influence the project’s net financial exposure. Even small differences in when bonds activate or expire can have a significant impact on how well capital is protected at any given moment. This matters because the developer’s exposure is rarely constant; it changes continuously as payments are made, value is delivered, and equipment moves through different stages of production and transport.
The purpose of bond modelling is not to eliminate all risk. Doing so would be prohibitively expensive and, in practice, almost impossible. Instead, the value lies in understanding when exposure occurs and whether that exposure is acceptable given the project’s maturity. For example, once all major permits have been granted and the project is firmly committed, some periods of exposure may be entirely reasonable.
In many projects, the most pronounced exposure occurs after the main equipment has been manufactured but before it arrives on site. At this stage, large payments have been made, the equipment is physically in transit, and the developer has not yet received or taken ownership of it. Although the exposure is visible in the modelling, it may be considered acceptable because the fundamental project risks have already been resolved.
It is important to distinguish bond coverage and cancellation cost. Cancellation cost is a commercial agreement between the developer and supplier; it determines what the developer owes if the developer cancels the project. Bonds, on the other hand, are financial guarantees that protect the developer if the supplier fails to deliver, becomes insolvent, or defaults. They provide security against supplier failure, not against the developer’s own decision to cancel. Understanding this distinction is crucial when evaluating financial exposure.
In addition, liquidated damages modelling enables developers to assess the financial impact of delays with a level of precision that supports both negotiation and risk management. Infrastructure contracts often contain complex clauses that define how penalties are triggered across different phases of the project, such as components delivery, mechanical completion, and commissioning. These clauses may include grace periods, tiered thresholds, or termination rights, all of which can significantly affect the financial exposure of the developer.
By simulating various delay scenarios, on a daily level, our modelling provides clear visibility into when these contractual thresholds are reached and what the consequences may be. This allows developers to proactively manage risk and engage in more informed negotiations with suppliers. Rather than reacting to delays after they occur, our clients are equipped to structure contracts that reflect operational realities and protect against worst-case outcomes. The result is a more resilient procurement process, where timing and risk are not just acknowledged, but actively managed.
Ultimately, concepts like time value of money, exposure modelling, and liquidated damages are not just financial constructs, they’re a lens through which procurement decisions can be made safer, smarter, and more aligned with project success. In infrastructure development, where capital is committed long before assets are operational, understanding when and how financial exposure occurs is essential.
Where Blue Power Partners come in
Through our modelling and advisory support, Blue Power Partners helps developers move beyond price and toward a more resilient, risk-aware approach to supplier selection and contract structuring. By integrating tools such as bond exposure modelling, liquidated damages analysis, and cash commitment curves, we provide clarity in moments of uncertainty and confidence in moments of decision. This enables our clients to structure procurement processes that reflect not only commercial logic, but strategic foresight, ensuring that every euro committed is protected, purposeful, and positioned for long-term value.
Drawing on experience across the full project lifecycle, from origination and development to construction and operation, Blue Power Partners supports clients with financial modelling that reflects the realities of renewable energy projects. This includes early-stage Capex benchmarking across geographies and technologies, as well as advanced LCOE and equity return modelling within complex project finance structures.
Our valuation specialists work closely with developers throughout the procurement process, helping to structure and interpret commercial data in a way that supports informed, value-driven decisions. Whether comparing multiple OEMs or validating a single offer, our role is to provide clarity through modelling, ensuring that decisions are grounded in robust analysis and aligned with long-term project goals.
To summarize key points
- Financial modelling is essential for renewable energy developers, enabling smarter supplier selection by considering not just price (CAPEX), but also timing, risk, and financial exposure throughout procurement
- The time value of money (TVM) significantly impacts supplier attractiveness; payment schedules and timing of cash outflows can change which offer is most financially advantageous, even if headline prices are similar
- Modelling cash commitment curves and cancellation costs helps developers understand when capital is truly at risk, supporting better alignment of payment terms with project milestones and risk maturity
- Bond exposure modelling and liquidated damages (LDs) analysis provide transparency on financial exposure, showing how guarantees and penalties interact with payments and project delays
- Robust financial modelling helps avoid common pitfalls like premature supplier dismissal or sunk cost fallacies, ensuring procurement decisions are resilient, risk-aware, and aligned with long-term project value
Oliver Lønstrup Thorsen
Lead – Valuation
olt@bluepp.dk
Joakim Cato Marciniak Johannesen
Associate
jjo@bluepp.dk
