PESTEL: what it is and what to do instead

The idea worth keeping

Not as boxes to fill, but as questions that fall out of the maths of the goal:

• Which input to my maths (price, volume, cost, timing) could an outside factor move?
• By how much, and how likely is it?
• Can we protect ourselves with a contract, a partner or timing?

Why reaching for it fails in an interview

• It is generic. Six letters of outside factors can be listed for any country and any industry.
• It misses the driver that matters. For a solar farm, policy matters only through the price per unit of power and grid limits, and a list does not size either.
• It sounds rehearsed. Running through all six letters sounds like a school checklist.

What to do instead: a worked case

1. 1

   Pin the question

   Decide whether the farm pays back within the company's 12-year limit.

2. 2

   Write the maths of the goal

   • Power produced per year = megawatts x 8,760 hours x capacity factor
   • Profit per year = power produced x price per megawatt hour minus operating cost; payback = build cost / profit per year
3. 3

   Use what you know about the business

   • For solar, the price per megawatt hour and how much power the grid accepts decide revenue; sunshine sets the capacity factor.
   • A price fixed by government auction for many years removes most of the risk; selling at market prices does not.
   • Curtailment (the grid refusing power at busy sunny hours) cuts output directly.

   The structure that falls out of it

   • Power produced
     • Capacity factor
     • Curtailment by the grid
   • Price per megawatt hour
     • Fixed auction price or market price
   • Cost
     • Build cost
     • Operating cost

   Hypothesis: The farm works if the price is fixed by contract; at market prices it probably does not, so the price route decides it.

4. 4

   Find the facts that decide it

   • 100 MW x 8,760 hours x 20% = 175,200 MWh a year. At an auction price of 50, revenue is 8.76 million; minus 1.76 million operating cost, profit is 7 million. Build cost 70 million: payback 10 years.
   • At a market price of 35: 175,200 x 35 = about 6.13 million of revenue and 4.37 million of profit, a payback of about 16 years. If the grid curtails 10% of output, both get worse.
5. 5

   Say so what

   Build only with a fixed price from the government auction: at 50 per MWh the farm pays back in 10 years, within the 12-year limit, but at a market price of 35 it takes about 16. Bid in the next auction and check the grid connection terms to limit curtailment. The risk is a lower winning bid price, so set a floor of about 43 per MWh, where payback reaches 12 years.

Build the acumen behind it

The worked case used two things a list cannot give you: the five moves, and knowing how this kind of business makes money. These pages teach both.