This blog continuous our previous post “Quick Assessment of Wind Power Investment Opportunities 1/3” make sure to start off by reading our first post here!
This series of blogs addresses the main elements and considerations regarding wind investments and how they can be built into a quick investment case analysis. The aim of these posts is to support investors in assessing project viability and project uncertainty supporting decision makers with a better understanding of wind farm economics.
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ENERGY PRODUCTION Continued…
By taking into account wind speeds and directions as well as air density, temperature and humidity the expected annual energy production (AEP) of the wind park are modelled.
The understanding and forecast of wind conditions at the project site are essential, as sufficient wind speeds are the main drivers of wind energy production and of wind park revenues. Hence, assessing the wind energy resource at the given project site though a wind study is of high priority. This study measures wind conditions at the site in intervals (for a period of typically 2-5 years) and on the basis of these measurements describes the speed, direction and density of the wind at the site. Special attention must be paid to project specific factors -such as the height of the planned turbines- and they have to be put under consideration in order to guarantee the most valuable information as the output of the study.
Through a wind study, a power curve is characterised by a cut-in and a cut-out wind speed. The cut-in wind speed is the level at which the turbine starts to produce power, while the cut-out wind speed is the level at which the turbine stops producing power as excessively high wind speeds could otherwise damage wind turbines.
Based on the gathered information and output, the best fitting turbine can be chosen, in order to optimise production. Aiming rarely stopping power production due to either too low or too high wind speeds.
While a wind study results in an expected energy production from the wind farm, this estimate is exposed to uncertainty. Therefore it is still important to take into account when assessing the energy production of a wind farm. Wind studies often quantify the uncertainty in terms of standard deviations, which allow for the modelling of expected production based on a statistical approach and lead to a more qualified assessment of expected production and production uncertainty.
The expected yearly production of a wind farm is called the P50, and represents the production level which is exceeded with a probability of 50%. Furthermore, many studies state a P75 and P90, which are interpreted just as the P50, and can be used to evaluate the uncertainty in the production forecast.
Additionally to the expected level of production, power prices highly affect the profitability of a project. And power price forecasts should always be put under consideration, as prices have a direct impact on the projects profitability.
A lot of information can be found in short-term futures and forward markets if power contracts are traded frequently. However, in the long term, markets often become illiquid and forward prices may reflect inflation expectations rather than the expected development of the market price.
Economics
Including the topics: Transaction Type, Sale Type, Percentage of Sale, Offtake Type, Offtaker, Power Revenues, PPA/FIT Type, PPA/FiT Duration, Revenues p.a., Revenues per MWh, Total CAPEX, Basis of CAPEX Definition, OPEX p.a., Basis of OPEX Definition, Targeted Selling Price, and the Economical Lifetime of Project
In our experience, onshore as well as offshore wind farms operate with a rather high EBITDA, reflecting the low marginal cost of producing power through wind turbines. Hence, OPEX for an offshore wind farm can be expected to be somewhat higher then compared to an onshore farm due to greater costs of accessing and maintaining turbines.
In general, OPEX may vary significantly between projects depending on mainly price of the service contract and the land lease. Some operating costs such as land lease, insurance, management costs and maintenance costs (O&M) can be fixed at a yearly amount. But some OPEX elements may be pegged to revenue or production to form a hedge on profit margins.
Main elements of OPEX include costs for O&M as well as asset management. O&M will often be covered by a service contract with the turbine supplier for a certain amount of years. But it is important to consider costs not covered by the contract and potential changes in operating costs after service contracts may expire. Over the operational life the turbines will be worn down and additional costs can apply due to more frequent maintenance and/or breakdowns.
In addition to the OPEX elements described above, tax considerations are also an important part of an investment case analysis. The characteristics of tax modelling will vary across countries and projects. Furthermore, it is important to consider the differences between payable– and accounting taxes, as they differ in their effect on a project’s liquidity.
Legal Information
This Includes a wide set of information varying heavily, depending on the project at hand. Information which we assess includes: Landplot Ownership, Status of Landplot Ownership, Remarks for Landplot Ownership, Power Production Licence, Term of Power Production Licence, Issue Date of Power Production Licence, Building Permit, Zoning, Civil Construction Study, Grid Connection Agreement, and Environmental Impact Assessment.
Technical Information
This set of data has to be considered especially, when assessing a project’s energy production. Depending on the wind project at hand, the information which we assess includes: Grid Connection Type, Distance to Grid, EPC Contractor or Errecting Contractor(s), O&M Contractor, Turbine Type, Turbine Capacity, Hub Height, Number of Turbines, Turbine Provider(s)
Continue reading about the chapters Economics, Technical Information and Legal Information in our next blog: Quick Assessment of Wind Power Investment Opportunities 3/3 where we talk about key financial figures such as project IRR and LCOE!