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Assume that inflation is stable and all the figures are inflation-adjusted.

At €25/MWh you need 800 MWh to cover the €20k fixed costs. This is at most (assuming 2000 MWh/yr) 40% of the production. This leaves you with 60% of the production to sell to investors. Since the investors put in €1.5M, each €25k of investment buys them 1% of the output. How much is this worth?

1% of the output is between 20 and 30 MWh/yr, at 25 to 75 €/MWh, for 20 to 25 years. That is between €10k and €56k total. Over 20 years, though, variations will average out to between €19k and €22k total. This always loses money compared with 25k, but that is because you have offloaded the entire risk to the investors.

If instead you say that over 20 years the average price is unlikely to drop below €40/Mwh so you need only 500 MWh/yr to cover fixed costs; and arguing the 20-year average output is unlikely to drop below 2.4 Gwh/yr, you only need 21% of the production to cover costs and you can sell on 79%. Then each 19k of investment buys 1%, and returns 19k to 22k total at 95% confidence, for about 1.5% return above inflation with no downside.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:21:21 AM EST
[ Parent ]
so why should anyone invest in this when they can get the same return with much less risk by investing in government bonds?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 07:47:44 AM EST
[ Parent ]
But how can you reasonably offer anyone a higher return than this anyway?

The extreme case is where you assume a €75/MWh wholesale price so you only need 267 MWh/yr to cover your fixed costs, and assume 3GWh/yr production, enabling you to sell 91% of the production so 1% of production (returning 19k to 22k) costs €17k. this is still 1.5% per year above inflation, tops.

How can you issue debt on this project at more than 4.5% yield?

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:56:36 AM EST
[ Parent ]
thus the need for PTC, unless you make much higher hypotheses on electricity prices.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 08:17:18 AM EST
[ Parent ]
What is PTC and how does it allow you to issue debt at higher yields?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 08:49:58 AM EST
[ Parent ]
See the body of the diary: it's a tax credit for each kWh produced, which allows wind projects to get more income for their production without having to sell their production at prices higher than the market will give them.

Typically, a wind project will sell its electricity to a local utility for 3-4c/kWh (usually under a long term fixed price contract) and get an additional 2c/kWh (inflated) via the PTC for the first 10 years.

The higher (and very stable when you have a fixed pirece power purchase agreement) revenue levels make the project able to service debt even during periods of low wind. The cash waterfall is simple: revenu is used first to pay ongoing operating costs, then debt costs (which are fixed if you used a fixed interest rate), and whatever's left, which is likely to be quite volatile goes to the investor.

Depending on the project, the investor and the country, debt can cover 70 to 90% of the initial investment.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 09:39:49 AM EST
[ Parent ]
So we're talking up to a 40% subsidy for the first 10 years?

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 09:47:45 AM EST
[ Parent ]
you could say that, I suppose. You might want to add the budget of the DoD, highway patrol etc..., to the price of oil, and you'd suddenly get a subsidy of several hundred percent to oil producers.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 09:51:45 AM EST
[ Parent ]
Comparing a tax credit with the DoD budget is not exactly apples to apples.

What you're saying is that wind needs a wholesale price of $50 to $60 per MWh but that the wholesale price that can be locked in with long-term contracts is $30 to $40.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 09:56:04 AM EST
[ Parent ]
And so was I.

And the reason long term prices cannot be locked at higher levels is because it is difficult to force utilities to buy power at a higher price than they can get from coal-fired plants, especially older ones that have been grandfathered and do not have to fulfill all pollution and emission requirements and have to pay neither the environmental damage of strip mining, mountaintop removal or global warming.

So yes, I object to any expression that makes it look like wind gets huge subsidies.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 19th, 2008 at 10:03:47 AM EST
[ Parent ]
On the other hand, if you issue debt you need at least €75k/yr just to repay the €1.5M principal, and that adds to your fixed costs, so if you're not able to produce more than about €100k on any given year (say, the if the wholesale price drops below €35/KWh, or even below €50 with bad wind year) you have a serious risk of default.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:50:41 AM EST
[ Parent ]
Actually, the second case is 0.75% return over inflation.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Sat Jan 19th, 2008 at 07:55:47 AM EST
[ Parent ]

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