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Yes, but what I wanted to know was what that rate was, and whether there was room for "creative" accounting. Jerome seems to have answered this above.
by gk (gk (gk quattro due due sette @gmail.com)) on Thu May 20th, 2010 at 06:08:20 AM EST
[ Parent ]
gk:
what I wanted to know was what that rate was
You think that's a constant set in stone?

Okay, so currently investors are happy with a 3.5% risk-free 30-year return rate. Check back a year from now and it may be different.

And changes in the discount rate can tip an investment into insolvency.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:14:28 AM EST
[ Parent ]
is that you can set it into stone from the start (given that you need most of the money upfront to build the windfarms). Markets (banks, anyway) are happy to give you a fixed rate.

Today, pensions funds are happy to invest in wind at 7-8% leveraged returns on equity; debt for projects costs roughly 6% flat for onshore, more like 7% flat for offshore. Public finance would make a big difference.


Wind power

by Jerome a Paris (etg@eurotrib.com) on Thu May 20th, 2010 at 06:16:43 AM EST
[ Parent ]
Jerome a Paris:
you can set it into stone from the start (given that you need most of the money upfront to build the windfarms). Markets (banks, anyway) are happy to give you a fixed rate
And then if the interest rate environment changes the cost of refinancing an equivalent energy stream will be different. Balance-sheet risk doesn't go away just because all your debt instruments are fixed-rate.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:23:57 AM EST
[ Parent ]
They can always invest in a property bubble.

Part of the insanity of the markets comes from insisting on returns which can only be created by bubbles.

Stability isn't quantified or considered a financial good - which is unfortunate, because volatility and uncertainty are excellent ways to destroy opportunities for real wealth creation.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 20th, 2010 at 07:11:45 AM EST
[ Parent ]
ThatBritGuy:
Part of the insanity of the markets comes from insisting on returns which can only be created by bubbles.
I wonder if most people realise the meaning of required rate of return when they learn the basics of finance.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 07:20:31 AM EST
[ Parent ]
When I was at the recent annual conference of the Swedish Green party, I spoke with some guys from Vattenfall. They told me that the required rate of return they were supposed to reach, as mandated by the government, was 15 %. Need I add that I started raving incoherently at them?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu May 20th, 2010 at 09:28:12 AM EST
[ Parent ]
Mig
I wonder if most people realise the meaning of required rate of return when they learn the basics of finance.

The "required rate" is determined by the issuer of the loan each time a loan is issued. US credit card issuers charge up to 30%, including fees, etc. 15% to 18% returns on equity is the rate that TBTF financial pirates "require" on an ongoing basis. The Fed is "requiring" almost nothing for TBTFs just now. Everyone else falls in between. Other than the Fed, if anyone reasonably thought they could get a higher return, consistent with acceptable risk, they would "require" that higher rate.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 20th, 2010 at 06:08:14 PM EST
[ Parent ]
This required rate of return is of course denominated in fiat currency eg $, €, £ - issued as a claim over debt.

The required rate of return by an investor in gold or in energy, on the other hand is zero per cent. These investors are not aiming to make a profit: they are aiming to avoid a loss.

There are currently tens of billions invested in energy markets - typically through futures markets and structured finance, but occasionally directly "peer to peer" (eg Shell's transaction with ETF Securities) - at zero percent in dollar terms.

Such funds could easily be deployed as direct investment in future energy production. Renewable energy, and energy savings, then have an advantage over all other forms, since it is possible to monetise energy which is essentially free.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 21st, 2010 at 08:37:29 PM EST
[ Parent ]
ThatBritGuy:
Stability isn't quantified or considered a financial good - which is unfortunate, because volatility and uncertainty are excellent ways to destroy opportunities for real wealth creation.
You can always make bets on the volatility by trading options.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 07:21:35 AM EST
[ Parent ]
Of course. And the markets love volatility for that reason.

Meanwhile in the real economy, volatility and high returns mean unemployment and impoverishment.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 20th, 2010 at 07:34:11 AM EST
[ Parent ]
Can't you avoid the need for refinancing by loaning the money over say 20 years?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu May 20th, 2010 at 09:29:26 AM EST
[ Parent ]
But each new project that gets financed changes the environment in which the existing ones operate. A market return on capital for a state of the art wind farm may look good.

But an off-market return on capital for a 5-year old farm maybe doesn't look that good any more. If interest rates are lower you'd want to refinance to take advantage of the lower costs, or new developments will price you out of the market. If interest rates are higher the present value of your production drops.

This is part of what drives the business cycle: the conditions at which a project is financed may be wholly inappropriate years later.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 09:44:37 AM EST
[ Parent ]
I don't see the problem. If interest rates go up, you're safe with your current loan. If they go down you refinance.

And you will hardly be priced out of the market by new more cheaply financed windfarms, when wind is just a few percent of the total power supply.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu May 20th, 2010 at 09:59:28 AM EST
[ Parent ]
If interest rates are lower you'd want to refinance to take advantage of the lower costs, or new developments will price you out of the market.

There is no problem with that which can't be solved by a 20-year take-or-pay contract with the receiving utility.

Feed-in-tariffs and preferential scheduling laws are, as far as I can tell, simply a way to force utilities into long-term take-or-pay contracts with an industry that isn't considered Serious, and/or where the utilities have more market power than the individual wind development.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 20th, 2010 at 04:24:43 PM EST
[ Parent ]
Balance-sheet risk doesn't go away just because all your debt instruments are fixed-rate.

Possibly.

But a going concern with a fixed-rate loan portfolio and sufficient net revenue to cover financial costs, investment and maintenance of its capital plant can tell The Market to sod off and value its assets according to its own internal discount rate.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 20th, 2010 at 04:20:12 PM EST
[ Parent ]
is that you can set it into stone from the start (given that you need most of the money upfront to build the windfarms). Markets (banks, anyway) are happy to give you a fixed rate.

Today, pensions funds are happy to invest in wind at 7-8% leveraged returns on equity; debt for projects costs roughly 6% flat for onshore, more like 7% flat for offshore. Public finance would make a big difference.

As I've been reading through articles from Spain about the FIT debate there, I've been thinking. Would it be best to have a gradual transition from production based incentives, e.g. FITs, to construction based approaches, e.g. loan guarantees.  In the latter case the revenue source could still be consumers, but as wind production costs pass through the band of market prices the focus would shift from infant industry protection to lowering start up costs.  

A legacy program could "grandfather" existing wind farms into a FIT regime that would be phased out after 10 years. But, future wind farm construction could be fomented through small equity stakes taken by  the Sociedad Estatal de Participaciones Industriales, State Corporation for Industrial Participation.  This would be consistent with the policy adopted at the regional level, where the autonomous communities have fostered private participation in wind farm development through taking small stakes.  (This was particularly true in Navarra, where Sodena, the Navarra Economic Development Society, was a huge player in building wind farms in the province.)

Direct lending would provide could create wider access to capital, allowing a broader group of players to get involved in wind farm construction. As of 2010, the total Spanish FIT budget is around €6.3 billion.  About half (53%) of that goes to solar installations, and about a third (31%) to wind.  I honestly believe that FITs for PV are a bad idea.  Residential cost parity is rapidly approaching, particular in the sunny south of the country.  Since these are small installations, why not subsidize construction through a direct lending program for building co-op boards?  That would spread the money a lot further. FITs, I think, should be reserved for utility scale production, which is primarily going to be thermo-solar.

If FIT rates for wind in the legacy program were cut from €0.0792/kWh to €0.05/kWh, that would reduce the amount going out from €1.953 billion to €1.232 billion.
That would liberate €721 million annually for a program to provide capital access to wind farm developers.  Used to cover interest costs, that would be enough to finance interest free loans for perhaps ten times that amount.

I've got more, but this is turning into a diary, which I think I'm going to write later.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu May 20th, 2010 at 11:35:49 AM EST
[ Parent ]
What would your proposal do to the preferential dispatch schedule? If wind isn't guaranteed a preferential dispatch, it gives unreasonable market power to utilities.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 20th, 2010 at 04:33:39 PM EST
[ Parent ]
I don't see any reason why that couldn't continue.  I think that it's an essential part of the merit order effect.

My thinking would be to transition wind away from production incentives towards ones for construction. Wind basically has no marginal cost, so practically, there's not a huge difference.

On the other hand, I think that thermo-solar still needs infant industry protection, although the rate needs to be more reasonable.  PV on the other hand I think should have financing support, and should be limited to supplying the needs of the building that they are attached to instead of put on the grid.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Thu May 20th, 2010 at 05:24:44 PM EST
[ Parent ]
There is always room for creative accounting.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Thu May 20th, 2010 at 06:26:34 AM EST
[ Parent ]

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