Wind Energy Financial Model
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1 Wind Energy Financial Model Matemáticas Aplicadas February Quantil (Matemáticas Aplicadas) Wind Model February / 34
2 Plan of the Presentation 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
3 Contenido Introduction 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
4 Introduction Introduction Equity IRR and NPV: We calculate the equity internal rate of return (equity IRR) of a wind project. We also calculate the value of the project as the discounted values (at equity rate) of the net cash flows to equity (value of equity) plus outstanding debt. This the net present value (NPV) of the project. Quantil (Matemáticas Aplicadas) Wind Model February / 34
5 Introduction Introduction The model aims to: 1 Asses the financial attractiveness of the private sector investment in wind power in Colombia, under the current regulatory system. We are particularly interested in analyzing how the regulatory treatment of firm energy (via the cargo por confiabilidad) affects the attractiveness of investment. How other policy parameters (e.g. taxes, CDMs, cost of debt financing) would affect profitability of wind power. How other parameters (e.g. initial investment, spot energy price, wind speed, exchange rate, etc.) would affect profitability of wind power. 2 Estimate the financial risks associated with key risk factors: wind speed and spot energy price. Quantil (Matemáticas Aplicadas) Wind Model February / 34
6 Contenido Financial Model 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
7 Financial Model Financial Model In any period, if the spot price is under scarcity price, the cash flow is equal to the reliability payment plus the earnings for selling energy in the spot market. If the market price is over the scarcity price then it is mandatory for generators to sell their firm energy at the scarcity price. If a generator produces more energy than its firm energy, he can sell the excess energy at the spot price. However, if less energy is produced than its firm energy, the generator has to buy this energy at the spot price from someone else. In the presence of debt financing, we consider net cash flows to equity. Some other variable costs (FAZNI and CERE) and fixed costs (MO costs) are also included. Quantil (Matemáticas Aplicadas) Wind Model February / 34
8 Contenido Benchmark 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
9 Benchmark Benchmark No. Parameter Value 1 Exchange Rate (pesos/usd) 1,900 2 Spot Price (pesos/kwh) Installation costs (pesos/kwh) 3,420,000 4 FAZNI (pesos/mwh) 1,000 5 Number of Wind Mills (Nordex N60) Firm Energy 6% 7 CERE (pesos/mwh) 20,000 8 Firm Energy Payment (pesos/mwh) 28,000 9 Wind Speed (m/s) Scarcity Price (pesos/kwh) Time Horizon (years) Proportion of excess energy sold at spot price 10% Quantil (Matemáticas Aplicadas) Wind Model February / 34
10 Benchmark Benchmark Quantil (Matemáticas Aplicadas) Wind Model February / 34
11 Contenido Sensitivity 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
12 Sensitivity (i) Sensitivity Quantil (Matemáticas Aplicadas) Wind Model February / 34
13 Sensitivity (ii) Sensitivity Quantil (Matemáticas Aplicadas) Wind Model February / 34
14 Sensitivity (iii) Sensitivity Quantil (Matemáticas Aplicadas) Wind Model February / 34
15 Sensitivity (iv) Sensitivity Quantil (Matemáticas Aplicadas) Wind Model February / 34
16 Sensitivity (v) Sensitivity Assuming a proportion of the initial investment is financed with a loan that matures in fifteen years with a 3.5% annual real interest rate and monthly payments. Quantil (Matemáticas Aplicadas) Wind Model February / 34
17 Sensitivity (vi) Sensitivity Quantil (Matemáticas Aplicadas) Wind Model February / 34
18 Sensitivity (vii) Sensitivity Typical cumulative cash flow with debt financing. Quantil (Matemáticas Aplicadas) Wind Model February / 34
19 Sensitivity (viii) Sensitivity Benchmark investment cost. Quantil (Matemáticas Aplicadas) Wind Model February / 34
20 Contenido Risk Analysis 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
21 Risk Analysis Risk Analysis We now simulate the IRR for the full model with the same calibration for all parameters except risk factors: Spot price Wind speed 25 years ahead Quantil (Matemáticas Aplicadas) Wind Model February / 34
22 Wind Speed Simulations Risk Analysis Quantil (Matemáticas Aplicadas) Wind Model February / 34
23 Spot Price Simulations Risk Analysis Quantil (Matemáticas Aplicadas) Wind Model February / 34
24 Risk Analysis Risk Analysis For example, assuming CERE is paid and firm energy is set at 6% we obtain the following IRR distribution. The black lines represent the average and the 5% quantile. Quantil (Matemáticas Aplicadas) Wind Model February / 34
25 Risk Analysis Risk Analysis Firm Energy CERE Mean Quantile 5% 0% $ % -8.27% 6% $ % -5.73% 20% $ % -1.97% 30% $ % -0.08% 36% $ % 0.98% 0% $ 20, % % 6% $ 20, % % 20% $ 20, % -5.88% 30% $ 20, % -3.40% 36% $ 20, % -2.18% Assuming FAZNI is unchanged Quantil (Matemáticas Aplicadas) Wind Model February / 34
26 Contenido Firm Energy and El Niño 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
27 Firm Energy and El Niño Firm Energy and El Niño (i) Quantil (Matemáticas Aplicadas) Wind Model February / 34
28 Firm Energy and El Niño Firm Energy and El Niño (ii) Quantil (Matemáticas Aplicadas) Wind Model February / 34
29 Firm Energy and El Niño Firm Energy and El Niño (iii) Quantil (Matemáticas Aplicadas) Wind Model February / 34
30 Firm Energy and El Niño Aproximación CREG Curva Potencia pot 3000 "Datos" Datos kv^3 MejorCubica vel Quantil (Matemáticas Aplicadas) Wind Model February / 34
31 Correlations (i) Firm Energy and El Niño The correlation between the sea surface temperature anomaly and windspeed (10mts) is (p value of: 5x10E -6 ) Quantil (Matemáticas Aplicadas) Wind Model February / 34
32 Correlations (ii) Firm Energy and El Niño Correlation of (p value of 2x10E -5 ) Quantil (Matemáticas Aplicadas) Wind Model February / 34
33 Contenido Conclusions 1 Introduction 2 Financial Model 3 Benchmark 4 Sensitivity 5 Risk Analysis 6 Firm Energy and El Niño 7 Conclusions Quantil (Matemáticas Aplicadas) Wind Model February / 34
34 Conclusions Conclusions Current regulatory regime is not financially attractive for Main drivers of equity IRR are: 1 Spot price. 2 Wind speed. 3 Initial investment. 4 Debt and cost financing structure. 5 Reliability payment. By any measure, these are very risky financial investments. All comments and suggestions are very welcome: ariascos@uniandes.edu.co. Quantil (Matemáticas Aplicadas) Wind Model February / 34
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