PV plants have proved significantly more reliable investments than wind farms in recent years, with many of the world’s largest energy investors expressing surprise at how well they have performed.
The chief reason for the discrepancy between the two technologies has been their yield risk – the risk that they will not produce as much power as expected – with onshore wind farms almost universally disappointing investors in recent years.
“Five, six years ago, everyone was very bullish on wind performance and believed resource forecasts were highly reliable,” says Daniel von Preyss, who oversees infrastructure investment for Impax Asset Management. “But over the past few years, a lot of wind farms have really suffered on the performance side.”
Project financiers used to base their financial models on the so-called P50 estimate provided by consultants, which, in theory, denotes the probability of a wind farm producing a given amount of energy in a given year.
A P50 means there is a 50% chance of reaching the projected annual output; a P75 means there is a 75% chance, but the output estimate is lowered to take into account the higher probability of the level being reached.
But P50s have proved so unreliable that it is now “standard” for banks to use the P75 estimate instead, von Preyss says. Because they are basing investment decisions on lower output estimates, the cost of finance goes up for wind developers.
Von Preyss was speaking at a renewable-energy conference in London.
Yusuf Macun, HSBC’s head of power and renewables for Europe and Africa, says it is even worse than that. “Forget the P50 or P75,” he says. “In three out of the past five years in Europe, I’d say a lot of wind farm owners can probably talk about not even hitting their P90.”
Andrew Marsden, managing director in Europe for GE Energy Financial Services, agrees that P50s are often not worth the paper they are printed on.
“When a wind consultant tells us what we can expect to come from our wind farms¿ our tendency is not to believe them,” he says. “The only place where the wind has been significantly better than we expected is Hawaii.”
Unreliable forecasting is only part of the reason so many wind farms have not met investors’ expectations, says Chris Hunt, managing director at Riverstone, which is one of the world’s largest energy-focused private-equity houses, with about $4bn invested in renewables.
The other key issue is that “generally speaking, many wind turbine manufacturers have not delivered the power curve or the availability they promised”, Hunt says. “When we look to our solar assets – and we’ve now got 52 projects spread across eight countries – we’ve generally found that they are outperforming what our expectations were. And I think most people are finding that.
“It’s still too early to tell what the degradation curve [for PV modules] is going to look like over ten years. But I can tell you that it’s been significantly better than we expected up to this point.”
The downside to investing in solar has not been the equipment or resource assessments, but the regulatory risk, investors agree.
Germany and Italy have rapidly changed the rules governing their feed-in tariffs in recent years, while Spain and the Czech Republic have retroactively changed their support schemes, leaving many investors with much less valuable assets.
The sovereign risk issue has made wind appear a safer bet than solar in many countries, although that advantage will erode as subsidies for both technologies shrink.
“When we compare both sectors, wind has much less of an ability to forecast future production, but political support seems to be more stable,” von Preyss says, and that can tip the scale for many risk-averse investors.
Yet despite their challenges, wind and solar have largely proved sound investments.
HSBC has about $1bn invested in renewables assets, says Macun.
“The good news for wind and solar is this is a performing portfolio. [HSBC’s] overall experience in renewables has not been overly negative,” which is saying quite a lot in the current economic climate, he adds. “Despite all the negatives impacting banks, a lot of us are still looking at these projects.”
|Wind Watch relies entirely
on User Funding