Wind power production forecast inaccuracies have dogged the industry and improvements to more recent forecasts remain to be seen, Fitch Ratings says. We believe these issues have taken on more importance in light of a deal to limit greenhouse gases announced Wednesday by Chinese leader Xi Jinping and President Obama, which would accelerate the U.S.’s shift to alternative energy, including wind power.
The majority of 19 operating wind projects we analyzed in a recent report suffered chronic production shortfalls. Actual production only occasionally exceeded base case levels and generally fell between base and rating case levels. On average, actual production was 7.8% below Fitch’s base case projections and 6.1% above Fitch’s rating case. Going forward volatility is likely. The difference between minimum and maximum annual production in the rated projects is 14% on average and can be higher even in those projects performing relatively well.
In our view, this underperformance is mainly attributable to an overestimation of average wind conditions and underestimating the wake effects between turbines for studies completed prior to construction. Three out of the four Fitch-rated wind projects that used forecasts incorporating actual operating data performed close to base case expectations. Wind resource consultants continue to hone their methodologies and report that more recently completed studies have improved accuracy. Fitch-monitored projects with forecasts prepared in 2003-2006 performed on average only slightly worse than projects with forecasts prepared in 2007-2010. As production data from newer projects becomes available, Fitch will be better able to validate the claims of improved accuracy.
In addition to production shortfalls, wind projects must contend with grid curtailment, technical issues and excess operating costs. Operations and maintenance (O&M) expenses (which include labor, services and replacement parts) can also be significant for some projects. O&M services are often provided by the equipment manufacturers, reducing expense volatility even after original warranties expire. However, the cost of replacement parts and frequency of replacement can increase significantly for projects without service contracts. The impact is deeper when parts availability is strained for weaker manufacturers.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Wind Projects: High Risk of Production Shortfalls
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