Financing Aspects - Wind Energy

A financial analysis is intended to clarify whether or not the wind farm project is financially feasible for the chosen site and types of wind turbines and several other parameters. A financial efficiency threshold is often set by the project developers. The financial analysis can reaveal, which technical or non-technical modifications can be conducted to reach and surpass the set efficiency threshold. For this purpose a complete cost-benefit analysis under consideration of all relevant project parameters (according to site conditions, choice of technology and financing conditions) must be conducted.

There are several major indicators that can be used to evaluate the financial feasibility of a project based on a complete description of benefits and costs. Common examples are:

• the financial internal rate of return (FIRR),
• the Debt Service Coverage Ratio (DSCR),
  
• the Return on Equity (ROE) and
  
• the levelized generation costs of the wind park.
  

These indicators and their significance are described at the end of the article.

Costs included in financial analysis

The analysis of costs include:

• Investment Costs
  
• Operation and Maintenance Costs
  
• Land Lease Costs
  
• Costs for Mitigation Measures
  
• Project Financing Structure
  
• Equity Finance
  
• Debt Finance
  
• CDM Up-Front & Administrative Costs
  

The different types of costs are explained briefly in the following. Certainly the type and number of costs that come up in a project depend on project size and site conditions. To give a inclusive summary of possible costs descript big wind park project i

Investment costs

The total investment costs consist of the following items:

• Turbines incl. Erection
  
• Sea transport and inland transport
  
• Crane, if necessary incl. sea transport
  
• Crane works
  
• Installation
  
• Civil works
  
• Road access
  
• Crane pads
  
• Foundations / basements
  
• Cable trenches
  
• Control building
  
• Required electrical equipment
  
• Extension of substation
  
• Civil works for new substation
  
• Transformer (132kV / 33kV)
  
• Auxiliary equipment of substation
  
• 132 kV components
  
• Overhead lines (OHL)
  
• Wind park cabling, earthing, Scada
  
• distribution stations on site
  
• Electrical equipment inside control building
  
• Auxiliary transformer at control building
  
• Equipment for maintainance team (e.g. tools, cars)
  
• Engineering (international and local)
  
• Mitigation measures

If the project has an international character, investment costs should be divided into the costs borne by local investors and the part of costs borne by foreign investors.

Operation and Maintenance Costs

The O&M costs include:

• repairs
  
• maintenance
  
• spare parts
  
• insurance costs
  
• personnel costs for wind park management and maintenance
  
• electricity consumption

The range of the costs is determined by the changing lifetime of the components and their prices which can not be predicted exactly. Furthermore the way of operating the wind parks can have an influence on the expected costs which can also be only estimated for future times. In addition, the size of the machines and the operating time under full load is expected to have an influence on the maintenance costs.

According to Consultant s experience, manufactures have to guarantee that in wind parks with an installed capacity of approximately 50 MW, two experts (usually, one electrical engineer and one mechanical engineer) will be constantly present at the wind park. Additionally, a team of four local experts has to be established for maintenance tasks and a crane has to be available, at least once per year, to realise operation revisions. Further, condition monitoring should be realised by independent engineers in order to plan the repairs. The O&M costs have taken insurance costs into consideration in the form of an insurance following commissioning (Business Interruption Insurance). This has been calculated as an annual 12.0 % of the wind turbine price

Land Lease Costs

The agreed land lease costs (with regional authority or private owner of the site) have to be considered.

Costs for Mitigation Measures

If the analysis of the environmental impacts of the wind park revealed significant problems resulting from erection and operation of the wind park, reasonable mitigation measures have to be planned. Common environmental problems concern:

• protection of birds and bats
  
• protection of other species disturbed by building and operation of the wind park
  
• protection of nearby domestic dwellings from noise of the wind park
  
• technical resolution measures to prevent adverse effect on telecommunication systems in the area
  
• ...
  

The planning of application of mitigation measures is normally controlled during the approval of the planning application of the wind park.

Project Financing Structure

Depending of the availability of investors and funding, the project developer creates a financing structure: He decides, which part of investments has to be provided as equity and which share is finance based on dept.

• Equity Finance: It has to be considered, which components and working procedures should be financed by equity. Additionaly it should be decided whether equity should be used for the first investments.
  
• Debt Finance: The ultimate financing conditions at which debt can be raised will depend upon several factors, including for example the general environment in the debt markets, local political conditions as well as the Lender s interpretation of the projects risk profile. It has to be decided, whether the debt can be provided by foreign or domestic financial institutions, while local activities will be covered by local loans.
  

The dept structure describes conditions of repayment and interest by the following parameters:

• Availability period of the credit
  
• final maturity - time period after which repayment should be finalized
  
• repayment profile - frequency number of repayment rates is determined
  
• base rate in % per annum
  
• grace period - a starting period without repayments is often arranged for the first years of project operation
  

CDM Up-Front & Administrative Costs

In order to register a project as a CDM activity, the project participants have to incur mainly in CDM up-front and CDM monitoring costs. CDM-Upfront costs for a large scale project are usually estimated at USD 100,000. Additionally ongoing CDM administrative costs have to be accounted. GTZ assumed USD 5,000 / per annum for a large wind park project in Ethiopia. CDM administrative Costs are applicable only in years determined as CDM credit periods.

Benefits
Financial Benefits
Electricity Sales
CDM Revenues

Additional Information needed
Inflation Rate
Rate of Exchange
Depreciation Rates
Dividend Distribution
Applicable Taxes
Discount Rate (WACC)
Project s Milestones
Major Financial Indicators
Net Present Value
Financial IRR (FIRR) and Return on Equity (ROE)
Return on Equity (ROE)
Debt Service Coverage Ratio (DSCR)
Levelized Costs

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see: GTZ 2009: Development of Implementation Strategies for a Regional Regulatory Action Plan (RRAP) for the Western Cape. http://www.gtz.de/de/dokumente/gtz2009-en-regional-regulatory-action-plan-western-cape.pdf

Financial Incentives and Programme Funding pp. 78

There are different types of instruments available to support renewable(wind) energy projects which range from direct to indirect policy instruments. Direct policy measures, such as (encouraging) Feed-in-Tariffs, aim to stimulate the installation of renewable technologies, whereas indirect instruments focus on improving long-term framework conditions. In addition to regulatory instruments, other approaches are aimed at removing barriers which limit investments, such as lack of information, lack of skills, limited research and development, inadequate regulatory structures, and limited incentive programmes.(...) Renewable energy incentive programmes can assist in establishing a competitive selfsustaining renewable energy supply while increasing the quantity of renewable energy
generated country-wide. There are a range of incentives that can be used including:

• direct subsidies from government in the form of feed-in tariffs and capital grants;
• fiscal incentives such as tax rebates or exemptions;
• investment incentives which encourage the participation of national and international financiers; and incentives that promote public-private partnerships to increase the use of renewable energy technologies.
  

Portal:Wind