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Wind and power derivatives in project financing

Wind and power derivatives in project financing. EWEC 2007 Milano Drs. J.P. Coelingh, senior consultant. Introduction. Consortium Basic principle Wind derivative Key drivers Prerequisites Example Power derivative Key drivers Prerequisites Example. Consortium.

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Wind and power derivatives in project financing

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  1. Wind and power derivativesin project financing EWEC 2007 Milano Drs. J.P. Coelingh, senior consultant

  2. Introduction • Consortium • Basic principle • Wind derivative • Key drivers • Prerequisites • Example • Power derivative • Key drivers • Prerequisites • Example

  3. Consortium • Knowledge of energy whole sale and structuring • Bank with experience in brokering risk management services / products • Expertise in wind and solar energy and CO2-emissions

  4. Consortium • Three partners acting as broker • Interfacing between project owner and financial counterpart • Payment on fee basis • Involvement ends after close of contract

  5. Basic principle

  6. Basic principle

  7. Basic principle

  8. Annual premium Pay-out in bad year Basic principle

  9. Key drivers for derivatives • Financial instrument • Reduction of uncertainty in financial planning of (renewable) energy projects • Mitigation of long-term volume and/or price risks • Results: • cash flow stabilisation • improved debt service coverage ratio • lower risk premiums, less financial stress • Better financing conditions

  10. Wind derivative

  11. Key drivers • Annual income depends on annual yield (#kWh), determined by annual mean wind speed • Volume risk can be mitigated in long term fixed price contract, risk and upside reward remain with buyer

  12. Characteristics • Project based put option structure • Derivative structured according to client requirements: tailor made • Annual upfront option premium and annual settlement • Underlying indicator obtained from independent source (i.e. meteorological institutes)

  13. Tick-size k€100/0.1 m/s Cap pay out based on income loss for specific project Calculated and agreed strike level Pay out in year X Independent wind speed data Annual mean wind speed in year X Calculated and agreed cap level (e.g. P90) Basic mechanism Cap level Strike level Cap pay out Mtr./sec

  14. Prerequisites • Consensus on suitable wind speed data (>20 yr) • Contract terms defined by: • strike level (in m/s) • tick size (pay out in € per m/s) • cap (in € per annum) • maturity (several years) • (annual) settlement • Correlation between (loss of) revenues and wind speed statistics • Clearing and settlement to cover counterpart risk

  15. Scenarios wind derivatives

  16. Project example • 30 MW wind farm • Annual income estimated at € 3 M (electricity) • Cap pay out = € 600k • Maturity 5 years • Agreement on wind speed data and strike level • Annual premium = € 125k Average annual pay out (last 10 years)= € 75k • Financing advantage = € 60-90k (estimate)

  17. Round-up • Contracts are tailor-made • Wind speed follows statistical laws (trends!?) • Anything can be priced • Pricing on daily basis

  18. Power derivative

  19. Key drivers • Electricity value depends on power price developments • Applies to every (renewable) energy plant in free market conditions • Price risk can be mitigated in long term fixed price contract, risk and upside reward remain with buyer • Price risk can also be covered with power derivative

  20. Characteristics • Tailor-made financial deal • Upfront premium for the whole maturity period • Annual settlement • Settlement is based on independent average power market price (APX, EEX, NordPool, etc) • Power derivatives are additional to power purchase agreements, in which physical power is being traded • Simple put or combined put and call (collar)

  21. Project example (June 2006) • Underlying: annual mean of the daily mean APX price Day Ahead power price. • Contract size 102 GWh per annum • Maturity 5 years from July 1st, 2007 until June 30th, 2011 • Upfront premium payment for whole period at beginning of first year • Total upfront premium equals maturity ×volume ×premium • Settlement every year 5 work days after July 31st • Price indications for price floors: • 25 € / MWh put: € 0.35 per MWh premium • 40 € / MWh put: € 2.25 per MWh premium

  22. Round-up • Contracts are tailor-made • Power price follows economic laws (trends!?) • Anything can be priced • Pricing on daily basis

  23. Examples of tradable products • Wind derivatives • Solar derivatives • Power price derivatives • Reversed power price derivatives • CO2 asset management

  24. Summary • Wind and power derivatives enhance financing conditions • Definition is clear and accepted • Tailor-made products can be priced

  25. More info / contact details • Website: www.ecofys.com • Email: j.coelingh@ecofys.nl • Tel: +31 (0)30 280 8395 • Ecofys stand G022

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