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Wind and power derivatives in project financing

Wind and power derivatives in project financing

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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