Economic Analysis on the Profitability of Wind in Portugal Between 1992-2006

Economic analysis on the profitability of wind in portugal between 1992-2006

Ivonne Pena, Carnegie Mellon University, Instituto Superior Técnico, (+1) 412 295 9630,

Inês Lima Azevedo, Carnegie Mellon University,

Overview

The wind feed-in tariff (FIT) scheme in Portugal was applied since the construction of the first wind park in 1992, and currently guarantees payments for the first 15 years of production or 33 GWh per MW installed. Total spending in the form of FITs by the country so far has been approximately 3.6 billion dollars (ERSE 2011). The policy has created a tremendous positive impact: Portugal’s average annual wind capacity additions have been approximately of 220 MW over the last 20 years with wind representing 17 percent of total electricity generation in 2010 (INEGI 2010). However, there is still an open question of whether these incentives have overcompensated the investors, and the same results could have been achieved at much lower costs to Portuguese consumers. The purpose of this paper is to estimate the profits made by wind independent power producers (IPPs) that connected to the grid between 1992-2010. All prices are in $2005 values.

Methods

We estimate profits and return to capital investment of wind parks connected in 1992-2010, by year of connection.We also estimate the aggregate annual profits and returns of the wind industry at national level. Total profits made in year i by a particular wind IPP are equal to total revenues minus total costs:

,i = 1,2,…,lifetime

Where:

geni is total wind generation of year i

FITi is the average annual national FIT payment in year i ($2005/MWh), paid for the first 15 years of generation, 33 GWh per MW installed or December 2019, whatever is the longest, according to Law 33A/2005.

priceiis the price per MWh ($2005/MWh) that wind porducers will receive after the FIT period is over (i.e., after 15 years). Based on the Portuguese Law, price should take the value of the average national spot electricity market price plus green certificates price or average FIT payment extended for five more years. This means that wind IPPs will receive at least the average spot electricity market price (approximately $60/MWh in 2010). We considered $0/MWh, $30/MWh and $60/MWh to be conservative in our estimates.

T is the period for which the FIT is guarantee, 12 for wind parks connected in 1992-2004 and 15 for wind parks connected in 2005-2010, according to Law 33A/2005.

are total investment costs per MW ($2005/MW), including foundation, road, land and grid connection. These include a lag time of one year to take into account construction time. Due to data availability, we used Danish investment costs for 1992-2002 and Portuguese investment costs for 2003-2010. Correlation of 0.9 of Danish and Portuguese data for years 2003-2006 justifies the use of Danish wind investment data.

r is the discount rate (10%).

is total wind capacity (MW) connected in Portugal in year i

To better inform policy makers on the design of the FIT, we consider the following scenarios:

1. BAU: the FIT system continues as it is currently established under Law 33A/2005
2. Scenario 2: The FIT ends after 12 years of operation or by December 2012, whatever is the longest.
3. Scenario 3: The FIT ends in December 2014for all wind parks, regardless year of connection.

Results

The following table summarizes the estimates of the national average profits made by wind parks connected between 1992-2010 in Portugal, for the three scenarios:

For all cases FIT and capacity factor of year i = annual national average capacity factor of year i, lifetime = 20 years, r=10% and price received after FIT period of $0/MWh and $60/MWh. Estimates of government spending using a price after FIT period of $60/MWh.For period 2011-2029, FIT = average FIT for the period 2005-2010 = $105/MWh. Capacity factor = average capacity for the period 2005-2010 = 0.23. Because projects end their lifetimes in different years, profits are discounted to December 2012.

BAU Scenario:All wind parks have positive returns except 1992 (-1%) and 1993 (-4%). Because these wind parks have received a FIT for every year of operation, these negative returnsmean that our estimates are conservative. Projects connected in 2007 and 2010 yield the largest and smallest return to capital (45% and 8% respectively). National average of wind industry is approximately 23%, which is very high for low risk investments.

Scenario 2: A national return of at least 4% shows that a FIT period of 12 years is feasible. Returns range between 3% and 39%, corresponding to projects that connected in 2010 and 2007 respectively.

Scenario 3: A national negative return highlights that for most projects it is not feasible to stop the FIT by December 2014 and do not receive a guaranteed after-FIT price ($0/MWh). Nevertheless, wind parks that connected in 1997-2003 could stop receiving the FIT by December 2014, not receiving a guaranteed after FIT price and still yield positive returns above 15%. If the government guarantees an after-FIT price of $30/MWh, wind parks connected in 2004, 2006 and 2007 could also have positive returns-of 6%, 12% and 12% respectively. Other projects would need a larger after-FIT price. For instance, if the FIT ends in December 2014, projects connected in2005 would need an after-FIT price of $60/MWh to have a return of 1%. Projects of 2008, 2009 and 2010 would not be able to have positive returns for a price of $60/MWh if the FIT stops in December 2014. These projects can have positive returns of 8%, 11% and 1% respectively, under the conditions of the BAU scenario (FIT for 15 years) and a no guaranteed after-FIT price ($0/MWh).

Conclusions

Our analysis indicated that the FIT level has overcompensated some wind IPPs.Portugal can lower FIT spending by negotiating a new scheme to compensate current wind IPPs.In particular, if BAU conditions are maintained, there is no need of guarantee a price after FIT period is over. This means that for all projects, except those that connected in 1992 and 1993, a $0/MWh will still yield positive large returns between 1% and 40%. The large differences across projects highlight that the otcome of the policy is not the same for all wind IPPs and as such, if a different condition is established for all Portuguese wind IPPs, it must guarantee positive returns for the most expensive projects. Under the BAU scenario, 2005 and 2010 projects are the ones that yield the lowest return of 2% and 1% respectively because had the largest investment costs. If a $60/MWh is guaranteed, projects connected in 2005 and 2010 will have returns of 10% and 8% respectively. Results of the BAU scenario suggest that the Portuguese government can shortened the FIT period and even stop the FIT for some wind IPPs by December 2012 or 2014.In the first case, assuming a new FIT period of 12 years and a $60/MWh price for the last 8 years of operation, returns are positive for all projects and range between 3% and 34%. A price of $0/MWh yield negative returns between -9% and -3% for wind IPPs that connected in 2005, 2008 and 2010. Therefore, these projects can negotiate a guaranteed price of $60/MWh. Other wind IPPs have returns between 2% and 22% with a price of $0/MWh. This means that a FIT of 12 years can be negotiated, depending on the after-FIT price established, and that some wind IPPs do not even need such guaranteed price. In the other case, if instead of shortening the FIT period the Portuguese government decides to stop the payments by December 2014 and offer also an after-FIT price of $60/MWh, all projects will yield positive returns between 1% and 35% except those that connected in 2008, 2009 and 2010. Moreover, if the FIT ends earlier-by December 2012, and an after-FIT price of $60/MWh is guaranteed starting January 2013, only wind parks that connected in 2005, 2008, 2009 and 2010 will have negative returns. All other wind IPPs will have returns ranging between 10% and 21%. For 2005, 2008, 2009 and 2010 projects we suggest that they receive the FIT for 12 years as established under scenario 2, which would yield returns of 5%, 10%, 13% and 3% respectively.

References

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