Friday, August 21, 2009

Wind Power Economics - Government subsidy edition

View of Lempster Wind project in Lempster, NH (photo courtesy of wikipedia)

A while back I did a post on the economics of wind power that had some financial analysis on a few local wind power projects.  One of the projects I featured was the Vinalhaven, ME,  Fox Islands Wind project.

You may recall that one of the major factors affecting the economics of wind power is the project's "cost of capital."  You can think of cost of capital in the same way you would the interest rate on a home loan.   Just as a lower mortgage rate can dramatically reduce the cost of home ownership, a lower cost of capital can dramatically reduce the cost of a wind project over its lifetime.

It turns out that the Fox Islands Wind project just got a  huge reduction in its cost of capital in the form of a USDA loan guarantee.  According to this USDA press release (hat tip SeacoastOnline), the Fox Islands Wind project has been awarded a $9.5 million loan guarantee through the USDA rural electrification loan program. 

Currently, rates for loans under this program are in the 2-4% range, depending on the term.  I don't have the exact details for the Fox Islands Wind loan, but I made a best-guess and re-ran the cost per kilowatt numbers through the  WindFinance  tool to see how this low interest loan might help the project's economics.

The table below shows the values I used as inputs in my earlier wind power cost analysis.  These inputs were copied directly from this previous post.  Installed cost per kW and annual production in MWh are computed from the other inputs.  


Below, I've updated the results from the prior post with the new low-interest loan taken into account.  In the last row of the table below, you can see the impact of the new loan on the project's cost per kilowatt.  The project's cost per kilowatt hour ranges from 16.81 cents with a 13% cost of capital, to 10.79 cents with an 8% cost of capital, to 7.66 cents with a blended 8%/4% cost of capital (the government 4% loan covers $9.5M of the project's cost).


You can see from these updated results how low-cost financing can completely change the economics of a project.  Although I don't know the details of this specific loan guarantee program, presumably the loan must be paid back with interest over time, and it shouldn't cost taxpayers anything if all goes well.  The downside is that if for some reason the project goes bust and Fox Islands Wind defaults on the  loan, taxpayers will end up footing the bill.
Posted by at 12:30 PM
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2 comments:

  1. In its original application for a Certificate of Site and Facility, Noble/GRP predicts a 35% capacity factor, or an annual energy output of 303 million kWh.

    The New Hampshire Wind Energy Association is a formal intervenor in the Noble/GRP project.

    Throughout the course of the 14-month PUC proceeding, we asked for specific meteorological data collected from on-site meteorological towers (@ 50-meter height) in order to verify the 35% capacity factor independently.

    Despite signing to a “confidentiality” agreement, NHWEA never received reliable, real-time meteorological data from Noble. Lots of mirrors, no smoke.

    The FSEC’s staff, and the committee itself, simply does not have the technical expertise to evaluate this claim. Comments from hostile intervenors were mainly superficial and never spoke to the factors affecting energy output.

    NHWEA is concerned that the annual energy output of the entire project is based largely on historical and modeled wind data. Further, the wind resource data collected at the Millsfield site is fragmentary or missing or otherwise sketchy—making the 35% capacity factor questionable.

    Noble/GRP says that the wind turbine manufacturer, Vesta A/S, has verified the output of the project, based on wind data provided by Noble. (Most develpers have performance contracts with the wind turbine manufacturer which guarantees AEO for a fixed period, usually five years) Without such a guarantee from the wind turbine manufacturer, it is doubtful that a wind project developer could obtain financing for a wind project.

    That said, it is quite possible that, given the high elevation of the project, the Vestas V90 could generate enough electricity to achieve a 35% capacity factor. But without more “real world” measured wind data, the 303 million kWh continues to be aspirational.

    Incidentally, the Power Purchase Agreement between Iberdrola and PSNH relies on a 30% capacity factor, not 37%. The PSNH/Iberdrola contracts stipulates that the project will generate 69,426,720 kWh annually.

    Financing a large, utility scale wind project is far more complicated than merely calculating the “cost of capital” and cannot be compared to the financing of a home.

    For example, the Treasury department has just issued regulations which provide guidance to wind developers on tax incentives. Noble/GRP is eligible to take the Production Tax Credit ($0.021/kWh) based on actual energy output OR a 30% tax credit on the capital cost of the project. This would amount to approximately $82.5 million of the estimated $275 million project.

    With questionable meteorological data, Noble/GRP might be well advised to take the $82.5 million, obtain project finance, build the project, sell it and then get the hell outta Dodge before the posse catches up.
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  2. 69,426,720 kWh / 24,000 kW / 8766 hr = 0.33 , so the assumed capacity factor seems to be 33%, not 30%.
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