The experts from TÜV SÜD underline how comprehensive due diligence can prevent investments from being ‘gone with the wind'.

Generating profits with wind energy

Thomas Zirngibl | TÜV SÜD Industrie Service GmbH

Some years ago, renewable-energy projects started to become interesting to investors and German energy supply companies alike. Onshore wind farms in particular have grown significantly more important in recent years. Investors can acquire wind farms at various phases in the project: during greenfield planning, at the start of the project, following issue of the building permit or after wind-farm completion. From an economic point of view, wind farms are first and foremost long-term capital investments – the critical aspect for those banks that decide on funding and lending. As in other transactions on this scale, comprehensive due diligence is imperative for a reliable and solid profitability analysis. Solid technological expertise is an essential requirement for avoiding bad investments.

From drawing-board to profitable investment

The pre-construction planning phase of a wind farm in particular involves a multitude of imponderables. The realisation of a wind-farm project ultimately stands or falls by the building permit. For risk assessment in this phase, the experts must have in-depth familiarity with the applicable regulatory acts and carry out a case-by-case review. The German Act on the Prevention of Harmful Effects on the Environment Caused by Air Pollution, Noise, Vibration and Similar Phenomena (Bundes-Immissionsschutzgesetz, BImSchG) is of overriding importance in this context. To ensure smooth project realisation, the future site must be examined in detail. If the future site is located in a region where the nesting and hatching periods of birds must be observed, this fact must be included in the plans. Conditions set forth because of, say, bat populations may require shutdown periods, reducing the energy output – and thus the profit – of the future wind farm.

Wind reports that forecast the potential wind speed at the site are necessary, supplying the data needed to prepare reliable energy yield prediction and guarantee wind-farm profitability. A high-precision analysis of the site and of the prevailing wind conditions thus delivers a reliable forecast of the income expected to be delivered by the investment in future operation. Also the quality of the foundation soil is critical for the success of the project. Geotechnical surveys must be carried out to examine whether the site is suitable for the installation and stability of turbines or whether additional measures are necessary.

Who will pay the additional costs?

Although the rights and duties of the seller, purchaser, contractor and the manufacturing and supplier companies involved seem to be clearly regulated once the contracts for wind-farm acquisition have been signed, the agreements may fail to address important details, resulting in liability issues in the wake of contract conclusion. Who will pay the additional costs caused by unscheduled expenses during the project? Who will be liable for production losses if the turbines fail to provide the warranted capacity? What servicing and maintenance activities are guaranteed by the manufacturers, and what replacement parts are included in the costs?

These questions serve as examples to show that a number of contingencies have to be taken into consideration. As many of these questions must be viewed in a larger technical context and both national and international directives and standards on the state of the art play a major role, detailed contract review by TÜV SÜD's third-party experts is recommended. This measure protects investors against losses and benefits all parties and stakeholders by ensuring clear and unambiguous contracts and agreements – ultimately one of the key requirements for successful wind-farm realisation.

Existing wind farms under scrutiny

Even a wind farm that already feeds power into the grid should be put through its paces prior to acquisition. As in all M & A activities, in-depth analysis of the operational data and reports is imperative to assess future profitability. These data are also helpful for early identification of weaknesses in wind-farm operation and control which can have a significant impact on long-term revenue figures.

Another focal aspect is the state of repair of the wind turbine and its components. The list of possible defects is long. In some cases failures in network systems, makeshift repairs or damage and defects in the foundation, nacelle or rotor blades may cause significant additional costs and production losses unless they are identified and repaired on time. On-site inspection is imperative for their assessment and evaluation, enabling additional investments and repair costs to be considered and calculated prior to acquisition.

However, the profitability of a wind farm project does not depend on the ongoing operation of an existing wind farm alone. External influences, including the impact of repowering measures in nearby wind farms, are frequently underestimated. In-depth analysis of wakes and turbulence provide information about whether, and to what extent, repowering may adversely affect the capacity of the existing wind turbines. Given this, due diligence should already determine the existing repowering risk and the associated income losses in the runup to a project.

Changes in framework conditions

Political and social framework conditions, which generally change dynamically, are another factor impacting on wind-farm profitability. The amendment of Germany's Renewable Sources Act (EEG), for example, which came into effect on 1 August 2014, will significantly impact on the placing into service of new wind turbines. To identify possible financial risks and point out the economic limits of the project, various scenarios must be developed and examined.

Conclusion

For some years now, wind-energy projects have reached a scale that is making them interesting to institutional and financially strong investors. However, wind-energy projects are fundamentally different from the traditional financing models for large-scale power stations or infrastructure projects. The technologies used are relatively new and are still developing very dynamically. Energy yield fluctuates depending on the wind speed and the conditions at the site and impacts considerably on the project's profitability. Precise, customised due diligence review of a project thus requires specific engineering, economic and legal expertise. Due diligence forms the basis of valid financial forecasts in wind energy and is critical for long-term economic success.

Author:

Thomas Zirngibl, Team Leader Site Assessment & Technical Due Diligence,
TÜV SÜD Industrie Service GmbH

 

 


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