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

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Presentation on theme: "EWEC 2007 Milano Drs. J.P. Coelingh, senior consultant Wind and power derivatives in project financing."— Presentation transcript:

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

2 Wind Derivatives Introduction Consortium Basic principle Wind derivative –Key drivers –Prerequisites –Example Power derivative –Key drivers –Prerequisites –Example

3 Wind Derivatives Consortium Knowledge of energy whole sale and structuring Bank with experience in brokering risk management services / products Expertise in wind and solar energy and CO 2 -emissions

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

5 Wind Derivatives Basic principle

6 Wind Derivatives Basic principle

7 Wind Derivatives Basic principle

8 Wind Derivatives Basic principle Annual premium Pay-out in bad year

9 Wind Derivatives 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 Derivatives Wind derivative

11 Wind Derivatives 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 Wind Derivatives 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 Wind Derivatives Mtr./sec Basic mechanism Strike levelCap level Cap pay out Independent wind speed data Calculated and agreed strike level Pay out in year X Annual mean wind speed in year X Tick-size k€100/0.1 m/s Calculated and agreed cap level (e.g. P 90 ) Cap pay out based on income loss for specific project

14 Wind Derivatives 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 Wind Derivatives Scenarios wind derivatives

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

18 Wind Derivatives Power derivative

19 Wind Derivatives 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 Wind Derivatives 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 Wind Derivatives 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 1 st, 2007 until June 30 th, 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 31 st Price indications for price floors: –25 € / MWh put: € 0.35 per MWh premium –40 € / MWh put: € 2.25 per MWh premium

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

23 Wind Derivatives Examples of tradable products Wind derivatives Solar derivatives Power price derivatives Reversed power price derivatives CO 2 asset management

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

25 Wind Derivatives More info / contact details Website: Tel: +31 (0) Ecofys stand G022


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