ASSESSING THE PROFITABILITY OF A WINDFARM PROJECT

ASSESSING THE PROFITABILITY OF A WINDFARM PROJECT

TASK DESCRIPTION:

This modelling exercise aims to compare the profitability of a wind farm project that will be operated by CleanEnergy Ltd, one of the companies which intend to bid for government funding for this project. The company can choose from the different investment scenarios available to them which depend on two key factors;

Ø Setup Location – Which can be offshore or onshore of Windonia

Ø Type of turbine to used – There 3 types of turbine to choose from; Davide, Windmine and Collosel

The firm has decided to make use of a single type of turbine and lease out an effective area of no more than 1km2. From this, we will be able to calculate the profitability of the different investment scenarios in the event the government bid will be successful

DATA DESCRIPTION AND VALIDATION:

The following data was provided;

1. a) Size of wind turbines – This was stated in terms of the rotor diameters of the wind turbines available.
2. b) Effective Area – This is defined as the circular area around each wind turbine that is necessary for its installation and operation. It has been given as a multiple of the wind turbines’ rotor diameter
3. c) Energy Output Per Turbine:

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• This is the standard energy output each wind turbine based on the type selected will produce in an hour. It is measured in MWh.
• However, the average output that will be sold to the market is a fraction of this total output with rest of this going to sustain the power plant.

1. d) Annual Leasing Costs-

• In the event of a successful bid, CleanEnergy will lease out the required effective area from the government via The Central Electricity Generating Council (CEGC) of Windonia.
• The leasing fee is depended on the location chosen and the annual gross revenue from the electricity sales.

1. e) Installation and Decommissioning Costs:

• The Installation cost is dependent on the location and the type of turbine chosen, and the price negotiated between the supplier and the company.
• The Decommissioning Cost is a multiple of the installation costs

1. f) Annual Maintenance Costs:

• This cost is expressed as a percentage of the gross revenue of sales.
• The company is yet to do extensive research, and thus the data may not be credible

Before using the data for the profitability task, validation and reasonable checks was carried out to ensure consistency and quality.

Line graphs were plotted against the three types of turbines with the annual maintenance costs shown in the y-axis and the year shown in the x-axis on the Adjusted worksheet. This showed inconsistency in all the 3 graphs (but no missing values) and the check was further done on the to validate this.

To ensure consistency, the assumption that the maintenance costs would increase as the leasing period increases was made as the wind turbines would depreciate as a result of wear and tear and thus would require high maintenance in the future. The cells highlighted in yellow on the Adjusted worksheet were then corrected in order to ensure that the maintenance cost was increasing period increases. This is represented in the Adjusted Raw Data Line Graph.

ANALYSIS:

1. Estimating the Number of Turbines:

• To calculate the number of turbines, the effective area diameter was calculated from the turbine’s rotor diameter for each type.
• The assumption made about the maximum effective was that it is a square area whose length and width are the same.
• From this, the number of turbines that can occupy the length will be obtained from the length and width of the square area and the circular area holding each turbine.
• The results from this calculation are highlighted in green on the Adjusted Parameters Worksheet.

2. Yearly nominal output:

• The assumption made in this case, is that the energy output data given per turbine will be per hour.
• This figure is then converted to KWh and the yearly energy output is then calculated for each turbine.
• From this we can get the total yearly output for the wind farm based on the type of turbine installed and the number of turbines calculated in 1 above.
• A factor will then be applied depending on the location chosen by CleanEnergy to calculate the yearly nominal output that is expected to be sold.
• This figure has been highlighted in yellow in the Adjusted parameters worksheet.

3. Gross Revenue:

• This is estimated by looking at the electricity sale price per year and the yearly nominal output calculated in (2) above.
• It is estimated that every year, the sale price will increase by 1.5% per year. The increase has been shown in the sale price column for each investment scenario analysed in the Adjusted Parameters worksheet.

4. Net Revenue:

• The net revenue has been calculated by deducting the annual maintenance and leasing costs from the gross revenue amount calculated for the 30 years that the wind farm plant will be operational.
• This has been highlighted on the Net Revenue column for each of the investment scenarios provided

5. Further Calculations:

• The present value of the of the end of year balances were then calculated based on the cumulative revenue up until the current year being considered were then calculated for each investment scenario
• The overall net profit was then calculated by subtracting the decommissioning costs from the gross revenue at the end of the 30th year. The assumption made in this case is that the decommissioning is done at the end of the year 30.
• From this overall profit, we are able to see the investment scenario that yields the highest profit.
• The profit margin was also calculated which was a ratio of the present value of the overall profit and the installation cost. The investment scenario that gives the highest profit margin is to be tagged as the most profitable option, in this case building Davide turbine in an offshore location
• The discounted payback period, which is the length of time the initial cost is ammortised by the subsequent revenue generated was also calculated. The figures obtain from each investment scenario is highlighted in orange on the Adjusted worksheet colum. An MATCH/INDEX function was used to obtain the result for each of the investment scenario highlgihted
• From this it can be shown that regardless of the location, if CleanEnergy choses to install Davide turbine, it will take a shorter period for it to ammortise the initial cost of installing the turbine.

CHARTS:

From the analysis above, a combo chart was drawn to provide a visual representation of the profit margin and the overall profit per turbine and location. This can be seen from the Charts worksheet by the graph labeled ‘Profitability by Investment Location’ with the legends representing the location for both the profit margin figures and overall profit.

A staked column chart was also plotted to illustrate the comparison between the end of year balance patterns for the six types of investment scenarios available to the company. This is shown by the second chart with the heading, ‘End of Year Balance’

The following conclusions can be inferred from the two chart representations;

• The offshore location yields a higher profit than the onshore location for all the types of turbine options available to the firm.
• By installing the Davide turbine option, the company is able to yield higher profits than the other two options
• The Colossel offshore option has a higher discounted payback period thus meaning that it is the worst investment scenario that the firm can chose.
• The optimum investment scenario that yield the highest profit is thus the Davide Offshore option.

STRESS TEST ANALYSIS:

A stress test analysis was also done to determine the affordability of the investment in the event the interest rate on borrowing would increase significantly right from the outset. This was carried out by adjusting the discount payback period to 25 years. This means that the company should be able to clear the initial debt in 25 years’ time.

The analysis can be found on the Stress Test worksheet column with the interest rate obtained using a trial and error assumption whereby the interest was manually changed until a discounted payback period of 25 years was obtained.

The final value can be obtained on the cell highlighted in blue.