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Title: Bookending the Opportunity to Lower Wind’s LCOE by Reducing the Uncertainty Surrounding Annual Energy Production

Abstract

Reducing the performance risk surrounding a wind project can potentially lead to a lower weighted-average cost of capital (WACC), and hence a lower levelized cost of energy (LCOE), through an advantageous shift in capital structure, and possibly also a reduction in the cost of capital. Specifically, a reduction in performance risk will move the 1-year P99 annual energy production (AEP) estimate closer to the P50 AEP estimate, which in turn reduces the minimum debt service coverage ratio (DSCR) required by lenders, thereby allowing the project to be financed with a greater proportion of low-cost debt. In addition, a reduction in performance risk might also reduce the cost of one or more of the three sources of capital that are commonly used to finance wind projects: sponsor or cash equity, tax equity, and/or debt. Preliminary internal LBNL analysis of the maximum possible LCOE reduction attainable from reducing the performance risk of a wind project found a potentially significant opportunity for LCOE reduction of ~$10/MWh, by reducing the P50 DSCR to its theoretical minimum value of 1.0 (Bolinger 2015b, 2014) and by reducing the cost of sponsor equity and debt by one-third to one-half each (Bolinger 2015a, 2015b). However, with FY17 fundingmore » from the U.S. Department of Energy’s Atmosphere to Electrons (A2e) Performance Risk, Uncertainty, and Finance (PRUF) initiative, LBNL has been revisiting this “bookending” exercise in more depth, and now believes that its earlier preliminary assessment of the LCOE reduction opportunity was overstated. This reassessment is based on two new-found understandings: (1) Due to ever-present and largely irreducible inter-annual variability (IAV) in the wind resource, the minimum required DSCR cannot possibly fall to 1.0 (on a P50 basis), and (2) A reduction in AEP uncertainty will not necessarily lead to a reduction in the cost of capital, meaning that a shift in capital structure is perhaps the best that can be expected (perhaps along with a modest decline in the cost of cash equity as new investors enter the market).« less

Authors:
 [1]
  1. Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States). Energy Analysis and Environmental Impacts Div.
Publication Date:
Research Org.:
Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States)
Sponsoring Org.:
USDOE Office of Energy Efficiency and Renewable Energy (EERE)
OSTI Identifier:
1393624
DOE Contract Number:  
AC02-05CH11231
Resource Type:
Technical Report
Country of Publication:
United States
Language:
English
Subject:
17 WIND ENERGY; 32 ENERGY CONSERVATION, CONSUMPTION, AND UTILIZATION

Citation Formats

Bolinger, Mark. Bookending the Opportunity to Lower Wind’s LCOE by Reducing the Uncertainty Surrounding Annual Energy Production. United States: N. p., 2017. Web. doi:10.2172/1393624.
Bolinger, Mark. Bookending the Opportunity to Lower Wind’s LCOE by Reducing the Uncertainty Surrounding Annual Energy Production. United States. doi:10.2172/1393624.
Bolinger, Mark. Thu . "Bookending the Opportunity to Lower Wind’s LCOE by Reducing the Uncertainty Surrounding Annual Energy Production". United States. doi:10.2172/1393624. https://www.osti.gov/servlets/purl/1393624.
@article{osti_1393624,
title = {Bookending the Opportunity to Lower Wind’s LCOE by Reducing the Uncertainty Surrounding Annual Energy Production},
author = {Bolinger, Mark},
abstractNote = {Reducing the performance risk surrounding a wind project can potentially lead to a lower weighted-average cost of capital (WACC), and hence a lower levelized cost of energy (LCOE), through an advantageous shift in capital structure, and possibly also a reduction in the cost of capital. Specifically, a reduction in performance risk will move the 1-year P99 annual energy production (AEP) estimate closer to the P50 AEP estimate, which in turn reduces the minimum debt service coverage ratio (DSCR) required by lenders, thereby allowing the project to be financed with a greater proportion of low-cost debt. In addition, a reduction in performance risk might also reduce the cost of one or more of the three sources of capital that are commonly used to finance wind projects: sponsor or cash equity, tax equity, and/or debt. Preliminary internal LBNL analysis of the maximum possible LCOE reduction attainable from reducing the performance risk of a wind project found a potentially significant opportunity for LCOE reduction of ~$10/MWh, by reducing the P50 DSCR to its theoretical minimum value of 1.0 (Bolinger 2015b, 2014) and by reducing the cost of sponsor equity and debt by one-third to one-half each (Bolinger 2015a, 2015b). However, with FY17 funding from the U.S. Department of Energy’s Atmosphere to Electrons (A2e) Performance Risk, Uncertainty, and Finance (PRUF) initiative, LBNL has been revisiting this “bookending” exercise in more depth, and now believes that its earlier preliminary assessment of the LCOE reduction opportunity was overstated. This reassessment is based on two new-found understandings: (1) Due to ever-present and largely irreducible inter-annual variability (IAV) in the wind resource, the minimum required DSCR cannot possibly fall to 1.0 (on a P50 basis), and (2) A reduction in AEP uncertainty will not necessarily lead to a reduction in the cost of capital, meaning that a shift in capital structure is perhaps the best that can be expected (perhaps along with a modest decline in the cost of cash equity as new investors enter the market).},
doi = {10.2172/1393624},
journal = {},
number = ,
volume = ,
place = {United States},
year = {Thu Jun 01 00:00:00 EDT 2017},
month = {Thu Jun 01 00:00:00 EDT 2017}
}

Technical Report:

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