Preliminary valuation considerations on the sale of a 2-turbine wind farm

I came across the sale of two generators in Southern Italy. Here is what the sale package includes:

• One Vestas V52-850 kW, with an associated tariff contracted at 140 Euro / MWh for the next 14 years
• One Vestas V52-850 kW, not operational since September 2021, with an associated tariff contracted at 121 Euro / MWh for the next 14 years

The starting valuation prepared by “independent auditors” takes the past cash flow and projects them in the future, with simple considerations with respect to the operational conditions faced in the past and expected in the future. This is where the opportunity lies and what this piece is about.

This specific asset sale includes a number of non-conformities, ongoing litigations and therefore is not that appealing after all. However, I wanted to write about how the lack of expertise and sophistication can present opportunities.

A Valuation mismatch

The economic feasibility of a wind farm is assessed in terms of two major factors:

• Amount of energy forecasted to produce on average during its operational life (20+ years)
• The cost of building and operating the wind farm

We cannot predict the future wind, but through a measurement campaign or through some modeling, we can estimate what the average wind speed has been in the past 20+ years. We would therefore extrapolate, and assume that the average wind speed at a specific location is stable when averaged over a long period of time, where by long we mean, once again, at least 20 years.

Back to the valuation of this specific tender. The person in charge of evaluating the predicted energy production used as an estimate of the future produced energy the average production of the past 5 years. While this on one hand makes sense, it bakes in all energy and operational losses, it does not account for how windy these past 5 years have been compared to the expected long-term average. The standard deviation of the annual average wind speed at specific locations is function of the local climate, but it usually is within 2 to 6 %.

The wind farm object of the tender may have experienced lower than the long-term average wind speeds for the past 5 years, thus the valuation could be impacted by an underprediction of the expected future energy. Of course, the same reasoning applies in terms of overpredictions as well.