Analytical models for wind power investment

Abstract

Wind power generation has experienced an explosive growth worldwide. It is a

promising renewable energy source to countries that are short of fossil fuels, e.g. China.

While wind power is a distinctive direction to go for, it is still necessary to examine the

rationale behind such investing mania, and this thesis analyzes the issue by collectively

investment modeling.

For investment analysis, it is necessary to first identify the relevant market

background before inferring to any analytical model. Chapter 2 identifies a number of

wind power investment scenarios in accordance to modern electricity market regime,

primarily American and European structures. Among them, two main scenarios are

investigated and modeled subsequently: fixed tariff wind power project invested by

independent power producer and wind power project undertaken by utility. It has to be

emphasized that different market scenarios would lead to different modeling

methodologies for best representing the reality.

Wind power is intermittent and uncertain. One way to describe the probabilistic

energy production is by statistical characterization of wind power in a period of time.

Chapter 3 presents a standalone analytical model of the wind power probability

distribution and its higher order statistics. Large-scale deployment of wind power would

influence power system in unprecedented ways. High penetration wind power poses a

need of refinement to existing methodologies on production costing and reliability

evaluation. The applications of the probabilistic wind power model to these topics are

outlined in this chapter.

In Chapter 4, investment of fixed tariff wind power project is analyzed. Operation

of wind farm is very passive and as long as wind keeps blowing, such wind power

investment has minimal risk in annual revenue. The low-risk profile facilitates debt

financing. This leads to the attempt to manipulate the project capital structure to

maximize the project levered value. Yet the default probability is raised and associated

with a subjective value of default probability there is a value-at-risk debt level. I therefore

propose an optimization formulation to maximize the wind power project valuation with

debt as decision variable subject to the value-at-risk debt constraint.

Apart from independent wind power producers, many policy and market factors

driving wind power development are actually put on the utility side, e.g. Renewable

Portfolio Standard (Renewable Energy Target) in U.S. (Europe) and Green Power

Programs. It implies that utility has to have wind power (or other renewable) capacity

ready by a certain date. In practice, utility may take action earlier if conditions are

favorable or optimal. The conditions considered here are fossil fuel prices or in more

general setting, electricity contract prices. Define the total fuel cost saving from

conventional units as the benefit of wind power. If fuel prices are high enough,

substituting load demand by wind energy is profitable, vice versa. The investment

decision is analogous to premature exercising of an American option, in which the wind

power project is modeled as real option. Chapter 5 offers detailed formulation of this idea.