Wind Energy Marketing

Wind Energy Marketing

Global climate change resulting from the widespread burning of fossil fuels has the potential to be one of the most important environmental problems of our time. By the year 2100, some experts predict that the Earth's average temperature can be expected to warm by 1 to 4 degrees Celsius. This is a modest increase, but likely consequences include: the spread of tropical diseases; disruption of agriculture due to drought and changes in rainfall patterns; elimination of many now endangered species; increasing numbers of deaths during summer heat waves; increasingly severe tropical storms; and melting polar icecaps, leading to rising ocean levels and coastal flooding. (Harris, Navarro, 2003) What strategy will each nation take to meet its Kyoto commitments? For many nations, increased wind energy development can play in an important role. However, it is an open question as to how wind energy development can be encouraged in a largely deregulated global electricity generation market, in which fossil fuels are cheaper to use than renewables.

A comprehensive policy response should include a balance of both cost-side and demand-side responses, as well as institutional and regulatory changes. The overriding long-term goal should be to create a stable, long run market for wind and other renewables in a way which minimizes economic costs, while capturing the indirect environmental and economic benefits of an increased reliance on renewable energy. The short-term goal should be to restimulate the development of the most economic wind energy sites available in a timely manner. (Harris, Navarro, 2003)

A financial risk premium

Today, "project financing" is the norm for most large wind projects: A wind developer borrows some of the money - the "debt capital" -typically from a bank or major financial institution. The remainder of project funds is then provided by equity investors who stand to benefit from both the cash flow of the project, as well any stream of available tax advantages. (Harris, Navarro, 2003)

Because wind turbine projects are capital-intensive and use virtually no fuel, the cost of wind energy is largely determined by the project financing terms, specifically, the cost of debt, the loan maturity, the cost of equity, and the project's capital structure, which measures the ratio of debt and equity to total capital. One important constraint on the amount of debt used is the "debt service coverage ratio" or DSCR. This is the minimum ratio of operating cash flow to total yearly debt service required by a lender, where "operating cash flow" equals total revenues less cash expenses and total yearly debt service includes both principal and interest payments. Table one compares the key financial parameters of a wind project relative to its chief competitor in the generation market - natural gas combustion turbines. It is important to note here that these unfavorable financial terms raise the price of a wind project relative to natural gas by more than 20 per cent. (Jacobs, 2005) The stark differences shown may be traced to the greater perceived financial risks of a wind energy ...