Renewable Energy Finance and Project Ownership

Renewable energy finance and project ownership

The impact of alternative development structures on the cost of wind power

Ryan H. Wiser

Ernest Orlando Lawrence Berkeley National Laboratory, I Cyclotron Road, MS 90-4000, Berkeley, CA 94720. USA

This paper uses traditional financial cash flow techniques to examine the impact of different owner- ship and financing structures on the cost of renewable energy, specifically wind power. Most large, non-hydroelectric, renewable energy projects are developed, owned and financed by private non- utility generators. Recently, however, US utilities have begun to consider owning and financing their own wind power facilities rather than purchasing power from independent renewable energy sup- pliers. Utilities in other countries have also expressed interest in direct renewable energy invest- ments. A primary justification for utility ownership of wind turbine power plants is that utility self-financing and ownership is cheaper than purchasing wind energy from non-utility renewable energy suppliers. The results presented in this paper support that justification, although some of the estimated cost savings associated with utility ownership are a result of suboptimal utility analysis procedures and implicit risk shifting. Financing terms and variables are shown to significantly im- pact wind power costs. Copyright © 1997 Elsevier Science Ltd.

Keywords: Wind power; Electric utilities; Finance

Renewable energy benefits society by reducing pollution (Proops et al, 1996), mitigating electricity price risks (Hoff and Herig, 1996) and increasing power supply flexibility (Chapman and Ward, 1996). Despite these and other bene- fits, cost related and institutional impediments have pre- vented the large-scale development of non-hydroelectric renewable energy (Jackson, 1992). This paper demonstrates the importance of financing in the renewable energy project development process by exploring the effects of financing and ownership structure on the cost of renewable energy fa- cilities. Specifically, the comparative cost impacts of non- utility generator (NUG), investor owned utility (IOU) and public utility ownership and financing of wind power pro-

jects are assessed. The financial inputs that have the great- est impact on project costs are identified and the trade-offs associated with different types of project ownership are ex- plored. Finally, the implications of electric industry restruc- turing on renewable energy finance and the alternative ownership results are discussed. Although the analysis techniques presented here are generally transferable to

other renewable energy supply options and countries (with substantial caveats for tax effects, renewables incentives etc), this paper focuses on US wind power development.

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