Wind earnings revised downward -- Investors' diminishing returns

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Investors in German wind plant who budgeted with wind speeds based on the national wind index are in for an unpleasant surprise. The index was re-booted in March after its provider, the Ingeniur-Werkstatt für Energitechnik (IWET), accepted that the average energy content of winds across Germany is less than originally calculated. Investors who relied on the IWET index to budget their future returns can wave goodbye to between 5% and 15% of their earnings, reports Naturlig Energi, a news magazine for Danish wind turbine owners. Thousands of German wind turbines are owned by private Danish investors, according to association consultant Jørn Larsen.

"An investor who bought a wind turbine on the basis of an IWET-based expectation of a repayment period of 14-15 years had better add at least a couple of years to that," advises Per Nielsen of EMD, a Danish company that specialises in wind project planning. It provides the Danish national wind index.

The two national indices can be used by investors to predict future income based on measured wind patterns of the past. But a period of strong winds in northern Europe in the late 1980s and early 1990s, when the IWET wind index was started, now appears to have been atypical, followed as it was by a decade of much lower winds (Windpower Monthly, January 2006). The Danish index was again re-booted at the start of last year to reflect more recent history. Nielsen has long been a critic of the IWET index, which even after the adjustment in March still appears to be overly optimistic by 4% based on a comparison of the two indices at the German-Danish border, he says.

Victims limited

The long term and fixed purchase prices for wind power in Germany have attracted a large number of overseas investors, both private and institutional. But it is not likely that many will have fallen into the trap of budgeting their investment solely using output forecasts based on the IWET index.

"By the time the index adjustment actually happened in March, it had already been factored into risk calculations," says Henning Krebs from engineering and wind forecasting company IB Kuntzsch. Moreover, under German regulations the index must not be the only tool used for long term wind forecasting. His company uses historical wind data from a variety of sources to correlate wind strengths gathered at project sites.

Krebs points out that while in the windy regions of northern Germany the index has been raised, indicating that winds are lower than originally believed, the opposite is true for southern Germany where winds are probably stronger than the index has led developers to believe.

IWET's Jochen Keiler points out that the recent index adjustment is not the first. "Changes have been implemented every three to four years, previously in 1999 when the number of indices was extended from 13 to 25 regions, and at the end of 2003." In the adjustment earlier this year, the baseline of 100% has been calculated afresh from the 30-year period 1975-2004. Previously a 14-year period had been used. "Discussions amongst many experts concluded that three decades is the right period to take, although some individuals still argue that as the climate is changing a shorter period of ten years would be better," says Keiler. "There are currently no further plans to adjust the index," he adds.


Keiler warns against placing too much faith in the indices. "We have long since cautioned everybody, don't just be careful with what you do with the indices, be extra careful. They are general values. It's na•ve to take them at face value for turbine performance."

Nonetheless, the index is useful, says Guido Vieten, of EcofinConcept, a German consultancy company specialised in acquiring renewables projects for private and institutional customers. He points out that wind forecasting has become increasingly reliable. In Germany it is now based on measurements acquired from a fleet of 20,000 turbines compared with just 2000 in the 1990s.

Unlike in Denmark, the German wind index is not widely used to calculate insurance payments for lost production resulting from operational downtime. "All the policies that I know of are based not on theoretical values but rather on what the adjacent turbines in the wind station produced during the period in question," says Hans-Joachim Schug of Versicherungsbüro für Umweltprojekte in Quickborn.

Insurance company Andresen Versicherungs und Finanzmakler, which insures the owners of about 10% of Germany's turbines against production losses, has never used a wind index to decide what turbines would have produced had they been running, says the company's Thomas Andresen. Instead, compensation payments are based on comparison with a turbine that remained in operation nearby, or, where this is not possible, on average daily production during the previous year.

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