Experts warn investors of high risk in Germany -- Overly optimistic resource calculations and failure to hedge uncertainty

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Investment in German wind power can be a high risk venture and extreme caution should be exercised before buying shares in wind stations based on a project prospectus. The stark warning emanated from a packed seminar for existing and potential owners of wind turbines in Germany held by the Danish Association of Wind Turbine Owners. In worst case examples, seminar participants learned that wind stations in Germany have produced less than 30% of the electricity promised by the project sponsor.

Following the collapse of the Danish market for new wind turbines -- caused by the government's steep reduction in wind power purchase prices -- hundreds of Danes have chosen to look over the border and buy into German wind projects instead. These are frequently advertised in the Danish and German press. Investment by Danes in turbines in Germany in recent years amounts to EUR 130 million.

Space for Danish investors in the German market became available when the traditional customers for shares in wind plant -- often well-heeled German professionals looking for relatively safe investment opportunities -- shied away from the market when a series of projects collapsed financially, amid scathing press reports (Windpower Monthly, November 2004). More recently, the government has raised the prospect of reducing tax breaks for German citizens investing in wind plant.

The main risk in buying into a German plant lies in the overly optimistic calculations of wind speeds used by German project sponsors, the Danish seminar was told. If the project finances are based on wind speeds which turn out to be 10-20% lower than promised -- and the plant is then hit by unexpected operating costs, the problems start, said Jørn Larsen, economics adviser for the owners' association. "Sellers have always had a tendency to play down operating costs," he warned.

Larsen was backed in his views by Per Nielsen of Danish energy and environmental data company Energi og Miljødata (EMD), an international expert in wind resource measurements. Based on EMD's experience in Germany, Nielsen warned that several independent sets of wind resource data for a particular project are no guarantee of quality. Calculations from four different German companies can all be overly optimistic and the actual resource can be between 84% and 90% of that being promised. He warned against investment in projects based on an average of several wind resource calculations.

Not only are German wind calculations generally too high, even though there has been an improvement in recent years, but project sponsors in Germany only rarely include electricity network losses, which typically run at 2%. Neither do they take account of operational downtime due to problems with the network or the wind turbine, which seldom account for a production loss of less than 3%. "Always subtract typically 5% from the calculated results in German reports to gain a basis for earnings," Nielsen advised investors.

Uncertainty ignored

Another factor to be taken into account is the uncertainty associated with local wind conditions, continued Nielsen. "In Germany, wind resource calculations are often based on haphazard wind data and if they are not controlled by the use of reference wind turbines or the application of in-depth experience, you might as well be playing lotto," said Nielsen. Also here he advised subtracting another 5% from the promised production.

Last but not least, is the uncertainty associated with calculations of the long term wind resource, a real risk which is often not accounted for at all in a German project prospectus. Nielsen again advised subtracting 5% from the production stated in a prospectus before looking at a project's economics.

Failure to take all these factors into account can mean that an investor is left with a project that in reality produces less than 30% of the electricity it should do, said Nielsen, who knew of such examples. "Not all project sponsors reveal the whole truth in their prospectuses," he concluded.

Nielsen stressed, however, that it was not his opinion that German wind resource calculations were generally unreliable, but there are strong indications that the basis for calculations is set too high, so even with "correct arithmetic" there is a real risk that after 20 years all projects in Germany will have 5% too little wind because of the level of the wind index.

That picture is already beginning to emerge, confirmed department head Lars Knudsen from Denmark's Ringkjøbing Landbobank, which has financed a large number of turbine projects in both Denmark and Germany. While many projects are running well, Knudsen has also seen cases, mainly in Germany, with wind turbines producing 20-25% less than they should. For this reason, the bank demands three separate wind resource calculations for all projects it is asked to finance.

Such was the interest in the seminar -- which could not accommodate all who wanted to attend -- that the Danish turbine owners association is planning two further gatherings on German wind power investment in autumn.

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