Mastering New Realities of

Project Finance in Wind

Energy Sector

A study on making wind energy sector available to broader

range of investors by facilitating the innovative nancing
methods

Pujan A. Vakharia
March 2018

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 Introduction and Overview
e nancial perspective to wind energy

(Skip to page 6 for solutions)

Wind power and clean energy sector in general being investment heavy entities,
requires high volume investors and more commonly business empires to fund and
maintain the nancial affairs. The traction for renewable energy requirement has
gained quite signi cantly due to increased awareness of climate changes and the
changing public sentiment towards Oil and Gas expenditure on a global level. The
world witnessed this public outrage during Volkswagen conspiracy in the recent
past.

Shift towards renewable and clean energy sources is not the most convenient
in the history of humans. However the limitation of the fossil fuel reserves and the
environmental impact of such resources has made this shift inevitable. The
question of why and how has turned in to when in the not so recent past. The

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 nancial, social and implementation restraints has made it clear that there can be
no single alternative to the current energy requirements which are also growing
signi cantly year over year. (As the gure suggests) Ideal scenario is concept of an
energy mix. Involving many different sources of energy to contribute to the
industrial and domestic need and step by step replacing the traditional sources of
energy to better alternatives, eventually aiming to increase their share. Wind energy
becomes a signi cant sector for the countries having abundant landscapes and the
coasts where the wind ow is suf cient enough to be leveraged. India, in this
perspective becomes a major potential for wind power generation.

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 The McKinsey Global Institute Analytics marked wind sector as a low

penetration sector. (However the growth till now has been faster than projected on
the global scale.) Wind power sectors as alternative to the traditional energy
introduce challenges in more ways than one. Traditional energy sources have had
xed amount of raw resources, pre-determined by various scienti c methods, based
on which the returns on investments are calculated with very high accuracy. The
return margins being signi cantly more pro table over the current alternatives.
Wind energy sector requires similar and in some cases more amount of initial
investments to acquire assets with high volatility in returns. From land acquisition
to machinery and infrastructure development, the factors in requirements and
returns are complicated. The turbines and the wind farm machinery has a very
niche applicability which puts a very low returns on assets. Resale and reutilization
potential of such equipments is next to none. The implementation of the
infrastructure takes clever nancing as well.

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 Funds and Financial
Innovation
Feasibility and challenges

India attained 4th position(Ref. #4) in the installed capacity of wind energy
worldwide. e renewable energy target for 2022 by the current government is
considered highly ambitious by the experts however, the governmental tendency to
push the investment in the renewable energy sector makes the wind sector more
lucrative.
e funding of large scale plans like wind energy are made feasible in India
through project nance. As with any energy sector investment, investment in wind
energy required long term stake holders. Returns on such projects take a long term
route. e major obstacles in nancing of such projects are (1) High volatility in
returns and (2)Very high illiquidity.

Volatility

Multiple factors contribute to the high volatility of wind farm projects. Major
factors are 1) Non-stationary prices of energy due to advances in other alternative
energies. 2) e optimizable wind ow is predicted using stoichiometric models to a
certain extent of accuracy. Annual returns are comparatively less predictable especially
when the climate changes create a deviation in existing prediction models. 3)
Immediate utilization requirement. e storage infrastructure to create a bu er
between energy generation and energy utilization is nancially and technically
unfeasible, which creates a need to utilize the energy while it generates. is makes a
constant need for recipient of generated energy at the outgoing side of industry.

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 To lessen the risks and to encourage funding in this eld, the policy of Power
Purchase Agreements (aka PPA) is facilitated. According to the policy, a credible party
ensures the purchase of wind electrical energy at a pre-decided rate for a xed period
of time. is eliminates some factors contributing to the volatility such as competitive
attitude against alternative sources of energy, uncertainty in production due to
optimizable wind source and the immediate utilization requirement. is in turns
makes it more convenient to formulate nancial models of returns with element of
assurance. e price to returns rations are better determined and quantitative certainty
of the projects is increased drastically.

However, due to the change in government in 2014, the PPAs have been
replaced by Feed-in Tari s aka FiT’s which have a ected the nature of such
investments. Feed-in Tari s allow bidding on the tenders released by industries,
neglecting the volatility compensation introduced by the PPA’s. Failure of wind power
companies on procuring a bid on a tender may potentially mean no returns on the
wind energy until the buyer of energy is found, due to the immediate utilization
requirement. Practically in such scenario, a wind farm generating energy would not be
performing since the generated energy is not being utilized, making it as good as no
energy generated at all. e existing companies have had to bid below break even
threshold in order to avoid complete loss. e mood is despondent due to such
changes by the government.

Illiquidity

e wind energy sector requires signi cant amount of land for large scale
installations. Land is a textbook example of illiquid asset. For the projects, land acquit
ion is performed in two ways. 1) Purchase of land by business empires due to long
term plans or strategic investment policies, 2) Long term lease of land. In both cases
the illiquidity remains high.

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 e equipments for wind power generation are uniquely applicable, meaning, the
equipments may not be able to solve any other equally valuable purpose. e best
method of optimization in such equipments is to utilize until worn out. is makes
the time scale of wind projects much longer. e equipment being a very large scale,
implementation of wind farms also takes up signi cant costs, which require the
operability of the farms to be long term.

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 Promising Solutions
Making the wind power generation projects more liquid is not possible through
physical and technical means. It is however possible to liquidate the ownership of the
projects, given the possession can be quanti ed into tradable form. e concern then
arises about the methods of sharing subjective elements of the ownership. e
governmental bene ts, the subsidies and the tax rebates. How can the abstract part of
assets be quanti ed becomes the driving factor of liquidity.

In order to facilitate more nancial liquidity and open more funding from
majority of investor domain, the new realities of banking sector in India can be
leveraged. e recently revealed opportunities in the banking sector is one of the most
important factor if not the most important factor to consider large scale quanti cation
of assets and facilitating modest range of investors to contribute to and bene t from
the growing economy of India. Scenario of banks in India is a contrasting line of
reason. However, due to demonetization the macroeconomic analysis shows how the
deposits have surges over the top while the loans have fail to catch up to the practical
needs. (Figure below provides the quantitative analysis) Such status of bank sector
economics may bring down the pro tability of banks and is a concern rising with
time. Most promising way for government to retain its stakes while allowing the
private sector to bene t from impactful projects is to leverage this built up
pressure on banks to circulate the stagnant currency.

e banking sector can be leveraged in the following ways and a small research
in the feasibility of the theoretical possibilities goes a long way.

1. Empowering strategic investors and energy companies.

Non-private banks may facilitate low interest rates loans to relevant markets in
order to push investment in the wind energy sector. Energy companies such as
turbine manufacturers may be facilitated low interest loans in wind sector

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 projects since that funding allows the manufacturers to have a say in decision
making of the projects, which allows better communication and co-operation
between corporate strategic investors, business empires and the manufacturing
companies. e low interest loans in such area come at the status of low risk
low returns for banks since the growth in wind sector signi es growth in the
energy manufacturing sector, accelerating the overall growth cycle.
Government has the indirect control and involvement while the decision
making and growth is ensured by private sectors and individual strategic
investors. is method provides a best of both world scenario which may push
the development and research while retaining the installment rate.

2. Domestic Investment through Indian Banking Sector

Domestic investment by non-private banks in such projects, facilitated by

emerging nancial gateways free of legacy operative issues may allow
government to hold stakes and avoid con ict of interest in developing and
maintaining wind energy plants. Government may further release limited
bonds with tax bene ts to involve the safe investors. Dynamic and secure
pricing of which is possible for newly developed nancial tech analytics
leveraging big data and machine learning.

3. Empowering the wind project bene ciaries to accelerate for Initial Public
O erings by nancial incubation in the seed stage

Such actions allow the projects to accelerate implementation through the

initial stages and quickly optimize the organic structure of operations. is
eventually makes room for scalability by creating a sustainable system to
maintain the operations and move forward to more installments. is can
create a reinforcing ecosystem where installment rate can be improvised.

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 4. A peer-to-peer micro- nancing infrastructure : An aid to PPA alternative

Power Purchase Agreements are the aid that government generally provides to
reduce the risk on returns. It becomes important especially in an advancing world
where better opportunities are created on frequent basis. However, PPA does not
eliminate the risk factor, it merely diversi es it. Current advancements in the publicly
distributed ledger technology show that it does not have to be so. Introducing an
infrastructure where consumers can put micro orders from a large scale provider can
be e ective if two barriers are overcome.

4.1. e small scale consumer market should be large enough to meet the demand
threshold.

4.2.Transaction cost should be negligible compared to the amount paid by small

scale consumers. Which is solved by leveraging publicly distributed ledger
technology.

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 Peer-To-Peer Market
Infrastructure
An executable proposal

e Feasibility and Challenges section of the report describes two challenges

that contribute to the maximum friction. High Volatility and Illiquidity. e section
about promising solutions shows some of the most feasible and practical solutions that
can be leveraged to address the said challenges. is section provides the feasibility
check and proposal of the modi cations that can help reach the milestones of wind
power sector in India while dealing with the challenges using the presented solutions.

Addressing the notion of High Volatility

High volatility in the wind power sector comes from

1. Volatility in demand

Since the energy produced in the form of electricity does not allow for any cost
e ective way of storage which can act as a bu er, the generated energy must be
utilized at the time of generation. is requires a constant demand of
electricity to ensure that every unit of electricity generated is being paid for.

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 2. Volatility in production.

Wind power generation depends on wind speed and therefore the indirect
element of volatility is involved due to uncertain wind speed. is however
can be predicted using stoichiometric statistical models with acceptable
accuracy.

e issue traditionally is addressed using the concept of Power Purchase

agreements, where a large nancial empire, generally the government, agrees to buy
the electricity at a mutually agreed xed price for a xed period of time, generally
ranging from 5 to 10 years timespan. is model of PPA raises some concerns.
Change in government, and therefore change in position and philosophy of
government in energy sector makes the enforcement of long term PPA questionable.
Moreover, PPA transfers the risk factor over eliminating it, and hence the root cause
remains unresolved.

Alternative to PPA is possible today with the recently available technology

where the gap between large scale provider and a small scale consumer can be bridged.
Traditionally, this gap is bridged by involving a central entity which has the
infrastructure to purchase electricity in large scale and then distribute and charge it to
the individual consumer market. However, to create and maintain such infrastructure,
the company has to introduce its own margin which gets accumulated to the original
cost of the electricity, charging the individual customer higher than what large scale
supplier gets paid for. Moreover, due to a central pro t based entity, less pro table
customers are neglected. Since there are costs involved per transaction and a one time
cost of setup, if the consumers are geographically distant and consume comparatively
less electricity, the pro t to the central entity reduces signi cantly and generally such
customers are avoided. Rural locations is one of such customer segment. is a ects
India majorly since private companies do not extend their services to rural areas which
make up for majority of India.

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 Central entity can be bypassed entirely by a decentralized alternative and it may
solve both the drawbacks. i.e. the marginal costs and selective segments. Essentially it
allows the supplier to have more of a Business-to-client approach over a traditional
Business-to-business(-to-client) approach. Recently developed concept of publicly
distributed ledgers can minimize the transaction costs which can allow for large scale
electricity suppliers to sell comparatively smaller amount of electricity directly to
individual customers. In essence, the blockchain technology used in this concept can
facilitate the automatic transactions with preset conditions called smart transactions,
where a transaction between a supplier and a consumer is triggered as soon as certain
threshold of electricity is consumed. Smart transactions can be utilized to trigger a
transaction on a monthly basis where the supplier automatically gets paid by the
consumer at the end of the month based on the consumption of electricity recored by
the blockchain based meter, which can be equally if not more authentic than a trusted
central entity such as a private company.

• Transaction costs in decentralized infrastructure can be made negligible to an extent

of consumer paying the electricity costs on a daily basis, without incurring
considerable transaction costs.

• Having a larger reach i.e. involving (traditionally) less pro table customer segments
is an asset since the setup costs are incurred by the consumer in a decentralized
approach and it adds to the continuous demand.

• Since the suppliers and consumers interact directly, the cost of electricity for a
consumer becomes signi cantly lower.

• e wind power suppliers have the consumption data which can help them optimize
their outcomes even more.

• eg. If the consumption data shows demand peaks of certain duration, and demand
dips of certain duration, small bu er storage can be created to meet the high

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 demand while monetizing the lower demand periods with a single investment of
bu er storage.

• eg. Consumption data can be sold to relevant companies.

• Publicly distributed ledger technology can be integrated with each unit of electricity,
tracking the consumption of each and every unit of electricity, eliminating the
possibility of frauds. Traditional meters being standalone units, were prone to fraud
by being bypassed. In decentralized structure, since the supplier is the seller, each
and every unit of electricity generated is logged along with the units of electricity
consumed. Mismatch in both can easily notify the leak.

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 References
Analytics:

1. http://factchecker.in/modis-175-gw-renewable-energy-target-for-2022-needs-160-billion-
investment/
2. https://www.mckinsey.com/global-themes/india/mastering-the-new-realities-of-indias-
banking-sector
3. https://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/where-is-
technology-taking-the-economy
4. https://www.mckinsey.com/industries/oil-and-gas/our-insights/peering-into-energys-crystal-
ball

Indian Political and other a airs related to Wind Power Sector:

5. http://pib.nic.in/newsite/PrintRelease.aspx?relid=155612
6. https://www.thehindubusinessline.com/specials/clean-tech/death-by-a-thousand-cuts/
article9797357.ece
7. https://scroll.in/article/862428/good-tidings-wind-is-now-indias-cheapest-source-of-clean-
energy
8. https://www.windpowermonthly.com/article/1300394/ppas-offer-best-deal-wind
9. https://economictimes.indiatimes.com/industry/energy/power/indias-fastest-growing-clean-
energy-sector-hits-an-air-pocket-in-new-worry-for-modi/articleshow/60526839.cms

Financing of Wind Power:

10. https://www.wind-energy-the-facts.org/index-45.html
11. http://mnre.gov.in/ le-manager/UserFiles/presentation-01082012/
Presentation%20on%20Financing%20Wind%20Power%20Projects%20by%20K.S.
%20Popli,%20IREDA.pdf
12. https://www.mckinsey.com/industries/high-tech/our-insights/how-blockchains-could-
change-the-world

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13. https://www.pwc.com/gx/en/industries/assets/pwc-blockchain-opportunity-for-energy-
producers-and-consumers.pdf

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