One of the big risks for renewable (wind, solar, and more recently ocean) developers is the variability of the fuel source. While forecasting improves all the time, no developer can guarantee that a location with a history of strong energy estimates won’t underperform for a period.
Thus, to protect themselves against such underperformance, investors have developed a way to put production requirements on projects and therefore de-risk the loan. These requirements involve the calculation of probabilities for energy production which are expressed as P values. Typically P50 and P90 probabilities are used.
A P50 figure is the level of generation that is forecasted to be exceeded 50% of the year – in other words the ‘average’ since half of the year’s output is expected to surpass this level, and the other half is predicted to fall below it. As a project developer I like P50 as it is the most likely outcome in any given year. The power output using the P50 ranks my project higher. I therefore want to promote my projects using the calculated P50 number. The investment returns are better and the project is more likely to be funded.
A P90 figure is the level of generation that is forecasted to be exceeded 90% of the year. This is a more conservative estimate and as an investor I like the P90 number as it comes with a lower level of risk – 90% of the time the generation will be exceeded and therefore will more likely meet the financial performance targets for the project.
Hence the dilemma – project developers like P50 but their investors push them to deliver projects that are viable based on P90 estimates.
Posted: 01 November 2012