Wind onshore projects in France - profitability analysis and review of indexation rules of the feed-in tariff scheme (dgemp)

WIND TURBINES IN FRANCE:

How will the indexation of electricity tariffs affect investors in on-shore wind farms?

With an installed capacity of 3,027 MW thanks to 2,203 wind turbines installed in 2007, France only occupies fifth place in Europe and its annual production (4.2 TWh) represents only 1% of total energy consumption. In this context, the government has decided to promote development of the sector by obliging EDF (Electricité de France), or other non-nationalised distributors, to purchase the electricity produced by installations using wind power. The decree of July 10th 2006, which was supposed to be rapidly replaced by similar legislation by the ministry in charge of Energy after it was cancelled by the Council of State (see the interview of Marion Lettry in this newsletter), defined the repurchase tariffs and their annual indexation for installations built before its date of publication (July 26th 2006). Understanding the principles of this indexation provides more security for the business plan underlying an investment. This article highlights the consequences of annual indexation on repurchase tariffs for electricity produced by on-shore wind turbines over the first ten years of the investment cycle.

While the base repurchase tariff (Tb) of power produced by an on-shore wind turbine is initially 8.2 c€/kWh, providing a complete application was submitted in 2006, the investor must in fact take into account an indexing procedure throughout the life cycle of the installation. This indexation is twofold and mainly depends on the date a complete application was submitted by the operator, and not the date the installation actually started production. The initial indexation at the date of the complete application enables us to obtain the original tariff (T0) by multiplying the base repurchase tariff (Tb) by a coefficient K (AA) as soon as the installation is up and running. This coefficient and initial tariff depend on the year of the complete application (AA): T0 = Tb • K(AA); the annual indexation on November 1st enables us to obtain the current tariff (T) by multiplying the base repurchase tariff (T0) by a coefficient L (11/AA,MM/YY) starting on November 1st each year. This coefficient and the current tariff depend on the date of the complete application (MM/AA) and the month of November under consideration (11/YY): T = T0 • L(11/AA, MM/YY)

We should note that for a given project, the annual indexation occurs every year and the base tariff is therefore multiplied each year by the coefficient L of the month of November under consideration. Coefficients K and L therefore depend on the evolution of two indices published every month by the INSEE (French National Institute for Statistics and Economic Studies): the index of hourly labor costs in mechanical and electrical industries (ICHTTS1) and the index of production prices for industries and business services across the entire sector (PPEI). We should note that while the ICHTTS1 and PPEI indices follow an exponential trend, this is not the case for coefficients K and L, which are defined using a complex formula based on the ICHTTS1 and PPEI.

Overall, the evolution of coefficients K and L are each subject to two influences. Coefficient K (table 1) follows a downward trend over the years (the term (0.98)(AA-07) declines with AA), but also depending on changes (currently on the rise) of the two INSEE indices for the month of January of the year of application (the second term depends on ICHTTS1(01/AA) and PPEI(01/AA)). Similarly, coefficient L (table 2) is influenced by the value (currently on the rise) of the two INSEE indices for the month of November of the year considered in relation to their values on the date of the complete application (the coefficient depends on ICHTTS1(11/AA), ICHTTS1(MM/AA), PPEI(11/AA) and PPEI(MM/AA)). It is therefore difficult a priori to forecast whether, for a future project, coefficients K and L will be higher than today and a fortiori to compare two future projects without knowing the changes in INSEE indices.

In reality, the ICHTTS1 and PPEI indices have increased since January 1999, but according to an exponential trend (graphs 1 and 2). By extending the trends of the ICHTTS1 and PPEI indices, repurchase tariffs should evolve within a range of 8.5 c€/kWh to 9.9 c€/kWh during the year 2016, i.e. with a difference of 1.4 c€/kWh between the highest and lowest remunerations (graph 3).

However, for a given production, of an individual plant, the remuneration (measured in €/kWh) is strongly linked to the date of the complete application, via means of the dual indexation. In other words, at the date considered, the oldest facilities are not necessarily the biggest money makers. Indeed, the investor must carefully choose the moment to invest in a new plant, since for a given year the remuneration varies in a complex manner according to the month chosen for the date of the complete application. For example, it is preferable (graph 4) to submit a complete application in January 2008 (orange) rather than in January 2007 (green), or in December 2008 (red) than in January 2009 (blue).

The purchase of an existing plant depends on the moment the complete application was submitted, since among existing installations the remuneration varies in a complex manner according to the month and year of the complete application. For example, (graph 5), on the observation date in September, applications submitted in January 2009 (8.4 c€/kWh) and January 2008 (8.7 c€/kWh) are respectively the least and most lucrative. In December 2009 (green), applications submitted in November 2009 (8.4 c€/kWh) and January 2008 (8.8 c€/kWh) are the least and most lucrative. Contrary to what we could suppose, the most lucrative installations (for a given production) are not necessarily those that submitted a complete application the earliest. Indeed, the oldest applications benefited from a higher number of successive cash flows, indexed on different annual coefficients.

However, they did not necessarily benefit from the highest initial tariff, produced by multiplying the base tariff by coefficient K. Moreover, the results of our analysis are based on the fact that the ICHTSS1 and PPEI indices are supposed to continue their upward climb, causing a continuos increase in coefficients K and L.

Aware of the effect, on the one hand, of the value of indexation coefficients on future repurchase tariffs and, on the other hand, the evolution of INSEE indices on the value of indexation coefficients, Zelya Energy has developed a robust modeling tool enabling the estimation of expected revenues from electricity generated by wind turbines over the entire investment cycle in order to devise a business plan for investment in a new plant or purchase of an existing wind farm. This economic tool is an invaluable addition to the technical evaluation of production (by wind speed) and the design of a complete financial business plan (estimation of costs, calculation of available cash flows and net present value) within the framework of due diligence proceedings.

Author: Olivier Choffrut

olivier(-at-)zelya.com

link to the French ministry of industry (energy: www.industrie.gouv.fr/energie/sommaire.htm)

Purchase tariffs - from EDF