Sunday, October 07, 2007

Wind Power: Understanding the Numbers

How does one go about making sense of the numbers when it comes to evaluating offshore wind power? A Business Week article about a solar power startup called Ausra, Inc. offers a couple of useful clues. First, as to whether Bluewater Wind's proposed energy cost makes sense, here's an interesting benchmark:
The magic figure is 10 cents per kilowatt-hour (kwh) or less. "If we can lock in a 10 cents number for the life of a solar plant, it will be a clear winner," says Mark Kapner, senior strategy engineer at Austin Energy.
Bluewater Wind's proposed number is 10.9 cents per kWh.
Another clue comes from the article's discussion of financing alternative energy projects:
Coal plant builders have been able to count on 80% to 90% debt at an interest rate of 5.5% to 6%. Their equity investors expect about an 11% return on equity. That puts the average cost of capital at about 7%. But since no one has built a giant solar plant, investors demand a risk premium. O'Donnell's equity investors want a richer 20% rate of return. Plus, he can get only 50% debt, at an interest rate of 7.5%. As a result, the overall cost of capital for Ausra's first plants is 12%.
This is a hurdle Bluewater has already cleared.
Babcock & Brown's purchase of a majority stake in Bluewater Wind should dramatically lower the cost of capital compared to the risk premium Bluewater Wind would have had to pay investors as a startup company. With its project experience and asset base of more than $50 billion, Babcock & Brown should has the access to capital to get the project done. Of course, a signed deal with Delmarva Power would go a long way to reducing the riskiness of the project in the eyes of investors.


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