Three Industry-Specific Value Drivers to Consider When Valuing Wind Farms

The oil, gas, and alternative energy industries are subject to volatile market swings and evolving technologies. In an ever-changing climate, appraisers face serious challenges when valuing segments in this complicated industry. Beyond the different valuation methods and how they can be applied to the alternative energy industry, there are unique, industry-specific value drivers to be considered.

In BVR’s special report, What It's Worth: Valuing Oil, Gas, and Alternative Energy Assets, 2nd edition, the authors cover common value drivers when performing a wind farm valuation, including power purchase agreements, capacity factor, and tax credits.

1. Power Purchase Agreements

Wind power companies generate revenue through power purchase agreements (PPAs) with utility companies. PPAs lock in customers to a long-term agreement and afford service providers with protection against lower-cost alternatives. The agreement terms are usually from five to 20 years. There are times when a wind farm developer places a contract agreement that essentially acts as a PPA with a bank, in which case the bank agrees to pay a fixed price. These types of hedge agreements, typically shorter in term than PPAs, are usually for special studies needed.

2. Capacity Factor

Capacity is the wind farm’s ability to generate power. To generate certain levels of revenue every year, they need to make sure that there is sufficient capacity to reach those targets. One of the major challenges of meeting capacity factors is erratic weather or damage to lines over the winter, which can have significant impact on operations. If the wind doesn’t blow or a line doesn’t work, there is no power generated. A larger farm with multistage construction that falls behind on construction is not able to meet the capacity reflected in its forecast, which will have a significant impact on its ability to generate income and investor distributions. Typically, operators have engineers do capacity studies on their wind farms, and studies have been done that indicate the best locations for wind farms.

3. Tax Credits

U.S. legislation has been a key driver of growth for the industry, including several laws and incentives that have benefited the industry over the past five years, including:

• Federal production tax credits (PTC);
• American Recovery and Reinvestment Act of 2009 (ARR 2009); and
• State mandates requiring the diversification of electricity generation sources, making renewable energy a priority.

PTCs are the largest benefactor for the industry as they provide wind producers with tax credits of 2.3 cents per kWh of energy produced. The ARR allowed companies to opt for federal income tax credit (ITC) that enabled wind power generation companies to write off 30.0% of the taxes associated with building wind farms.

Conclusion

Wind farm valuation presents opportunities for appraisers as there will be a bigger reliance upon this energy going forward. Capacity factors, power purchase agreements (PPA), and tax credits will continue to play important roles in wind farm valuations.

To learn more about valuing alternative energies including oil, gas, and wind power, check out BVR’s special report, What It's Worth: Valuing Oil, Gas, and Alternative Energy Assets, 2nd edition.” Preview the table of contents and download a free excerpt of the report.