The expansion of onshore wind energy began in the late 1970s. Fast forward to today, and the best wind sites are often occupied by older, less efficient and smaller wind turbine generators (WTGs). These pioneering WTGs, while groundbreaking in their time, are now often overshadowed by the capabilities of newer models. This is coupled with the challenge of land constraints, making greenfield development a more complex proposition. With many of these initial turbines now in the second half of their life, repowering presents a potentially lucrative economic opportunity. For the purpose of this analysis, "repowering" will refer to the replacement of old WTGs with newer, more efficient models, distinctly different from developing a greenfield project.

TASK 1

You are a wind park operator working with a wind park that started its operations in the early phases of onshore wind energy expansion. The park has WTGs that have been in operation for 10 years, halfway through their projected 20-year lifespan. As they age, the O&M costs for these WTGs are expected to surge by 10% in the upcoming decade. New, advanced WTGs offer a repowering factor of 3, indicating a significant increase in efficiency and energy output. Most importantly, when the older WTGs are decommissioned, they can be resold, conveniently offsetting the dismantling costs. Suppose all the electricity produced will be sold on the spot market before and after repowering and the price of electricity follows the GBM process. The details of the repowering opportunity are shown in the table below.

 

Input Parameter

Value

Installed capacity of the old asset

10 MW

Capacity factor of the old asset

25%

O&M costs of an old WTG (in the second operating decade)

26.8 €/MWh

Installed Capacity of the new asset

30 MW

Capacity factor of the new asset

32%

O&M costs of a new WTG (at the beginning of lifetime)

24.1 €/MWh

Investment costs

30 M€

Assumed lifetime of a WTG / Decision time horizon

20/10 a

Number of periods per year (for binominal tree)

4

Discount factor

5.5%

Initial electricity price

30 €/MWh

Drift rate of the electricity price

0.04

Volatility of the electricity price

0.30

 

(a)    Calculate the Net Present Value (NPV) of retaining and operating the current WTGs for the remainder of their anticipated 20-year lifecycle.

(b)    Now assume that you can make the decision to repower at any time in the next 10 years. Determine the value of this American option and plot the exercise region. Then investigate how shifts in the capacity factor impact the timing for repowering.

(c)    Try to interpret the results obtained from (a) and (b). Engage in a discussion on the methodology, the setup of this question, or any other related topic of your choosing. Feel free to share your insights or perspectives.

Instruction for discussion

Below are a few sample questions for your consideration. While you can optionaly to respond to any of them, we especially welcome you to share insights on any topic of your choosing.

1. We have discussed how capacity factor affects the timing of repowering. In addition to the capacity factor, the repowering factor, which is the ratio of installed capacity before and after repowering, also plays an important role. Can you name some of the factors that influence the repowering factor?

2. Now that you have a plot of the exercise region, can you do any inference from the pattern? Is there is an overall governing optimal exercise timing? Why and why not? Is there a year when the option is most likely to be exercised (in terms of probability)? And how does the cumulative probability for exercising the option look like?