Short answer
Yes. If it was not, no one would build or invest. Together with solar power, wind power is considered the cheapest and most competitive source of electricity globally. An individual wind farm is profitable if the revenue from its production over the lifetime of the asset exceeds the costs of investment, operation and maintenance. A wind power park company may report weak or negative results in certain years, especially early in the asset’s lifetime when the largest expenses occur, while still creating significant value for the owner over time.
Why is this discussed?
The profitability of wind power is debated because the situation can seem contradictory. A study of annual reports in Swedish wind power project companies written by Sandström and Steinbeck is said to show that the entire industry is chronically unprofitable, and spectacular individual bankruptcies occasionally receive significant media attention. Despite this, sophisticated players such as pension funds, infrastructure funds, energy companies and banks continue to invest in or lend money to Swedish wind power projects. How can this be reconciled?
The explanation is that the long-term value of an asset cannot be inferred from averages in subsidiaries’ annual reports. Investors assess the value of a wind park based on all expected future cash flows, financing terms, risk and return requirements.
Common misconceptions
What affects the assessment?
- Geographical location
- Terms in offtake and hedging agreements
- Wind resources and correlation with other electricity generation
- Production availability
- Grid fees and other operating costs
- Financing structure
- Ownership structure
- Return requirements
Conclusion
Wind power and other renewable energy projects require large upfront investments, while revenues are generated over a long period. In addition, ownership and financing structures affect the numbers reported in publicly available annual reports.
For that reason, the result for a single year rarely tells the full story about the profitability of a park or the value it creates for its owner. Value is primarily determined by expected future cash flows, risk and return requirements.