4. Profitability analysis
4.7. Profitability calculations
investments. The value shows the discount rate for which the net present value (NPV) for this project equals to zero. For the exemplary 200MW offshore wind farm, the IRR can be used to compare the profitability of the project using different feed-in tariff plans and the two scenarios with different annual energy production. Similar to the NPV analysis, a sensitivity analysis for a range of different investment costs and operation costs will be created. The sensitivity analysis will help to understand how sensitive the IRR is to a change in the amount of initial investment and the yearly operation costs.
4.7. Profitability calculations
The following calculations will analyse the profitability of an investment in an offshore wind farm. Based on different conditions the NPV and the IRR will be calculated. In order to compare the values for different levels of initial investment and operation costs, a sensitivity analysis will be conducted.
The sensitivity analysis is an analysis that finds out how sensitive an output is to any change in an input, while other inputs are constant. The analysis will show how much the NPV or the IRR of the project is affected by a change of the initial investment or the level of operation costs. The sensitivity analysis will also help to assess the risk of an investment in offshore wind in Taiwan.
The values used in the sensitivity analysis are based on the values which were observed in offshore wind farms in Europe and introduced previously in this chapter.
4.7.1. Scenario 1 with 20-year continuous FIT
The first calculation will be based on the expected annual energy production of 736.354GWh for the 200 MW offshore wind farm in Taiwan (Scenario 1). Using the 20-year constant feed-in plan, there is a constant annual cash inflow over the whole operation period of 20 years. In addition to that, there is a high initial investment and annual operation costs. The cash flows
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over the whole lifecycle of the 200 MW wind farm with a capital investment of 120.15 NTDm per installed MW capacity and operation costs of 1172 NTD per produced MWh are shown in the figure below.
Figure 16: Cash flows for continuous FIT
The NPV based on the previously calculated required return rate and the IRR can be calculated for different levels of capital investments and operation costs. The values from the figure above are marked in the table.
Table 8: NPV Sensitivity analysis scenario 1, 20yr FIT NPV in Billion NTD Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13
From the sensitivity analysis for the NPV, we can see positive NPV for all observed situations.
For the values shown in the cash flow diagram above, a NPV of 13.89 billion Taiwan Dollar is expected. In the worst case with the highest operation costs per produced MWh and the highest capital investment, the NPV is with 0.13 billion Taiwan Dollar still positive. In the best case with the lowest operation costs and the lowest capital investment, the NPV reaches to 27.66
-25000
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billion Taiwan Dollar. Therefore, an investment in a wind farm in Taiwan represents a good investment with a low risk, assuming the annual energy production will reach the expected level. From the NPV sensitivity analysis we can also see that the NPV reacts less strong to changes in the operation costs and stronger to a changes of the capital investment.
Table 9: IRR Sensitivity analysis scenario 1, 20yr FIT IRR Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13 highest operation costs per produced MWh and the highest capital investment, the IRR is still 6.26%, which is more than the required rate of return. In the best case with the lowest operation costs and the lowest capital investment, the IRR reaches to 26.35%.
4.7.2. Scenario 1 with 2-period FIT split
Using the 2-period split feed-in plan, there is a high annual cash inflow over the first 10 years of operation and a lower annual cash inflow over the following 10 years. The initial capital investment and annual operation costs are the same. The cash flows over the whole lifecycle of the 200 MW wind farm with a capital investment of 120.15 NTDm per installed MW capacity and operation costs of 1172 NTD per produced MWh are shown in the figure below.
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Figure 17: Cash flows for 2-period split FIT
The NPV based on the previously calculated required return rate and the IRR are calculated in the following tables for different levels of capital investments and operation costs. The values from the figure above are marked in the table.
Table 10: NPV Sensitivity analysis scenario 1, 2-period FIT NPV in Billion NTD Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13
The observations for the NPV sensitivity analysis with the 2-period FIT are similar to the ones with the 20-year continuous FIT plan, only that the values for the NPV are higher with the 2-period FIT plan. For the scenario shown in the cash flow diagram, an NPV of 14.53 billion Taiwan Dollar is expected. In the worst case with the highest operation costs per produced MWh and the highest capital investment, the NPV is with 0.77 billion Taiwan Dollar positive.
In the best case with the lowest operation costs and the lowest capital investment, the NPV reaches to 28.30 billion Taiwan Dollar.
-25000
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Table 11: IRR Sensitivity analysis scenario 1, 2-period FIT IRR Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13
The same can be observed from the IRR sensitivity analysis. Also the IRR values are higher for the 2-period split FIT plan. For the mean scenario shown in the cash flow diagram, an IRR of 15.00% is expected. In the worst case with the highest operation costs per produced MWh and the highest capital investment, the IRR is still 6.58%, which is more than the required rate of return. In the best case with the lowest operation costs and the lowest capital investment, the IRR reaches to 32.68%.
4.7.3. Scenario 2 with 20-year continuous FIT
The calculations for scenario 2 are based on the lower annual energy production of 632.550GWh, which will be exceeded with a 90% probability. Compared to the scenario 1, the yearly cash inflows will be lower under this presumption.
Table 12: NPV Sensitivity analysis scenario 2, 20yr FIT NPV in Billion NTD Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13
From the sensitivity analysis for the NPV, we can see positive NPV for most of the observed situations. For a mean value of capital investment and operation costs (marked in the table
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operation costs per produced MWh and the highest capital investment, the NPV is negative 4.71 billion Taiwan Dollar. In the best case with the lowest operation costs and the lowest capital investment, the NPV reaches to 21.81 billion Taiwan Dollar. From this NPV sensitivity analysis it can be seen that the NPV only becomes negative when the initial capital investment is very high. Changes of the operation costs only have a small impact to the NPV.Table 13: IRR Sensitivity analysis scenario 2, 20yr FIT IRR Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13
Analogue to the NPV analysis, the IRR sensitivity analysis shows an IRR which is higher than the required rate of return for most of the scenarios. For the mean scenario an IRR of 10.35% is expected. In the worst case with the highest operation costs per produced MWh and the highest capital investment, the IRR is still 4.44%, but below the required rate of return. In the best case with the lowest operation costs and the lowest capital investment, the IRR reaches to 22.45%.
4.7.4. Scenario 2 with 2-period FIT split
Using the 2-period split feed-in plan, the calculations the NPV and the IRR for scenario 2 can be found in the following tables for different levels of capital investments and operation costs.
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Table 14: NPV Sensitivity analysis scenario 2, 2-period FIT NPV in Billion NTD Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13
Similar to the previous scenario, the NPV is higher with the 2-period FIT plan. For the mean scenario, an NPV of 10.55 billion Taiwan Dollar is expected. In the worst case with the highest operation costs per produced MWh and the highest capital investment, the NPV is negative 3.05 billion Taiwan Dollar, but higher than with the continuous feed-in plan. In the best case with the lowest operation costs and the lowest capital investment, the NPV reaches to 24.15 billion Taiwan Dollar.
Table 15: IRR Sensitivity analysis scenario 2, 2-period FIT IRR Capital Investment per installed MW in NTDm
69.18 94.67 120.15 145.64 171.13
Similar to the NPV, the IRR is higher for the 2-period feed in plan. For the mean scenario an IRR of 11.85% is expected. In the worst case with the highest operation costs per produced MWh and the highest capital investment, the IRR is still 4.20%, but below the required rate of return. In the best case with the lowest operation costs and the lowest capital investment, the IRR reaches to 27.54%.
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The report showed, that Taiwan has good factor conditions for offshore wind farms, similar to European offshore wind sites. Based on this information, the expected amount of annual energy production was estimated using statistical data from offshore wind farms in Europe. Together with the information about the feed-in tariff plan in Taiwan, we could estimate a potential revenue for an exemplary offshore wind warm.
Also from statistical data, the initial investment for an exemplary 200 MW wind farm was estimated in a range from 13.836 billion NTD to 34.226 billion NTD. The initial investment can vary extremely due to different conditions at the site. Depth of water, distance to shore and soil conditions are the main reason for those variation in offshore wind farms in Europe. The main cost drivers are grid connections, foundations, turbines and construction related costs.
Furthermore, the operation costs were estimated from statistical data of European offshore wind farms.
This data was used in a sensitivity analysis for both feed-in tariff plans and two different levels of annual energy production. For the scenario with the expected annual energy production, the analysis showed a positive NPV in all viewed options. For the lower annual energy production, the NPV was only negative, once the initial capital investment reached a very high level. The profitability analysis also showed, that the 2-period split FIT results into a higher profitability for the scenarios shown in this report.
The report has shown that an investment in offshore wind farms in Taiwan is very likely to be a investment with a high return. If country specific risks due to the immaturity of the local offshore industry or natural disasters are assessed correctly, an investment in offshore wind in Taiwan is highly recommendable.