Model risk regarding monthly wind energy production for the valuation of a wind farm investment

Abstract

Purpose The purpose of this paper is to assess model risk with regard to wind energy output in monthly cash flow models for the purpose of valuation and risk assessment of wind farm investments, where only a few approaches exist in the literature. Design/methodology/approach This paper focuses on the risk-return characteristics of this investment from the perspective of private and institutional investors and takes into account several risks, in particular the resource risk related to the uncertainty of the monthly wind energy produced. To this end, this paper presents different approaches for modeling monthly wind power output and assesses the impact of three selected models with different properties on the investment’s risk-return characteristics by means of a stochastic discounted cash flow model. In addition, the model considers the possibility of a joint operation of the wind farm with a pumped hydro storage system to reduce risk and improve profits. Findings The results show that the (non-)consideration of seasonality of the monthly wind energy produced considerably influences the risk-return characteristics, but that principal developments dependent on input parameters and model variables remain similar. Originality/value This paper contributes to the literature by presenting different approaches for modeling the monthly wind energy produced based on direct models of the wind energy output, which are rare in the existing literature. Further, their impact on risk-return characteristics of a wind farm investment is analyzed, and thus, related model risk is assessed.

Multi-Faceted Analysis of Systematic Risk-Based Wind Energy Investment Decisions in E7 Economies Using Modified Hybrid Modeling with IT2 Fuzzy Sets

“…They concluded that as the inflation rate increases, the return on investment decreases such that this risk should be managed effectively. In agreement with this study, Krömer [10] created a model for the risks involved in wind energy production. For this purpose, Monte Carlo simulation methodology was used.…”

“…The initial cost of these projects is very high. Therefore, the project can become even more costly when inflation increases [10]. Costs incurred during the distribution of all products purchased and electricity generated as a result of wind energy will increase in a high-inflation environment.…”

“…Volatility in the exchange rate (C1) [3,5,9] High inflation (C2) [1,10] Interest rate risk (C3) [6,11] Socio-political factors (D2)…”

Modelling the determinants of SME’s investment intention in the Ghanaian energy sector: the role of local content policy

“…It is used to broadly refers to firms' ability to understand customer's complex and diverse needs by using its tangible and intangible resources to achieve strong brand recognition (Qureshi, Aziz and Mian, 2017;Lee and Sok, 2017;Al-Mutairi et al, 2018;dos Santos and Marinho, 2018). New products and services development through the differentiation strategy further facilitate SMEs competitive strategy (O'Cass and Sok., 2013;Vinayak &Kodali, 2014;Gatzert and Kosub, 2017;Krömer and Gatzert, 2018;Krömer, 2019). The RBV regards marketing capabilities as part of the imitable corporate organizational resources that form strong component of IJESM 18,1 sustainable competitive advantage (Kozlenkova et al, 2014).…”