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Deriving value from portfolio diversity

As renewable technologies continue to penetrate global energy markets, one of the pressing challenges is how best to complement these sources of variable generation to ensure demand is met at all times. At the same time, competition among investors is increasing and the secondary wind and solar market continues to be highly active. For many investors, this has meant a shift towards large portfolio acquisitions as they pursue aggressive growth strategies and are unable to compete in smaller transactions.

Consolidating renewable energy assets into large portfolios can have clear advantages:

• Economy of scale: portfolios may be in the 100MW+ range and include numerous smaller projects, facilitating less costly due diligence, financing, and transactional costs as well as opex savings.

• Reduced market risk: a portfolio that encompasses multiple markets offers reduced overall risk due to changes in incentives or market rates for the supplied power in any single market.

• Reduced technology risk: serial equipment defects or other technology issues can be mitigated by employing a mix of technologies.

• More predictable revenue streams: by having a portfolio with geographic diversity, regional weather effects (e.g. low summer wind speeds in Ireland) can be balanced by higher revenues (e.g. higher irradiance in France) such that the overall portfolio has a more consistent generation profile than any single project might under the same real-world conditions.

Fig 1 illustrates this last point for a representative portfolio made up of wind and solar farms in the UK. Long-term production trends show that in many cases, a low wind speed year (e.g. 2010) coincides with a particularly sunny year. The combined portfolio production, and as a result shareholder returns, of a wind-only portfolio would have been significantly below the long-term average in this year. However, the above average solar generation partially compensates for this shortfall and the combined annual portfolio generation remains within 5% of the long-term average.

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