Valuating Wind Farms under Development: How to Value Offshore Wind Farms under Development Given Changes in Subsidies

Philip Krag-Olsen & Tobias Vuust Taarsted

Student thesis: Master thesis


During the last decade, global warming has become a substantial threat to the Earth. As a tool for reducing the carbon emissions, countries, firms, and consumers are shifting their focus towards the pollutant energy sector. Resultingly, renewable energy sources have received more attention, where the use of wind energy to produce electricity has been one of the most popular measures to counter the emission of carbon gasses. Previously, the Danish government has supported the sector using subsidies but are currently starting to reduce these. As the technology within the industry has been increasing, the costs of producing electricity from wind energy have been decreasing, which has caused a shift in policies regarding subsidies. As wind energy has become more popular, investors are realizing the value of the industry and thus, investments in the sector has significantly increased. The purpose of this study is to examine different valuation approaches in order to determine if these tools are useful in valuating Danish offshore wind farms without subsidies. The findings of the study are applied to the valuation of the Danish wind farm under development, Aflandshage. To capture the shifting market conditions, the project-specific risks, and the managerial flexibility related to wind farms development, a potential valuation model must incorporate these elements.
The thesis discusses traditional valuation models. As the original DCF model fails to incorporate the managerial flexibility and project-specific risks of the pre-operational period, it is therefore solely used to evaluate the operational stage of Aflandshage. However, the Expected Net Present Value succeeded in incorporating the stage-specific risks in the development stage, as it was possible to account for the probability of success of each stage. Conclusively, it was found that the Real Option Valuation bested the ENPV model in order to capture the full value of Aflandshage. However, both estimates reached the same conclusion, that Aflandshage is not a profitable investment. It was found that the removal of subsidies subtracted enough value to make the project non-profitable, as a higher price was found to be the lacking factor. While the costs and production have both reached a competitive level, the industry is found to be at breaking point between being self-sustainable without subsidies.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final ThesisMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2020
Number of pages131