This SAVi assessment was commissioned by B Capital Partners, Zurich, Switzerland. The assessment is currently ongoing and focuses on an onshore wind portfolio in Germany. The portfolio has a total capacity of 28.7 MW.
B Capital Partners, a Swiss-based investment house focusing exclusively on investing in sustainable infrastructure, invited the International Institute for Sustainable Development (IISD) to conduct a sustainability assessment on one of their onshore wind portfolios. The portfolio is located in Germany and has a total capacity of 29 MW.
The objective of the assessment was to integrate a range of environmental, social, and economic factors into an asset valuation to improve the transparency of the asset’s impacts on the environment and important stakeholders. In addition, the assessment served to reveal the asset’s financial resilience toward climate change risks. IISD customized and applied the Sustainable Asset Valuation (SAVi) methodology to conduct a comparative sustainability assessment of the onshore wind portfolio and a hypothetical gas-fired power plant with the same power generation capacity.
The SAVi assessment valued the environmental, social, and economic factors (externalities) in financial terms and calculated the costs induced by climate change risks for both assets. Externalities and risks were incorporated into the following modes for performance assessment:
• Cost-benefit analysis (CBA)
• Levelized cost of electricity (LCOE)
• Project finance analysis, generating performance results for the equity and project internal rate
of return (IRR).
Externalities and Risks
The SAVi assessment provided a valuation, in financial terms, of the following environmental, social, and economic externalities per asset:
Further, it was assessed how the following climate change risks would impose project costs for each asset
if they materialize:
Results of the SAVi Assessment
The summary results of the integrated CBA are displayed in Table 1 and cover cost and benefit factors that occur over the lifetime of each asset. Negative values are indicated in brackets. For the gas-fired power plant, a lifetime of 40 years is assumed, while the lifetime of the onshore wind farm amounts to 23 years. Indicated values are discounted at an interest rate of 4.5%. Reflecting the current market conditions in Germany, the price for electricity generated by onshore wind is assumed to remain 23.23% higher over time than the price for electricity generated by the gas-fired power plant. Details on diverging electricity price assumptions for both assets are explained in the report.
Levelized cost of electricity
The Levelized Cost of Electricity (LCOE) is a useful indicator for comparing the unit cost of electricity generation over the lifetime of an asset. Table 2 provides a full breakdown of cost components and the integrated LCOE results per asset. Positive externalities are, in this case, indicated with a negative sign because they reduce the LCOE. The lower the LCOE, the more preferable is the asset because it implies that electricity can be generated at a lower cost.
The results in Table 2 highlight that the onshore wind portfolio is the more affordable asset for electricity generation across all subtotals. While both assets are almost on par when comparing the conventional LCOE results (subtotal 1), the superiority of onshore wind becomes apparent when costs induced by climate change are integrated into the LCOE (subtotal 2) and even more when externalities caused by the respective asset are accounted for. The integrated LCOE results (subtotal 3) indicate that from a societal perspective, electricity generated by onshore wind is almost 18.5% less expensive than electricity generated by the gas-fired power plant.
Results of the Financial Analysis
The purpose of the financial analysis is to assess the financial impact of costs induced by climate change risks (Table 3) and, on the other hand, the financial implications if the monetary value of environmental, social, and economic externalities are internalized (Table 4). These two elements are integrated separately into the financial models of both assets as a change in cash flows in the cash flow (CF) statement.
Note: The scope of this financial analysis deviates from CBA and LCOE calculation in one dimension. The financial analysis of the onshore wind portfolio is conducted from the investor’s perspective. Hence, it captures the asset’s performance from the point of acquisition onwards and not the entire asset lifecycle, whereas for the gas-fired power plant comparator, the entire asset life cycle is considered in the financial analysis.
Table 3 summarizes the results for the project IRR and equity IRR of both assets if climate change risks materialize. The materialization of the assessed climate change risks would imply additional costs for the gas-fired power plant and negatively affect the asset’s cash flows while the onshore wind portfolio would not be affected. Air temperature increases reduce the equity and project IRR of the gas-fired power plant significantly, but it remains positive. An introduction of a carbon tax will imply that both financial performance indicators turn negative for that asset.
Internalizing the assessed externalities into the CF statement is rather hypothetical. In the near future, these externalities don’t imply costs for either asset and hence don’t have cash flow impacts. However, if the asset performance is analyzed from a societal point of view, Table 4 indicates how the project IRR and equity IRR would change if all externalities are internalized. Detailed results are presented in the report.
Altogether, the results across all asset performance indicators (CBA results, LCOE, IRRs) demonstrate that the hypothetical gas-fired power plant loses its investment attractiveness once costs induced by climate change risks or the value of monetized externalities are integrated into the assessment. In contrast, the performance of the onshore wind portfolio is not affected by the assessed climate change risks. While the performance of this asset decreases if environmental, social, and economic externalities are monetized and internalized into the CBA, the LCOE, or the financial analysis, this does not alter the investment rationale.
The wind portfolio is the more resilient and more profitable investment choice, as well as the more beneficial (less costly) energy generation asset from a societal point of view.
1 The SAVi report provides details on an additional method to value emissions of each asset by calculating the health cost of air pollution.