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Basis risk of hedging

Basis risk of hedging. There is basis risk in two directions. Power production affected by factors other than wind. There will be a payout although it would not be possible to produce. 1. Monthly payouts during course of time. Implicit monthly production (based on Index)

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Basis risk of hedging

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  1. Basis risk of hedging • There is basis risk in two directions Power production affected by factors other than wind There will be a payout although it would not be possible to produce 1

  2. Monthly payouts during course of time Implicit monthly production (based on Index) 1) Above red line (Put Strike) monthly production is sufficient and there will be no payout 2) Between red and green lines - difference between red line (Put Strike) and green line (Production) will be paid out (shortfall x feed-in tariff) 3) Below the blue line (Exit) there is no further payout (Maximum payout reached) Production > Put Strike = No Payout Jan Nov Put Strike Feb Apr Oct Dec Exit May Sep Production (MWh) Mar Jun Production < Put Strike = Payout Aug Jul No additional payout below blue line (maximum payout reached) Jan Dec Alternative: Put-Option on Annual Production Payout Exit Put Strike Option payoff Put Limit 0 Option Premium Annual Production Premium Put Strike

  3. Testing the value of the hedge • Wind farm developed by mid-size sponsor in Spain. • The project is located in a reasonable spot (good wind resource) • Costs are in line with market conditions

  4. Impact of adding Wind Protection on the project's economics • Even if only benefits is intangible one of reducing risk of financial distress, costs is relatively low. No protection in place 75% / 25% Buying wind protection Wind protection in place 75% / 25% • Put Option on Wind Power Index • Strike at (P75) • 5 years • 10 EUR MM limit • Premium 1.5 EUR MM1 Even with the associated costs of wind protection in place, the economics of the project are not greatly affected. 1 Rough estimation

  5. Potential benefits of Wind Protection. Wind protection in place + change in Capital Structure 80:20 Wind protection in place + reduction in margin of 50 basis points By placing a floor on the production, the debt capacity of the project increases; lowering capital costs and improving the economics of the project. With protection in place, lenders may also reduce spreads.

  6. Protection creates value across the capital structure Total benefit 4.52

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