P50 forecasts set a baseline for the expected electricity generated by a project. A number of factors are assessed to arrive at credible estimates for generation.
Preview our free video on wind forecasting to learn more about the details behind the forecast. This is one of the videos in our renewable energy project finance financial modeling course.
Regardless of the rigorous science behind forecasts, financial modeling is all about recognizing our forecasts are best guesses. This is why we constantly run sensitivities on generation and pricing! The question still remains, what happens when you move from forecasting to actual values? Do assets tend to overperform or underperform compared to the initial forecast?
What the data reveals
Solar projects generally tend to underperform 5-10% compared to initial P50 forecasts. According to data published by kWh Analytics for US projects in 2021, solar PV projects underperformed by 8%. For projects with Commercial Operations dates (COD) from 2016-2020, the underperformance during the first two operational years was closer to 10%. Fitch analyzed solar projects where 40% where located in North America, and the remaining 60% in EMEA, APAC & LATAM. It concluded that 73% of actual annual production landed within 95% or higher compared to original P50 forecasts.
For wind projects, the issue of underperformance is more evident. In the same Fitch report, production levels for one-third of wind projects underperformed by at least 15% compared to the initial P50 forecast.
What explains the gap in forecast vs actual
Although significant variation exists within each generation technology and project, a couple of high-level factors impact the level of underperformance.
- Solar projects benefit from relying on a resource that is easier to predict. Measuring the sun is more predictable than measuring wind speeds. Wind speeds are also impacted by the relative positioning of wind turbines, and this caused Ørsted in late 2019 to update its production simulations.
- Equipment malfunction impacting availability and understated inverter clipping
- Higher curtailment than expected
A lower generation than initially forecasted could have severe impact on solar and wind projects. Project owners potentially face the following adverse effects:
- Failing to deliver the required volumes under a PPA resulting in liquidated damages
- Actual DSCRs falling below the lock-up DSCR, causing the project to delay distributions
- Under a tax equity partnership with a PAYGO structure, lower generation volumes could lower the total investment size from the tax equity investor.
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