Taking advantage of portfolio diversity

Introduction

As the wind industry matures, companies are taking larger and more diverse positions in wind. Along with this maturity, portfolios are increasing in size and the savvy manager is beginning to think about ways to add value to their portfolio. This value is obvious when large geographic regions have low winds at the same time as evidenced by the 2015 "wind drought" in the US.

By properly considering portfolio effects, it is possible to construct a portfolio of wind projects that are resilient to the variations in the climate. This climate resilient portfolio will dampen cash flow variations, when compared to the the standard approach and it will provide benefit at financing for projects that are being financed as portfolios.

Approach

The approach used to solve the portfolio diversity challenge is using numerical weather prediction (NWP) models as a basis for simulating wind farms across geographically diverse regions. Using these simulations, we look at the annual and inter-annual variability of different styles of portfolios. Optimization algorithms are used to find optimal portfolios given certain constraints.

Main body of abstract

This presentation examines portfolio effects, both in terms of climate variability as well as modelling uncertainty, and will answer questions about how one should look at their portfolio.

Questions to consider are: What diversification is possible given that wind is typically installed in specific regions for other, more prominent economic reasons? How accurate are the climate signals we use to study this at detecting anomaly in any period? How does modeling uncertainty in my assessment consider into a portfolio effect? How should I capture the benefit of portfolio effects in my pro forma model?
In this presentation, these questions will be addressed from the commercial perspective of an investor looking to minimize risk. Less focus will be on the scientific rational and more on practical advice for someone attempting to model these effects.


Conclusion

Portfolio effects are real and advantage is possible for companies that are actively seeking to capture benefit from these effects.


Learning objectives
We hope to accomplish the following learning objectives.

* Make the audience be aware of how portfolio effects work and what range of benefit is possible.
* Inform the audience of the role of numerical prediction models in solving this.
* Introduce concepts of non-climate related portfolio effects
* convince the audience that a strategic approach considering this phenomenon can create value