An economic analysis for the design of ipp contracts for grid-connected renewable energy projects

Abstract

In this paper, we undertake an integrated financial, economic, stakeholder analysis of a grid-connected onshore wind project that is owned and operated by an independent power producer (IPP) in Santiago Island, Cape Verde. This IPP project has received considerable positive publicity and has won many awards. Cape Verde has a very good wind resource, but it suffers from high transportation costs for petroleum fuels due to its location. Hence, it would appear to be an ideal site for an IPP investment in a wind farm. This analysis is conducted from the perspectives of the electric utility, the country's economy, the government, and the private sector investor. The key question is whether the design of the power purchase agreement (PPA) can simultaneously yield a high enough cash flow for the project to be bankable while at the same time yielding a positive net financial and economic present value to the electric utility and the country respectively. The analysis shows that a negotiated PPA results in a negative outcome for the economy of Cape Verde in almost all circumstances. In contrast, the owners of the IPP are guaranteed, under all circumstances, a very substantial return on their investment.