Price and resource-related risk of the wind power business in electricity markets

A generalized mathematical model is developed that allows the quantification of the economic risk of the investment in a wind farm under the two most common revenue options defined by how the output of the wind farm is paid to the owner: (a) at a pre-established fixed-rate or, (b) at the hourly electricity market prices. Sensitivities are also characterized in order to determine the influence of various market and resource-related parameters on the variability of the annual revenue and the corresponding economic risk. Particular to the fixed-rate revenue option, the developed model allows the owner of the wind farm to determine the minimum necessary rate to meet a pre-established risk-return requirement. The model is validated using actual wind power output and electricity market datasets. Understanding the sources of risk in any investment is crucial for the development of proper hedging strategies.