NERA Economists Forecast the Revenue of Portuguese Wind Farms in Proposed Acquisition Operation

The Situation

In early 2020, a large European private equity investment company engaged in private negotiations for the acquisition of a large wind farm portfolio (>500MW) in Portugal.

NERA's Role

NERA was retained to provide regulatory due diligence and to forecast the regulated revenue of each of the wind farms in the proposed acquisition operation. NERA also liaised with the financial adviser to review the regulatory aspects of the valuation model.

NERA has extensive experience analysing the large and intricate Portuguese regulation on renewable generation. Although recently the Portuguese government has resorted to auctions to decide the remuneration of new installations, since the end of the 1990s, renewable generation had been incentivised in Portugal via feed-in tariffs (FiT) per MWh. Different remuneration schemes coexist, resulting in variants to a general FiT formula. Determining whether a wind farm falls under one scheme or another requires careful analysis of regulatory and administrative documents, which the NERA team performed.

In addition, NERA considered the remuneration in the “extension period” (i.e., the alternative remuneration scheme that wind power generators could choose as the result of negotiations carried out in 2013 between the government and producers). Wind power generators were given the opportunity to choose from various alternative schemes to extend the period of regulated remuneration once the period of application of FiTs finished. Also, those farms that increased their original power capacity (“sobre equipamento” or overpowering) have a special treatment under the regulation.

The Result

NERA carefully analysed the documentation of each of the wind farms (and their production phases) to confirm the corresponding FiT scheme as well as the exact validity period. We investigated the discrepancies with the vendor.

With this information, NERA created a financial model with the forecasted FiT for each wind farm with monthly estimates until the end of the validity period (late 2020s and early 2030s.) The model was flexible to accommodate for different generation forecasts for each wind farm (as the FiT in Portugal varies with the load factor). The soundness of the model was tested against actual revenues earned in the last three years.

NERA also produced a formal due diligence report reviewing the regulation and including the forecast results. The report could potentially be released to banks or other investment funds interested in taking part in the operation.

The acquisition operation was postponed due to the COVID-19 pandemic.