Wind Farms: Tokenised “Spinning Assets”

Eolian tokens are revenue participation notes of the fund. Assets are operational wind farms in the European Union with very stable revenues. Some of the fund’s assets will be shares of technology companies whose innovations promise to take renewables up to the next principal level.

Why Spinning Assets?

In developed markets, where interest rates are typically low, the unprecedented stability with which wind farms are able to generate revenue makes them an alternative low-risk investment tool. As strange as it may sound, these “spinning assets” compete with money markets and government bonds.

Growth Engines

Stability is surely great, but what are the factors that may support growth? It’s physics and politics:

  • Technical improvements of wind generators and supporting infrastructure
  • Regulations that make competition of clean and dirty energy sources more fair

You have probably noticed that wind towers have become larger from year to year. Why are they growing in size?

Although the proportion of wind energy converted by the particular turbine into electricity is irrelevant (wind is free), the “quality” of wind affects the efficiency and impact on equipment. Therefore, it is preferable to place generators higher so that turbulence is lower and laminar wind is faster. Another important factor is that connecting generators to the grid isn’t cheap, so aggregation reduces relative costs.

Characteristic dimensions — height, length of blades, generator size — all change proportionally. It is irrational to spend more money on taller towers without increasing power (i.e. placing larger rotors and generators). By doubling the size, you increase the power more than four times. Let’s see why.

Kinetic energy is proportional to the mass of the moving body and the velocity squared. “Body” in our case is a cylinder of air-mass that passes through the circle formed by the rotating blades, per unit of time. The mass is proportional to the volume (that is, the product of the area of the circle on the length of the cylinder), which, in its turn, is proportional to the wind speed (the faster the wind, the longer the cylinder that whizzes through the turbine).

As a result, the velocity of wind (v) is included in the formula for power in the third degree and the characteristic size (r) in the second degree. Power ~ v^3* r^2. If we also account for the surface effects, it slightly increases the dependence on size to the degree somewhere between 2 and 3. On another hand, engineering complexities (and costs along with them) grow with the size faster than power — namely, at least with a degree 3 (mass of objects ~ r^3). At some point, materials will break and logistics become infeasible.

One possible solution is building generators that use high-temperature superconductors. Such generators promise to be half as heavy per power unit. Superconducting material is a brittle ceramic; it demands a high level of grain alignment. Only recently was this material able to be packed in a usable form, so it is advantageous to begin utilising it.

Coated conductors can transport thousands of amperes of current in a layer of YBCO only a few microns thick — around one hundred times thinner than a human hair.
One of the companies that develops new generators is EcoSwing.

Another potential breakthrough is rather economic in nature, although it requires a new engineering solution.

Electricity is not sold on free markets. A significant portion of energy goes to monopolists who often impose fixed deal parameters (price, volume). If the wind was weak during the reporting period, and the volume was not high enough, the energy producer needs to buy “missing” energy in the market, where the price (of course) disproportionately jumps up because all the neighbouring generators have exactly the same problem.

The situation could be radically improved by energy “warehouses” so one can produce when it is better to produce and sell when it is better to sell. For such a large-scale purpose, chemical batteries are inappropriate. They are expensive, they age too quickly, and they are not easy to dispose. It is quite possible that a physically primitive scheme might work better: move a mass up so gravity effectively converts electricity into potential energy. Here is an example of such solution:

Local energy storage will make revenues smoother and cash flows will become even more predictable. Interest rates with which renewable energy facilities are valued will decrease (lower risk). Discounted cash flows will increase. This will affect both corporate and official statistics. The latter, in its turn, will have political implications. Subsidies may give way to direct pollution taxing of fossil fuel burning plants. That will affect electricity prices. And, of course, the economic competitiveness of renewable power is affected by fossil fuel prices.

So, what happens to the fund when electricity prices go up or down? Surprisingly, the fund’s performance does not directly depend on that. It may seem counterintuitive, but stopping distance does not depend on vehicle mass. A huge dump truck may outperform a compact car in braking, provided correct tyres, because the greater mass increases inertia and friction to the same degree.

Similarly, the fund’s performance can be hedged against the volatility of electricity prices if we apply the following logic: the lower the prices, the less profit each wind turbine makes, the lower its fair value, the greater the discount the fund can buy it at, the more turbines the fund can own at the given moment. Of course, there will be some discrepancies caused by the structure of demand, availability of long-term power purchase agreements, and some fixed costs but, generally, the prospects of the business mostly depend not on the electricity market but on the relative risks, when compared with other industry sectors with similar IRRs.

Sensitivity analysis: how does electricity price affect IRR and the fund’s NAV 5 years from now?

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