CREATING A BETTER ENVIRONMENT

MAXIMISING VALUE THROUGH PORTFOLIO DIVERSITY

If there’s one key message we hear from

our investor clients, it’s this: competition
for renewable energy projects is
increasing. In recent years there has been
unprecedented levels of secondary market
activity in Europe. For many investors, this
has meant a shift towards large portfolio
HANNAH STAAB
acquisitions, as they pursue aggressive PRINCIPAL SOLAR & ENERGY
growth strategies and are unable to STORAGE CONSULTANT
compete in smaller transactions. hannahs@naturalpower.com

The consolidation of renewable energy assets is particularly
visible in the UK: eight asset owners hold more than half
of the UK’s operational large-scale ground-mounted solar
capacity.1 A similar consolidation is taking place in the wind
sector, with large UK funds such as Greencoat, Octopus,
Ventient and Foresight acquiring additional capacity at a
rapid pace.
While Natural Power’s team of technical advisors has been
involved in flagship single-project transactions over the past
year, such as the financing of the 600 MW Markbygden ETT
onshore wind farm in Sweden, a typical mandate increasingly
consists of reviewing a large, multi-technology, multi-region
portfolio.
These types of portfolios offer several advantages in
comparison to single projects due to:
→→ Economy of scale: Portfolios may be in the 100MW+ range
and include numerous smaller projects, facilitating less
costly due diligence, financing, and transactional costs.
→→ Reduced market risk: A portfolio that encompasses
multiple markets offers reduced overall risk due to changes
in incentives or market rates for the supplied power in any
single market.
→→ Reduced technology risk: Serial equipment defects or
other technology issues can be mitigated by employing a
mix of technologies.
→→ More predictable revenue streams: By having a portfolio
with geographic diversity, regional weather effects (e.g.
low summer wind speeds in Ireland) can be balanced
by higher revenues (e.g. higher irradiance in France) such
that the overall portfolio has a more consistent generation
profile than any single project might under the same real-
world conditions.
In this white paper, we focus on the latter two aspects, which
are typically quantified as the portfolio effect or portfolio
benefit. The Portfolio Benefit describes how the average
generation of a diverse set of projects is more consistent, and
therefore carries lower risk, than individual project generation.
Figure 1 illustrates this benefit for a portfolio of UK wind and
solar projects, with wind and solar each making up half of
the portfolio’s net generation on average. The figure shows
a hindcast (back-prediction) of production to illustrate the
portfolio’s long-term performance. It is easy to see that:
→→ In many cases, a low wind speed year coincides with a
particularly sunny year. For example, the wind component
of the portfolio would have performed 5% below average
in 2003, but the solar component would have more than
compensated for this with generation over 10% above
average.
→→ The portfolio production shows less year-on-year variability
than both the wind and solar components and remains
above the P90 (incl. portfolio effect), even during the
particularly low wind year of 2010.
We explore how the portfolio effect is evaluated and provide
guidance on the typical magnitude of benefit that can
be expected for different types of portfolios. We focus on
onshore wind and solar projects as these currently form the
vast majority of mixed-technology portfolios; however, Natural
Power expects to see energy storage beginning to play a
larger role in these portfolios in the near future.

1 Liam Stoker. (2018) “Foresight targets top UK-listed solar fund spot
with 134MW portfolio purchase”, Solar Power Portal, 18 June. Available from:
https://www.solarpowerportal.co.uk/news/foresight_targets_top_uk_listed_solar_
fund_spot_with_134mw_portfolio_purcha. (Accessed 10/01/2019)

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 CREATING A BETTER ENVIRONMENT

Figure 1: Portfolio benefit illustration. Underlying data is based on analysis carried out by Natural
Power as part of a portfolio refinance mandate, but it has been anonymised for this white paper.

PORTFOLIO BENEFIT: HOW DOES IT

WORK?
When assessing the long-term energy yield of a wind or solar Main sources of uncertainty include:
farm, we report two key numbers:
→→ The inter-annual variability of the wind or solar resource.
→→ The P50, which describes the central estimate for the
project’s long-term average annual energy yield (i.e. there →→ The performance of components like wind turbines or PV
is a 50% chance the actual yield will be above or below modules.
this number).
→→ Losses such as downtime due to icing, shading, grid works,
→→ The P90, which represents the energy yield the project has or component faults.
a 90% chance of exceeding in a given period. The P90
→→ Measurement and modelling uncertainties, particularly in
is a more conservative metric than the P50 and is often
the pre-construction stage.
considered by lenders as a “worst case” scenario.
We typically think of these uncertainties as independent of
Lenders typically size debt based on P90 rather than P50
each other for a specific project. For example, whether a
figures, so reducing the uncertainty can materially improve
solar farm experiences particularly sunny weather in a given
project finance conditions.
year is unrelated to whether a major grid upgrade will be
carried out that year.

Figure 2: Impact of uncertainty on P90/P50 ratio

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 CREATING A BETTER ENVIRONMENT

Adding up all individual project P90s to calculate the The portfolio uncertainty for a particular component is then
portfolio P90 would assume that project uncertainties are fully calculated as:
correlated, which is overly conservative. Instead, we need to
assess each uncertainty component and establish to what
extent they follow the same patterns between projects. This
approach is called Modern Portfolio Theory.2

A basic example is shown in Table 1 below for the following

scenario:

Solar Farms 1 and 2 are neighbours and use the same Where σp represents the portfolio uncertainty, wi and wj the
modules and inverters. Solar Farm 3 is located in a different weight of projects i and j within the portfolio, σi and σj the
country and uses different technology. Wind Farm 1 and 2 project-level uncertainties, and ρij the correlation coefficient
use the same turbine models but are located in different between the two projects.
countries.
The key challenge is determining the correlation coefficient
In reality, things are more complicated than shown in Table 1. matrix – oversimplifying this may result in overestimating the
Uncertainty components may be partially dependent between portfolio benefit. For example, grid downtime is frequently
a pair of projects or show a degree of anti-correlation, which considered independent between projects (correlation factor
means that low generation for one project is likely to coincide of zero), but if two sites are located on the same transmission
with above average generation for the other project. This can or distribution line, they will likely be affected by outages due
be the case for a wind/solar pairing where particularly sunny to repair or upgrade works at the same time. An overview of
weather often coincides with low wind speeds. typical project interdependencies is given in the table below:
As part of Natural Power’s portfolio benefit methodology,
we carefully assess each uncertainty component for each PROJECTS GENERALLY SOMETIMES RARELY
WITH SIMILAR CORRELATED CORRELATED CORRELATED
project pairing and assign a correlation factor based on our
knowledge of resource patterns, technology performance, Technology Serial defects Market changes Grid conditions
modelling methodologies and project characteristics, including Degradation Resource
Power performance
historic production data if available.
Geography Resource Market changes Serial defects
Grid conditions Degradation
Power
performance

Table 1: Illustrative example of correlations matrix

PERFORMANCE UNCERTAINTY
Project Solar Farm 1 Solar Farm 2 Solar Farm 3 Wind Farm 1 Wind Farm 2
Solar Farm 1 Dependent Dependent Independent Independent Independent
Solar Farm 2 Dependent Dependent Independent Independent Independent
Solar Farm 3 Independent Independent Dependent Independent Independent
Wind Farm 1 Independent Independent Independent Dependent Dependent
Wind Farm 2 Independent Independent Independent Dependent Dependent
INTER-ANNUAL RESOURCE VARIABILITY
Project Solar Farm 1 Solar Farm 2 Solar Farm 3 Wind Farm 1 Wind Farm 2
Solar Farm 1 Dependent Dependent Independent Independent Independent
Solar Farm 2 Dependent Dependent Independent Independent Independent
Solar Farm 3 Independent Independent Dependent Independent Independent
Wind Farm 1 Independent Independent Independent Dependent Independent
Wind Farm 2 Independent Independent Independent Independent Dependent

2 Harry Markowitz, M. (March 1952). “Portfolio Selection”. The Journal of

Finance. 7 (1): 77–91.

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 CREATING A BETTER ENVIRONMENT

METHODOLOGY
The following sections discuss Natural Power’s methodology
for determining correlation coefficients (interdependencies)
between projects within a portfolio for the main uncertainty
components.
RESOURCE VARIABILITY
In many cases, the portfolio benefit is dominated by the
inter-annual resource variability component, particularly
for portfolios spanning multiple technologies and regions.
The interdependency of the annual windiness or sunniness
between projects is assessed by comparing long-term
production hindcasts based on meteorological station,
reanalysis or satellite data. These hindcasts are corrected to
100% availability and power performance in order to isolate
resource trends.
WIND
A moderate to strong positive correlation is observed for
wind farms in the UK and Ireland (UKI). Wind farms in
Scotland and Ireland tend to show slightly lower similarities in
resource patterns compared to projects in England, but the
portfolio benefit for a UKI wind portfolio remains moderate.
Similar resource trends are also found between wind farms in
UKI, Sweden and northern/central France.
The wind resource in France is fairly consistent, except for
projects in the south of the country which can experience
very different resource trends. This is linked to the presence
of microclimates driven by the Mistral and Tramontane winds
and suggests that a higher degree of portfolio benefit could
be achieved for a group of wind farms spread across France
than a similarly diverse UK portfolio.

Figure 3: Correlation between annual production of sample UK wind farms. Dotted line represents perfect
dependency (i.e. no portfolio benefit).

Figure 4: Correlation between annual production of sample French wind farms.

Dotted line represents perfect dependency (i.e. no portfolio benefit).

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 CREATING A BETTER ENVIRONMENT

SOLAR
A greater spread in correlation coefficients between UK solar
farms is found than for UK wind farms. While some sites
show highly dependent resource trends, solar production in
Scotland and southern England is less correlated than the
wind resource across the UK. This is attributed to the fact
that the solar resource itself is less variable than the wind
resource, resulting in fewer outlier years that dominate the
correlation for wind sites.
No clear evidence of correlation between UK and French
solar farms is found. The data suggests that resource trends
are largely independent, with moderate anti-correlation
observed between UK and southern France sites in some
instances, and moderate positive correlation between UK and
central or northern France sites.
Strong positive correlation is found between solar farms in
the south of France, but projects in the centre or north of the
country follow largely independent resource patterns.

Figure 5: Correlation between annual production of sample UK solar farms.

Dotted line represents perfect dependency (i.e. no portfolio benefit).

Figure 6: Correlation between annual production of sample French solar

farms. Dotted line represents perfect dependency (i.e. no portfolio benefit).

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 CREATING A BETTER ENVIRONMENT

WIND AND SOLAR

Within the UK, wind and solar production patterns tend to
show opposing trends (moderate anticorrelation) or are, at
the least, independent. The same applies for the relationship
between the UK solar resource and the wind resource in
Ireland, Sweden and France.
Solar resource trends in France can also be considered
largely independent from the wind resource in France as well
as UK, Ireland and Sweden.

Figure 7: Correlation between annual production of sample wind and solar farms. Dotted
line represents perfect dependency (i.e. no portfolio benefit).

Table 2: Summary of regional resource dependencies

SOLAR WIND

UK FRANCE UK IRELAND SWEDEN FRANCE FRANCE (S)

LEGEND
UK

(S)
SOLAR

Moderate
FRANCE

anticorrelation to
no correlation
(S)

No correlation
UK

No correlation to
IRELAND

moderate positive
correlation

Moderate to strong
SWEDEN

positive correlation
WIND

FRANCE (S)
Southern regions of
France
FRANCE
FRANCE (S)

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PERFORMANCE AND LOSS
UNCERTAINTY
Quantifying project dependencies for these uncertainty
components is typically based on engineering judgment and
knowledge of specific project characteristics. Natural Power
draws on its experience of analysing and advising on over 22
GW of wind and solar projects to inform this, as well as our
own in-house asset management expertise. In general, the
following aspects should be considered:
→→ Do the projects feature the same technology (WTG model,
PV module or inverter type)? Serial defects or quality issues
are likely to affect such projects equally. In the same vein,
particularly reliable components can be expected to yield
a benefit across all projects they are installed on. However,
technology performance is normally assumed to be
independent between wind and solar projects.
→→ Are the projects of a similar age and do they have a
comparable maintenance strategy? Typically, performance
issues can be expected to occur more frequently towards
the end of a project’s lifetime.
→→ Are the projects located in regions with similar climatic
conditions? Both wind and solar farms may experience
high losses due to icing and snow coverage in particularly
harsh winters.
→→ Are projects located on the same transmission or
distribution line and therefore likely to experience
simultaneous outages in the event of major grid upgrade
works?
→→ Are projects being maintained or asset managed by the
same service provider? Above or below average service
quality is likely to affect projects equally.
MODELLING UNCERTAINTY
This uncertainty component tends to be more significant
for pre-construction projects, where modelling uncertainty
contributes a larger proportion to the total energy yield
uncertainty than for operational sites. Aspects to consider
include:
→→ Have the same modelling tools and techniques used across
projects? Are there any known model biases (e.g. tendency
of linear wind flow models to overpredict speed-ups in
certain scenarios)?
→→ Do the projects feature similar design elements that are
key to the modelling process (e.g. bifacial PV modules)?
→→ Has the same long-term reference data source been used
across projects, which means that any bias or consistency
issues would likely affect yield predictions in the same way?
CREATING A BETTER ENVIRONMENT
MEASUREMENT UNCERTAINTY
This component refers to the uncertainty of measurement
data feeding into the long-term yield estimate. In the
case of pre-construction projects, this tends to be more
significant particularly for wind projects that rely on on-
site measurements. For operational sites, the measurement
uncertainty is typically lower and refers to the accuracy of
measured production data.
In most cases, measurement uncertainties will be considered
uncorrelated between projects.
PORTFOLIO CASE STUDY
It is difficult for investors to make an educated guess of the
magnitude of the portfolio benefit for a given combination of
projects, without commissioning a technical advisor to carry
out a detailed portfolio benefit calculation. The following
section presents guidance on what range of portfolio uplift
can be expected for a set of portfolio types.
In this case study, Natural Power has combined data from
real projects we have assessed as part of various portfolio
due diligence assignments and evaluated the portfolio effect
for a series of scenarios.
Our base case represents a representative portfolio of
onshore wind and solar projects totalling 400 MW. The
portfolio is equally weighted between UK Solar, France Solar,
UK Wind, Ireland Wind, France Wind and Sweden Wind
(based on net P50).
The portfolio benefit is presented as an uplift in the portfolio
P90, compared to the sum of the individual project P90
values.
The base case portfolio is more heavily weighted towards
wind (67%) than solar generation. As expected, removing
the solar component from the portfolio reduces the portfolio
benefit (see Figure 8). Of the regions examined here, only a
wind-only portfolio in France can achieve a similar portfolio
benefit to the base case due to the regional wind resource
differences between the north and south of the country.
However, if all the sites in a French portfolio are in the north
or centre of the country, the portfolio benefit will likely be
significantly lower.
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 CREATING A BETTER ENVIRONMENT

Figure 8: Typical range of portfolio benefit (one-year P90 uplift) for various wind portfolio scenarios. For each scenario, regions
and technologies within the portfolio are equally weighted on a net P50 basis.

Figure 9 presents the portfolio benefit range for various →→ A significant portfolio uplift can be achieved by combining
combinations of wind and solar projects in the UK and wind and solar projects within the same country. This is the
France. The following findings are highlighted: case for both the UK and France.

→→ The portfolio benefit is small for single-country, solar-
only portfolios. While only the UK and France have been
assessed as part of this case study, this is likely to hold
true for most similarly sized countries.
→→ The portfolio benefit for a wind-only UK portfolio is only
moderately higher than for a solar-only UK portfolio. This
is due to the very consistent annual wind speed trends
experienced by projects in the UK. As discussed above,
wind resource trends in France are more diverse and allow
a greater portfolio benefit to be achieved if projects from
the north and south of the country are combined.
→→ Combining solar projects across the UK and France results
in a moderate portfolio benefit, but a higher uplift can be
achieved by combining wind projects from both countries.
→→ The incremental benefit of moving from a single-country
wind and solar portfolio to a UK and France wind
and solar portfolio is relatively small. This suggests that
technology diversity is typically more valuable than
geographic diversity for the regions evaluated here.

Figure 9: Typical range of portfolio benefit (one-year P90 uplift) for various scenarios. For each scenario, regions
and technologies within the portfolio are equally weighted on a net P50 basis.

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CONCLUSIONS
As the renewable energy market matures and competition
between investors increases, transactions of large portfolios
are becoming increasingly common. At the same time, asset
ownership is consolidating, with a shrinking number of entities
holding a large proportion of renewable generation capacity.
A key question for investors is to what extent the diversity
of their portfolio will result in tangible benefits. By combining
multiple projects, in many cases located across different
geographic regions and featuring different technology, the
inherent risk of annual fluctuations in renewable energy
generation can be mitigated to a certain extent. This not
only results in more stable revenues but can also allow more
favourable financing conditions to be achieved, as lenders
typically consider the P90 or other exceedance values as
worst-case scenarios when evaluating projects and sizing
debt.
In this white paper, we have explored the methodology for
calculating the portfolio benefit and its implications for overall
uncertainty levels. Using real data from several large portfolio
transactions where Natural Power has acted as technical
advisor, we have calculated the range of P90 uplift that can
typically be expected for different types of wind and solar
portfolios by focusing primarily on the UK and French market.
CREATING A BETTER ENVIRONMENT
Some general trends can be observed:
→→ The portfolio benefit for solar-only portfolios tends to be
lower than for wind-only portfolios.
→→ Technology diversity results in a greater benefit than
geographic diversity (for the western European countries
evaluated in this white paper). Adding solar sites to a
portfolio of wind farms typically results in a significant
portfolio benefit, especially if wind and solar are equally
represented in the portfolio.
→→ Nevertheless, the geographic distribution of sites within a
country can have a significant impact in some cases. For
example, the wind resource in the south of France shows
different interannual trends than the rest of the country.
→→ When considering mixed wind and solar portfolios, it is
important to assign an appropriate weighting to each site
in the calculation of the portfolio effect. Natural Power’s
standard approach is to weight each site by its net P50
energy yield rather than its capacity (as a 10 MW solar
farm will not contribute as much to the overall portfolio
yield as a 10 MW wind farm).
While this white paper gives an indication of the magnitude
of the portfolio uplift that can be expected for different types
of portfolios, any investment decision should be made based
on a detailed portfolio benefit assessment and individual
project characteristics need to be considered. Natural Power’s
advisory and analytics team is ideally placed to assist with
this analysis, given our extensive track record of evaluating
wind and solar projects, as well as market- and technology-
specific expertise.
For further information on maximising value through portfolio
diversity or on any details within this paper, please contact:
HANNAH STAAB (Europe): hannahs@naturalpower.com
SHAWN SHAW (North America): shawns@naturalpower.com
MAXIMISING VALUE THROUGH PORTFOLIO DIVERSITY 9