8' International Conference on Probabilistic Methods Applied to Power Systems, Iowa State University, Ames, Iowa,
September 12-16,2004
Development of Eolic Generation Under
Economical Uncertainty
Carlos A. Ramos-Robles, Agustin Irizany-Rivera, Member, IEEE
Absfract- Development o f a wind farm in the east coast
of Puerto Rico has the potential of being au attractive
economic proposal. This is so because the best wind
resource of Puerto Rico is located on its east shore.
Reliable wind data is available for several sites io the east
coast, but important information in evaluate the economic
feasibility of the wind farm can only be estimated or is
unavailable. For example, land values, an unclear
permitting process, lack of a legal framework, and no
precedent in the Island of a purchase power agreement for
a wind generation project makes any economic evaluation
an uncertain one.
In this case study we use Present Worth (PW) economic
analysis estimating the values of uncertain parameters and
perform sensitivity analysis for such parameters. Also, we
perform Monte Carlo simulation to do financial risk
assessment. The results show under what conditions is
viable to develop a wind farm in the east coast of Puerto
Rico.
Index Term- Pucrto Rico, economic analysis, sensitivity
analysis, Montc Carlo simulation, risk assessment, tiind power
I. INTRODUCTION
Twuntrtes
. revolve around their energetic needs. It is
he welfare and socioeconomic development of modem
important for modem countries to have a reliable electric power
source with continuous capacity to provide all of the present and
future demand for electric energy at a reasonable cost. The
island of Puerto Rico has a developing economy that is
constrained by its electric energy needs, [I]. It is desired that the
additional electric power for Puerto Rico be derived b m
diverse, dependable, non-polluting sources appropriate for the
environment and economy of the island, [2,3]. Electric power.
generated h m wind turbines appears to he an attractive
alternative for Puerto Rim.
Although there have been a number of wind measurement
projects in Puerto Rico, [4-91, and the wind data is publicly
available, there has been no successful initiative to develop an
eolic generation project on the island despite the high price, as
compared to US prices, of fossil fuel generated electricity. A
major obstacle bas been the lack of a legal framework that
This work m-as supported by the University of hem Riw - Mayaguez.
CA. Ramor-Robles is pursuing his Masfen degree in Electrical
Engineering at the Univenily of hem Rico, Mayagocq PR 00681 (e-mail:
wlos.rmor~.upnnedu).
A.A. khnyRivera is Assistant Professor of Electrical Engineering a1 the
UniversLy of Puerto Rico, Mrtyagoeq PR 00681 (e-mail
agusIm*.upm.ed").
Copyright Iowa State University, 2004
71 1
clearly establishes a permitting process and facilitates the
negotiation of a purchase power ageement Another uncertainty
is the assessment of land value for the purpose of eolic
generation since there is no experience on how to determine this
value and land is a precious commodity on a relatively small
and heavily populated island [lo]. In the end, a financial risk
assessment will be required by potential investors considering
the wind alternativeto produce electricity.
The objective of an economical analysis of any project is to
determine whether the expected energy payments are suficient
to pay the debt on the project and provide an adequate rate of
retum.
This case study is an initial step in the economical analysis of
eolic generation for Puerto Rico. The Monte Carlo analysis is
presented as an easy to understand and effective technique for
engineering managers to measure risk. Also the logistic for
selecting probability distributions to represent sensitive
parameters is shown.
For the interested reader references [I I]and [I21 show other
analytical and simulation approaches to analyze risk.
11. THE pOT€NTlAl OF WIND ENERGY IN PUERTO NCO
A new energy policy for the Commonwealth of Puerto Rim
was announced on December 22, 1993 [Z,31. Factors within
the context of Puerto Rico's physical, social, and economic
environment were considered while developing the policy and
five areas of concem were identified:
Eficient distribution of electrical energy.
Use of fuels other than oil.
Increased use of renewable technologies to generate
electricity.
Modification of consbuction regulations.
Public education.
This energy policy addressed the need for energy and
identified potential energy sources. The sources were
categorized into short-, medium-, and long-term options for
application based on their feasibility for Puerto Rico. The
renewable energy technologies were categorized as long-term
solutions.
Renewable energy technologies are considered new in Puerto
Rico although there are renewable technologies in operation for
more than 50 years in different locations around the world.
Issues concerning the design, cost, safety, operating and
technical procedures to maximize reliability, appropriate
maintenance procedures, and development of appropride
infrastructure and transportation for the new technologies all
affect the ultimate commercialization of potential energy
SOWceS.
Puerto Rico is considering various renewable and non-
renewable energy technologies that can contribute to meet some
of the projected 1,200 MW of future elecbic power demand [2].
None of the renewable technologies being considered is likely
to meet that demand by itself. The most important of the
technologies under consideration are:
Fossil fuels such as coal, natural gas and oil. Non-
Renewable
Biomass. Renewable
Wind power. Renewable
Solar energy. Renewable
Hydroelectricenergy. Renewable
The disadvantage of wind is that it has a low energy density
compared with the fossil and nuclear fuels [2].
Wind power in Puerto Rico may be feasible on small scale
using state-of-the-art wind turbines. Land availability
constraints and practical physical access to acceptable sites may
limit the overall applicability of this technology in Puerto Rico.
Wind power through the United States is rated on a scale of one
to seven based on wind speed and power density, [13].
The exposed points and capes along the north coast of Puerto
Rico, as well as most of the east coast and the windward coast
of Culebra, Vieques, and Mona Islands, have Class 3 winds.
Cape San Juan on the northeast coast have class 4 winds. The
high-peaks and the ridges of the central mountains have class 3
winds, with isolated peaks having class 4 winds. Figure 1
shows a wind resource map of Puerto Rim made by the
National Renewable Energy Laboratories(NREL).
Factors such as environmental acceptance, consistency with
existing land uses such as agriculture, and planning flexibility
(short conshuction lead time and benefits associated with the
modular nahue of the wind farm) promote renewable energy use
in Puerto Rico.
FigI.PuertoRicoWlndMap:AnnualAverageWlndPower[14].
111. ECONOMICS
The electric power industry is highly capital intensive. It is
probably more capital intensive than any other sector,
particularly in developing countries. The planning and proper
financial and economic evaluation of projects is important for
rationalizing investment and achieving economic efficiency
~151.
712
Wind energy avoids some external or societal costs
associated with conventional resources. These costs are the
trade deficit from importing foreign oil and other fuels, and
the health and environmental costs of pollution. It has been
shown that wind energy is a reliable resource that provides
more jobs per dollar invested than any other energy
technology, [16, 171.
Wind farm projects can’t be developed if there is no
economic benefit. No bank or money lender will loan money
for a project without an adequate minimum attractive rate of
return (MARR)[15]. To develop a project investors need the
guarantees of, an appropriate incentive and an adequate
payback period. For this type of project the average payback
period is 7 years.
Wind turbine technologies has evolved greatly in the last 20
years and the cost of energy from the wind has dropped by
85% to the point that the price of electrical energy produced is
around 4 to 6 cents per kWh in places with proper conditions
to install wind turbines [13, 181. These costs are competitive
with the direct operating costs of many conventional forms of
electricity generation now. The prices are expected to drop
even further over the nest IO years [13, 181. Incentives like
the federal production tax credit and net metering provisions
available in some areas improve the economics of vzind
energy [18, 191.
The most influential factors on the nrice of wind generated
L
electricity are the wind speed of the location, the land value,
legal framework, and loan agreement. In Puerto Rico there
are no realistic local incentives or tax deductions to reduce the
capital costs of the project and thus promote a wind farm
project.
The Public Utilities Regulatory Policy Act of 1978
(PURPA), established that any qualiking individual can
install a wind generator and the local electric utility must
purchase the excess power, power not used by the owner,
produced. PURPA intended to create a market for clean,
renewable, electric-generating technologies by guaranteeing a
buyer for the excess power [20]. With PURPA, small power
producers meeting specific criteria are guaranteed purchase
and interconnection. Many states now permit net metering, in
which the utility must buy wind power generated by
homeowners at the same retail rate the utility charges. Net
metering allows the customer’s meter to turn backward while
wind energy is supplied to the grid by their wind turbine.
According to [21] PURPA does apply to the electric power
utilities in Puerto Rico.
IV. WIND DATA PROBABILITY ANALYSIS
The power available in the wind varies with the cube of the
wind velocity as expressed by equation 1 [22],
1
P =- p 3 A (1)
2
where, P is the power in watts, A is the area, in meters,
through which the wind is passing, p is the density of the air
1.225 Kgm3 at 15.55 OC and 101,325 Pa, and v is the speed
of the wind in meters per second.
Is critical to have a precise measure of the wind speed for
the location where wind turbines will be installed. A 10%
deviation on wind speed turns into over 33% deviation on
available power. Since wind velocity varies it is necessary to
capture this variation in the model used to predict energy
production. This is usually done using probability functions
to describe wind velocity.
The Weibull probability dislrihution [22, 231 has been found
to be a very accurate model to describe wind velocity
variation. Once we have the wind velocity probability
function the next step is to determine how much energy is
available, during a time period, to capture with a wind turbine.
The Energy Probability Function (epf) per unit of area is
plotted using the following equation:
_e@)
= _ 1 p'f(v)(hours)(dws) (2)
Area 2
where e(v) is the epf, f(v) is the Weibull pdf and the product
hours-days represents the number of hours in the period of
analysis. The units of e(v) are \Nlllm*/mis.
ARer plotting the epf the next step is to integrate the
expression, as shown in Equation 3 to obtain the total energy
for the given period per unit of area (m')). The limits of
integration are denominated by the minimum wind speed and
the maximum wind speed measured.
'"' e(")
E / A r e a = J-h (3)
,mn Area
where e@) is the epf and the Area is a constant.
The energy available is not the same energy that the wind
turbine will capture. Bet2 law [24] states the theoretical
maximum of kinetic energy in the wind that can be converted
to mechanical energy using a wind turbine is 16/27 (or 59%).
A more direct way to calculate the energy captured is using
the wind turbine power curve. It gives the output power of a
wind turbine for any specific value of wind speed. The power
curves vary with the turbine models and ratings and are given
by the manufacturers.
Using the turbine power curve data the average energy
captured that can be obtained from the turbine can he
estimated. Using the following equation
Ecopmred
= p,a,cd
(period- hours) (4)
where E,,,.,e is the energy captured and converted into
electric energy (kWh), Pra,d is the rated power in the power
curve at the average wind speed calculated, and the period in
hours is the time period of analysis.
The power available in the wind, per unit sweep area, may
also be estimated using Equation 1 and the average wind
speed for a given site. It has been found that the use of
arithmetic mean velocity tends to underestimate the electric
energy production. A case study made in Kappadaguda,
India, [22], suggests that the root mean cubic wind speed,
equation 4.2 below, produces a better estimate of actual
r-
energy production.
,v =J If(V)V'dV (5)
V. ECONOMIC ANALYSIS
Economics is the most important part of the installation of a
wind farm. Our analysis will be based on the present worth
713
method, a method used to compare different economical
alternatives [I 11.
To evaluate a wind project we use the following procedure:
1. Define the economic alternatives. Select between
these alternatives or do nothing.
2. Determine the study period, e.g. the life of the
project.
3. Provide estimates of the cash flow for each
alternative. This is the most important part, poor
estimates can result in the selection of an altemative
that is not the best.
4. Specify the time value of money or interest rate.
5. Select a measure of feasibility, In our example the
measure of feasibility is a positive value of present
worth.
6. Compare the alternatives based on highest present
worth.
7. Perform sensitivity analysis for parameters whose
variation can affect the outcome.
8. Select the preferred alternative.
Risks encountered in a wind farm project can be divided in
market and technical risks. Market risks include demand
growth, wind speed deviation l?om prediction, the price of the
land, cost of money, and tariffs. Technical risks include the
breakdowns and non-availability of wind turbines, changes in
technology, and prospects of future environmental legislation
and enforcement. During the implementation of the project
there are also the risks of cost overrun and delays in
implementation [IS].
Step seven of our evaluation procedure shows that
sensitivity analysis should be performed. Sensitivity analysis
is performed when there is uncertainty on one or more
parameters of the present worth analysis. The objective of the
sensitivity analysis is to help make decisions knowing:
How possible errors in the estimates of one or more
parameters can affect the outcome of the economic
feasibility measure.
Potential changes in the altematives preferences.
To perform sensitivity analysis we use single parameter
sensitivity graphs. These graphs show the effect deviations on
individual parameters have in the project outcome.
The final step of our economic analysis is a risk analysis
using Monte Carlo simulation, [I], IS]. Monte Carlo permits
to develop approximated solutions when a physical
experiment or the use of analytical approaches is either too
burdensome or not feasible and it is desired to analyze
situations involving risk. The following steps are used when
using Monte Carlo simulation:
I . Define the problem and collect data. This data can
he selling price, investment, useful life of the project,
salvage value, operating costs.
2. Prepare input data. Input data includes the Probability
distributions of the collected data, time patterns, and
initial investment conditions.
3. Decision rules and program. Randomly select sets of
input data according to their probability of
occurrence.
 4. Simulate. Determine a merit measure for each set of
conditions.
5. Repeatedly sample until a clear pattern of investment
risk appears.

VI. EXAMPLE OF A WIND FARM ECONOMCAL ANALYSIS

The NPW is positive making the project is feasible for the

assumed economic conditions, Figure 3 shows the project has
a simple payback period of 2 years.
The nest step in this economical analysis is to perform a
sensitivity analysis of the parameters shown in Tables 11, 111
and IV. For purpose of this example only a few of this
parameten where selected. Table VI shows the selected
parameters and the expected NPW for 20% changes in each of
them.

Probability UAVc URMC ,.E I Area ER,, 1Area YWr: 0 It015 16 to 25

Distribution (ds) fds) (kWb/m') (kWb/m') Revenue: 0 $2,695,077 $2,695,077
N o d I 6.50 I 7.33 1500.87 2173.41 EXIK!3Ys: -$700,000.00 -$2,329,656 6498,226
Weibull 1 6.46 I 7.33 1472.16 2168.03 Net Cash Flow: -$700,000.00 5365,421.00 $2,396,851.00
Net Annual Worth $19,517
Net P e a t Worth $39,033

Before Tares Cash Flow

$1,400kW installed
0 & M Costs
Down Payment
Loan Terms

50%
-sIw,ow
-s1,o~.Ow -
Revenues are given by the product of the price of the YUrS
available eleceic energy and the established price of this
energy. Expenses are the capital cos< divided in the initial Fig. 2. Net Cash Flow Dingnun.
loan down payment, annual loan payments, operation and
maintenance costs and land right costs. Cumulative Before Taxes Cash Flaw

TABLE m. ~ o t aRevenues.
l
$1" "I*I on" -
Revenus
Electricalenergy for sale (kwh): 1 30,281,765.98
Average cost of electricity (Skwh): I $0.089
Eleetriol Energy Aooual Gross Revmuc 1% I 52,695.077.17

With all relevant information about revenues and expenses

calculated the net cash flow of the project can be obtained.
Table V shows a summary of the net cash flow of the project.
The annual loan payment, Net Annual Worth (NAW) and the
Net Present Worth (NPW) are calculated.

714
 The sensitivity analysis shown is called a single parameter
sensitivity analysis, where only one parameter is varied at a
time and all other conditions remain equal (ceteris paribus
assumption). Base values are shown in Tables 11, 111 and IV.
This permits the study of a particular relationship, e.g. MARR
vs. NPW, in a simplified setting.
Figure 4 show a single parameter sensitivity graph for
M A F X , energy price, energy for sale and O&M costs. The
most sensitive parameters are MARR, energy price and energy
for sale. MARR can be ignored because it is a parameter
relative to what the investor think is a proper yield for his or
her investment on the project.
We now perform a risk analysis using Monte Carlo
simulation. Since the most sensitive parameters are the energy
price and energy for sale these parameters are modeled using
probability distributions. The probability distributions can be
triangular, normal, uniform or of any other empirical form.
Single Parameter Sensitivity Graphic
E6.ooo.ow
It 1 tool but a measurement of risk is still needed. The most
I II
Percent Change
Fig. 4. Single Parameter Sensitivity Graphics.
In this example we assume a normal distribution for the
energy for sale for simplicity of calculations. The normal
distribution closely resembles the Weibull distribution which
was used for the wind and energy distribution. A triangular
distribution is used to model the energy price. We assume the
maximum price can not exceed the current local energy price
of $0.13kWh, the minimum price will be no less than the
avoided cost of the local utility of $ O . O S k W h , and the mode is
the power expected price, $O.lOkWh. Table VI1 shows a
summary of the parameters, distributions, and the distribution
parameters.
Monte Carlo simulation requires random rninibers based on
the probability characteristics given for the different
715
parameters of the problem. The expression for the generation
of random normal values is given in [I I]. The expression for
generating random uniformly distributed values for the
triangular and other empirical distribution can he obtained
using the Inverse Transform Technique [XI.
Table VI11 shows an example of the Monte Carlo
simulation for the first 3 trials. After 1,000 Monte Carlo
simulation trials the expected mean value for the Net Present
Worth (NPW) is $482,063 with a standard deviation of
$637,605. From the average NPW vs. Number of Trial
graphic it is shown that afier 500 trials the NF'W stays very
close to the NPW expected mean value of $482,063.
M h i m m = 10.05kWh
Mode =$O.IOkWh
Monte Carlo simulation provides us with a risk analysis
popular measurements of risk used are:
1 . The Coefficient of Variation
2. The Probability of a negative outcome of NPW
The coefficient of variation is the standard deviation of the
projected returns of NPW divided by the expected value [27].
Assuming a positive expected value of NPW, the lower the
coefficient of variation, the lower the project risk.
-$265,363
-$81,474
$460,430
When using the probability of a negative outcome of NPW
generally, the project is considered safe when this probability
is less than 0.2 [27], but of course the critical value of this
measure of risk is subjective since every decision maker bas a
different degree of aversion to risk.
TABLE M.Monte Carlo Simulation Results
NPW Eipecfed
NPW Eipecfed Value
Value (Mean):
(Mean): I 6482,063.
6482,063
Standard Deviation: I $637,605.
$637,605
Minimum Present Worth: I -1801,099
I Maximom Present Worth I $2,216,059 ,
Based on the coefficient of variation and the probability of
outcome of a negative NPW this project may be risky, but
there is a greater chance of obtaining a positive income as is
given by the expected NF'W mean value of $482,063.
Table X shows the results if measured wind speed where
adjusted to hub height using Prandtl one-seventh power Iaw
1281.
 [8] Wegley, H.L., Elliot, D.L. Barchd, W.R George, R.L. "IVimiEnergv
Pmbabw UAvc Uanc EA,, I Area ERMcI Ares Resource Atlas". Volume 12, h e n o Rico and U.S.Virgin Islands U.S.
Distribution (ds) (ds) (kWhhn7 (kWm') DOE. Pacitic Northwest Laboratory, Janvruy 1986.
Normal 7.45 8.46 2215.09 3241.29 [9] Sodentrom K. "Wind Form Assessmentfor Pserto Rico". Preparcd for
Weibull 7.41 8.49 2182.E 3278.37 the Puerto Rim Office of Encrgy Office ofthe Govcmor and the Center
for Energy and Environment Research University of Puerto Rico, May
1989.
[IO] Almanaque Mundial2004. 2004. Editorial Telwisa-Puerto Rico, Inc.,
Puerto Rico, pp. 608.
[I11 Canada, J.R., Sullivan, W.G., white, J.A. 1996. Capital Invesment
Analvsis for Ewineering and Management. FTenticc-Hall, Inc., N n v
~

Jersey, 566 pp.

52W.Mo.W
5300.ay100
yw.pO0.m ~~ ......................... ~ ~
Number of Trials
Fig. 5 . Average NPW vs. Number of Monte Carlos Trials.
REFERENCES
Esser, C. August 2003. US. Energy lnfomtion Administration-Puerto
Rim Fact Sheet. h n p : I I M \ w e i a . d o c . g o v l ~ m ~ ~ ~ b ~ p " ~ ~ . h t ~
Zerby, C., Gnrdillo, M. "LNG Impor1 Tmninol ond Cogeneralion
Prq'ect Find Emironmenial I n i p c t Smement". Prepared by the
Federal Energy Regulatory Commission and the Puerto Rico Planning
Board, April 1996.
Southem Stater Energy Board. Energy Offlces in the South. Available:
wnw.swb.orgipdfleos2001 .pdf
Alvarado, J.A., "EsNdios de Potencial de Viento en Puerto Rico"'
Congnro Tbnico Pan, La Invertigaci6n y CoNervacl6n De Los
Recmos Energeticas, Hotel San Juan, San Juan, Puerto Rico,
Noviembre 7-9, 1919.
Elliot D.L., Aspliden C.I., Gower, G.L., Holladay, C.G., S c h w a .
"Wind Energv Reso!me Assesment of the Caribbean and Cet+l
Aineaca". Prepared for the U.S. Depamnent of Energy. Prepared by
Pacific Northwest Laboratory, April 1987.
Meridian Corp. "Wind Reroirrce Assersrrrea". Final Repn, prepared
for the Office of the Governor of Puerto Rico, Offce of Energy,
December 1984.
Pacific Wind Energy, Inc. 'Yn Enera, Production ond Cost Esrimale
for Culebro. Puerro Rico, DOE Condidare Sile". Performed for
Windtech Wind System P.R., 1985.
[IZ] Park, C.S. 1997. Contemporary Engineering Economics. Addison-
Wesley, Inc., California, 803 pp.
1131 U.S. Depamnent of Energy-National Renewable Energy Laboratory.
"ll'ind Power Todq"! Prepared for the U.S. D e m e n t of Energy-
Energy Efficiency and Renewable Energy, May 2003.
[I41 Wind Energy Resource Allas of the Uluted Slates-Regional Summaries.
Available: rredc.nrel.govlwindlpub*atlas/chp3.h~#pu.
[I51 Khatib, H. 1991. Financial and Economic Evaluation ofProjec1 in the
Electricity Supply Indushy The LnstiNtion of Electrical Engineen,
United Kingdom 199 pp.
1161 U.S. Depamnent of Energy-Office of Energy Efficiency and Renewable
Energy. Wind Powcring America Program. Available:
w . e e ~ eenergy.gov/\\indpoweringngamerica/
.
1171 American Wind Energy Asmiation. 2000. http:lM.awea.org
[IS] Flowen, L. December 2002. "Wind Enew,; Technologv. A4nlket3,
Economics. omi Slokeholders". Prepred by the U.S. D e p m e n t of
Energy-Wmd Powering America h g r a m .
[I91 Green, I. "Net Metering of Renewable Energy". Prepared by the U.S.
D e p m e n t of Energy-Wind Powering America Program.
[20] Electne Power Supply Association. Frequently Asked QuestioN: what
is PURPA? Available: ~ ~ . e p r a . o r g / c o m p e t i t i ~ ~ f ~ ~ . ~ ~ ? w ~ ~ 2 4 5
[21] U.S. Depamnent of Energ)i-Otflce of Fossil Energy. August 2003.
PURPA List: Electric And Gas Utilities Covered In 1998 By Titles I and
III Of ?he Public Utility Regulatory Policies Act Of 1978. Available:
w . f o s r i l . energy.govlpropramr/elcc~cityre%ulationipurpa.h~
1221 Jang-heni S.H.,Gwprasada Raq V. "Site Motching of 1Vimi
Turbine Generators: A Case Study". IEEE Transactions on Eaergy
Convenioq Vol. 14, No. 4, December 1999.
[23] Montgomery, D.C., Runger, G.C. 1999. Applied Statistics and
Robability for Engineen. John W i l y & Sons,Inc.,New York,817 pp.
[24] Danish Wind Industry Association. June 2003. Guided Tour on Wind
~.~ :
Emrgy. Available: ~.windpower.org/enltour/indexhtm
[25] Surlon Energy. 2003. Available: w.rurlon.com/"indexl.hun.
1261 Meng, X. August, 1998. Invene Transform Technique. Available:
uawcs.panam.edul-men~C~-lCS6337~~t~-te~l"~~9.h~
[27] Hacwq A., Jadamos-Hacwq M., Kocot, A. "Risk Anoly~is in
hvertmenr Appraisal Bosedon the Alonle Carlo Sinwlotion Technique".
The European Physical J o d B 20,2001, p. 551-553.
[28] Wind Power Barics. IruimitePowmOrg. Available:
w . ~ ~ i u p o w ~ r . o r g l p U F a c t S h13.pdf
eet.

716