Q: Since you don’t need additional funds to launch the power generation and sales of electricity, why would you want to sell (in the form of tokenisation) the existing farm in the first place? If this project makes you good money, why you do not need to liquidate it?
A: We don’t liquidate, we expand. We are effectively swapping the ownership of the asset of size X to the management of the asset of size 100x or even 1,000x. We can make MUCH more money that way. As the Fund reaches certain size thresholds, the scaling effects turn on so new operational assets can be purchased at greater discounts. One can hardly do this with his own money. We should expect more upside from EU regulators who tend to favour renewables more and more. You can’t benefit from that staying in one country and it takes a fund to expand. And, of course, to utilise the ongoing technological advancements that will further increase efficiency and reduce costs, it takes owning or managing the most modern turbines which you can’t get before you sell the old ones (if you’re not a fund). Plus, the fund structure is much more flexible in legal, managerial, and methodological terms.
Q: Renewables were trending some time ago but is it still a promising sector?
Of course. Look at the statistics. The reasoning behind investing into wind and other renewables is only getting stronger, the climate is changing fast, and humanity is still moving towards the point of no return. Of course, as time goes by, some questionable narratives come and go. One part of it could be a just paid-for black PR. Another part sounds very unpleasant but is not relevant. For example, wind farms are hardly the bird slayers they're made out to be. There are more sophisticated accusations that turbines actually heat the planet by slowing down wind. Another topic that may harm the image of renewables is the unreasonable crusade against nuclear energy production. There's certainly some serious misinformation about that in the media, but neither solar nor wind industries have anything to do with that.
Q: The 20-year time horizon without hedging looks risky. Wouldn’t some precautionary measures make this project more attractive?
A: The fund is going to be a “normal”, “eternal” company. It is not limited to 20 years in any sense. Just like McDonalds is not limited to the 5-minute lifetime of its hamburgers — they manage to utilise them while they are still hot. Turbine capacities nearing the end of their lifetimes will just be replaced by new ones that are likely going to be even more efficient and less expensive. The Fund operates according to the usual logic of companies whose shares are traded on the free market. With no implementation risks and virtually all other risks insured, with attractive and extremely stable returns, Eolian is a great business that we believe needs no hedging whatsoever.
Q: Why Romania? Electricity prices in Romania are lower than in many other European countries. Do you have some past experience in Romania regarding energy production?
A: We are already in Romania and are some of the greatest experts in this country. Nevertheless, we’re not going to get stuck there, we’ll expand. Comparison with other countries is somewhat irrelevant because the current financial model is built solely on the FACTUAL Romania-based data that we are 100% sure is true because we collected it ourselves. That model looks very sustainable; it allows us to pay high dividends and have some substantial growth. However, once we get the money in the fund, we will use it considering the scope of international options. We are on our way getting potential targets listed, but we will not be sharing those plans with brokers.
Q: Can we get to the actual site where the wind farm is located?
A: Yes, you can. But there’s probably no need to travel. We can provide the audit docs done by Deloitte. But any interested party is certainly welcome if they happen to be around that area.
Q: For the existing farm, who are the electricity buyers?
A: Part of it is sold on the terms of the fixed volume long-term contract, part on the market.
Q: How many employees will the fund have?
A: The fund structure is still under development. During the first year, probably not more than 5.
Q: What is the net profit of the existing business?
A: If we only consider O&M costs, with annual revenue over €1.2M and costs way below €300k, the margin is large. Normally, approximately 3/4 of the total cost of energy for a wind turbine is related to upfront costs such as the cost of the turbine, foundation, electrical equipment, connection to grid and so on. Obviously, fluctuating fuel costs have no impact on power generation costs. A wind turbine is quite capital-intensive compared to conventional technologies, where as much as 40-70% of costs are related to fuel and O&M. Thus, for wind farms, the cost of capital dominates over all other factors. Not in our case, though. There are no external debts associated with the farm, as it was built using the intercompany financing.
Q: Do you get government subsidies?
A: Yes, kind of. In most countries (and in all of them in the case of the European Union), generators of electricity from renewable sources receive financial support in terms of a subsidy per kW of capacity installed, or a payment per kWh produced and sold. In our case, we sell so-called green certificates. A Romanian Green Certificate is a documented proof that 1 MWh of electricity was produced with renewable energy sources. So, we have a constant inflow of these certificates. Many entities (around one thousand at the moment) must regularly buy some specific volume of these certificates. That’s why they represent value. Certificates are traded on a designated regulated online market. Schemes differ across Europe. The core idea is the same, of course. Since unregulated markets do not ensure that production occurs in socially and environmentally acceptable ways, market regulation must therefore be present in all energy markets and is a cornerstone of public policy. Notably, the economically most efficient method would theoretically be to make polluters directly pay their respective pollution costs in the form of a pollution tax. However, politicians have generally opted for narrower solutions. In a way, this represents an opportunity because we have solid grounds to expect further improvements in renewable policies, simply because they are still half-baked.
Q: What if electricity prices go up or down?
A: Of course, the economic competitiveness of renewable power is affected by fossil fuel prices. However, the fund’s performance does not directly depend on electricity prices. It may seem counterintuitive but stopping distance does not depend on a vehicle mass. A huge dump truck may outperform a compact car in breaking, 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 of the electricity market but on the relative risks, when compared with other industry sectors with similar IRRs.
Q: Why is owning shares of Eolian fund better than owning shares of a wind farm?
A: Besides independence on the electricity market (see previous question), one important reason is political diversification. Regulations vary across Europe and the process is quite dynamic. Scaling is another important reason. As the Fund reaches certain size thresholds, the scaling effects turn on so new operational assets can be purchased at greater discounts. For bigger farms, even the voltage for grid connection is different. When discussing costs, people frequently forget to mention which point in the value chain of power generation they refer to, i.e. are we talking about kilowatt-hours delivered at the location of the turbine, at the electricity outlet or somewhere in between; what is the voltage level; to which extent are we discussing firm or statistically predictable delivery including or excluding ancillary grid services; and who pays for grid connection and grid reinforcement? Large wind farms are generally connected to the high-voltage electrical transmission grid (usually 60 kV and above), whereas individual wind turbines or clusters of turbines are generally connected to the distribution grid (8-30 kV). If the local grid is already saturated with other electrical equipment, there may be the additional costs of upgrading the grid to accommodate the wind turbines.
RelAted Documents and POSTS
Our library is organised in three collections: documents and posts that, if taken together, constitute the Prospectus; same for the business plan; and miscellaneous thoughts, ideas, offers in the third collection.