Empowering strategic pricing decisions with robust cost forecasting
Supporting a global windfarm developer to determine the best contract pricing terms
Client: A global windfarm developer
Department: Investment and Business Case Department
As countries advance towards sustainability, renewable energy sources such as wind power are gaining prominence. While energy generation facilities like wind farms offer sustainable environmental benefits, their development requires substantial capital investment and long-term planning. To ensure their own financial sustainability, companies in extractive and energy generation industries need accurate cost and profitability estimation.
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Read MoreThe Challenge
Our client, a global windfarm developer, faced a strategic decision while bidding for a new long-term contract: whether to bid for the contract on a fixed or flexible price basis. This question, worth millions, can significantly impact the company’s ability to maximise returns from the development, construction and operation of the wind farm.
To inform their pricing decisions, the client’s Investment and Business Case Department needed robust cost estimation, including prices of key commodities that fed into the production of the turbines (aluminium, copper and steel), and erection and operating costs (such as construction wages and the price of machinery repair and maintenance). The profitability of the investment depends on input prices the firm incurs and the output prices it can charge when the generation of electricity eventually begins—a process that can span several years. This makes accurate long-term forecast crucial, yet challenging, given the volatility of input prices.
Additionally, the client sourced inputs from different countries than where the wind farm was to be located. In these instances, its revenues are tied to price movements in multiple countries. As such, an in-depth understanding of regional price variations and potential trade barriers was essential for accurate forecasting and risk assessment.
The Solution
We provided central forecasts of commodity prices, construction wages as well as machinery repair and maintenance costs in two global regions over the next decade. For each of the seven input prices, we outlined the supply and demand drivers that drove our central forecasts.
To help the client better understand the potential risks and their implications on prices, we undertook three exercises:
- Historical price analysis: We analysed how the prices of each input had varied in the different geographies over different phases of the economic cycle in the past, including the Global Financial Crises and the Covid-19 pandemic.
- Scenario analysis:
- Statistical scenarios: We developed scenarios with a one-in-six chance of occurring, both on the upside and downside of the baseline forecast.
- Event-based scenarios: We produced price forecasts under four specific economic or geopolitical events. These included scenarios around inflation and two potential geopolitical conflicts (an escalation of hostilities in the Middle East and increased tension between mainland China and Taiwan).
- Trade barrier analysis: We analysed the scale of existing trade barriers and reviewed current trade patterns to advise our client on the extent to which they could take advantage of regional commodity and input price differences by importing materials.
The Result
We delivered a set of baseline forecasts of commodity prices, construction wages and machinery repair and maintenance costs over the next decade, along with an in-depth analysis of the demand and supply drivers behind them, alternative upside and downside scenarios and trade barrier analysis. The client was able to use these insights to make a more informed decision in their bid.
The client’s satisfaction with our work has led to the commissioning of several additional input price forecasting projects for wind farm development around the globe, cementing a strong, ongoing partnership.