Deriving a minimum acceptable Rate of Return on equity for a wind farm from a comprehensive risk model using Monte Carlo simulation

Abstract

Investments in renewable energy are a relatively new asset class with only a decade of experience from private investors. It is distinctive to other investments in infrastructure and companies in their risk return profile. This paper outlines a comprehensive framework of risk management and allocation. Based on this model, a Monte Carlo simulation is run in order to calculate the expected values and the standard deviation for key target ratios for liquidity and return. The expected internal rate of return (IRR) and the standard deviation are compared to the respective figures from an investment in a S&P 500 portfolio by calculating the respective Sharpe ratios. From this comparison a minimum acceptable rate of return for this wind park investment is derived.