Curtailment removes revenue but leaves the operating costs in place, so the loan falls faster than the megawatt-hours.
Uncompensated grid curtailment cuts debt capacity faster than it cuts output, because it removes revenue while operating costs stay where they are. On an illustrative 150 MW contracted wind farm sized at 1.30x on P90, raising the curtailment assumption from 2 to 6 per cent takes 4.1 per cent off revenue, 5.7 per cent off cash flow available for debt service and $9.9 million off the senior loan, about $2.48 million for every point of curtailment.
Worked in full in The Project Finance Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Curtailment is the energy a wind farm could have generated but was told not to, because the grid could not take it. In some markets it is compensated, in others only partly, and in many recent connection agreements not at all. Lenders' technical advisers now put a curtailment line in the energy yield, and the number they choose has become one of the first things a sponsor argues about in a debt sizing.
| Input | Value |
|---|---|
| Installed capacity | 150 MW |
| Net capacity factor at P50, before curtailment | 33.0% |
| One-year P90 as a share of P50 | 88.0% |
| PPA price, per MWh | $75.00 |
| Operating costs, a year | $8.0m |
| Debt tenor | 18 years |
| All-in interest rate | 5.5% |
| Minimum DSCR, sized on P90 | 1.30x |
| Capital cost, per MW | $1.60m |
| Curtailment: base case / stressed case | 2.0% / 6.0% |
P50 output is 150 × 8,760 × 33% = 433,620 MWh; the one-year P90 is 381,586 MWh. Total capital cost is $240.0m. The choice between P50 and P90 sizing has its own cost, worked in how much debt sizing on P90 instead of P50 costs; here P90 is fixed and only curtailment moves.
Base: 381,586 × (1 − 2%) = 373,954 MWh. Stressed: 381,586 × (1 − 6%) = 358,690 MWh, 4.08 per cent less.
Base: 373,954 × $75.00 = $28.05m of revenue, less $8.0m of costs = $20.05m.
Stressed: $26.90m − $8.0m = $18.90m.
Maximum debt service = CFADS ÷ 1.30. With flat CFADS, the sculpted loan is an annuity, so debt = debt service × annuity factor (5.5%, 18 years) = debt service × 11.2461.
Base: 20.05 ÷ 1.30 = $15.42m a year, debt $173.4m.
Stressed: 18.90 ÷ 1.30 = $14.54m a year, debt $163.5m.
Excel: =PV(5.5%,18,-(CFADS/1.3))
Four extra points of curtailment remove 4.08 per cent of energy and 4.1 per cent of revenue, but 5.7 per cent of CFADS and therefore 5.7 per cent of debt, $9.9m. Operating costs are 28.5 per cent of base revenue and do not fall when the turbines are told to stop, so each dollar of lost revenue comes straight out of CFADS. The ratio of the two falls, 1.40, is the project's operating gearing. Each point of curtailment costs $0.286m of revenue a year and $2.48m of debt.
The sponsor fills the gap with equity: $76.5m instead of $66.6m, 14.9 per cent more, on a project whose energy fell by about 4 per cent. That is why a curtailment assumption is a negotiation about equity returns, not a technical footnote.
Sized at 2 per cent, operated at 6. If the loan is sized on 2 per cent and curtailment turns out to be 6, the DSCR at P90 falls from 1.30x to 1.226x: still above lock-up levels in most term sheets, but with a quarter of the cushion above 1.00x gone before a single bad wind year. The project only reaches 1.00x at 18.2 per cent curtailment, which is why lenders tend to accept a modest curtailment number and then size conservatively on P90 rather than load the stress twice.
| Curtailment | Energy sold, MWh | Revenue, $m | CFADS, $m | Debt, $m | Gearing |
|---|---|---|---|---|---|
| 0% | 381,586 | 28.62 | 20.62 | 178.4 | 74.3% |
| 2% | 373,954 | 28.05 | 20.05 | 173.4 | 72.3% |
| 4% | 366,322 | 27.47 | 19.47 | 168.5 | 70.2% |
| 6% | 358,690 | 26.90 | 18.90 | 163.5 | 68.1% |
| 8% | 351,059 | 26.33 | 18.33 | 158.6 | 66.1% |
| 10% | 343,427 | 25.76 | 17.76 | 153.6 | 64.0% |
Compensation changes the picture more than any single point of the curtailment assumption. If the PPA or the grid code pays for 75.0 per cent of curtailed energy at the contract price, the 6 per cent case behaves like 1.5 per cent: CFADS of $20.19m and debt of $174.7m, slightly above the uncompensated 2 per cent case. A deemed generation clause in the PPA is worth negotiating for the debt it supports, not only for the revenue.
Each point of uncompensated curtailment here costs about $2.48m of debt, and moving from 2 to 6 per cent costs $9.9m, all of it replaced by sponsor equity. Get the curtailment study early, push for compensation in the PPA, and remember that fixed costs make the loan fall faster than the megawatt-hours. The sculpting mechanics are in sculpted debt vs annuity debt, and two complete deal models are in the free workbooks for this book.
Whatever the lenders' technical adviser can support from a grid study for that connection, which varies widely by market and node. The method matters more than the level: apply it to the energy used for sizing and keep costs fixed. In the illustrative case each point of uncompensated curtailment removes $0.286m of revenue a year and about $2.48m of debt.
It depends on the market, the grid code and the PPA. Some regimes pay for curtailed energy, some only for specific causes, and many new connections carry none. If 75.0 per cent of curtailed energy is paid at the contract price, a 6 per cent curtailment case supports $174.7m of debt in the illustrative case, against $163.5m uncompensated.
Find the curtailment at which CFADS just covers debt service. With debt sized at 1.30x on 2 per cent curtailment, debt service is $15.42m a year, and the P90 DSCR reaches 1.00x only at about 18.2 per cent curtailment. Lock-up and cash sweep tests are set well above 1.00x, so distributions stop long before that.
This article is one calculation from The Project Finance Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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