solar project finance model

solar project finance model

Developing a Comprehensive Solar Project Finance Model

1. Introduction to Solar Project Finance

There are differences in investing in solar projects as opposed to fossil fuel mechanized operations and between solar photovoltaic (PV) and solar thermal operations. Some of these include project timing and delivery, technological performance and reliability, feedstock risk, plant location and access requirements, the business model itself, and project size. Where a small fossil fuel project might run perhaps a ~20% debt and ~80% equity finance model for a combined capital cost figure estimated in the tens to hundreds of millions, a similar solar project may exceed $1000 per peak installed kilowatt of capacity for its capital cost and still offer an ROI that, if performed optimally, could be over a period measuring less than five to seven years. Additionally, some programs and tools that assist clean energy project development prefer investor ownership in the projects. In these cases, more flexible financing options like leasing or offering a yield-investment could be required by a given project for it to be competitive for that program.

The successful project finance of a solar site is a function of many inputs that can easily exceed the millions of dollars level of investment. It is important then to have a comprehensive investment model that not only captures the true financial requirements for the project but also protects the potential equity investors from the wide variety of risks associated with solar project finance.

2. Key Components of a Solar Project Finance Model

Internal rate of return (IRR) – IRR, which is the prime investment decision criterion in case of a solar project, is easily calculated by summing up the net cash flows (after meeting all the expenses) in each year for the life of the project and then applying the IRR function in the Excel sheet to solve for IRR.

Solar radiation map of the area and temperature characteristics of the solar panels – To work out the electricity generation on a daily basis, all available data on the solar insolation at the site should be accessed and used. Also, the temperature characteristics of the solar panels should be used to calculate the drop in solar generation on hot days (the drop can be as high as 10-20%) because of the deteriorating efficiency of the solar panels. This is especially so because solar insolation is significantly higher during the summer months, so the power generation during the summer months is expected to be high. However, the actual generation will be lower than these expected high levels because of the drop associated with a decrease in the solar panel efficiency. Doom, overcast, and snowy days will also result in lower generation, and the daily generation can at best be a fraction of the below-mentioned optimal values.

The key components of a solar project finance model are:

3. Financial Analysis and Risk Assessment in Solar Project Finance

3. Categorization of Project Financial Risks Financing is linked to interest rates imposed by the market or the availability of funding by way of representing new projects or investors. We, therefore, summarize specific financial risks that specific stakeholders might need to be insured against such risks. By carrying out careful number crunching, it is possible to reduce risk. Despite the difference in risk insurance price, inflation, overruns, and often financing success, leading to a project financing failure. Finally, the lawsuit exposes the investor to claims resulting from unforeseen events such as system underperformance or system issues. From stakeholder perspectives, sources of project financial risk are equated to costs of capital competitiveness. Different financial stakeholders have various preferences regarding risk appetite. Please note that the study conducted in this book does not list any legal liability or project documentation.

2. Solar Project Financial Stakeholders Solar projects entail a variety of stakeholders who may benefit from integrating risk insurance services. These include financial stakeholders who are associated with project finance and operating financing. Furthermore, multilateral and national agencies directly involved in project finance or indirectly through the provision of political risk insurance and private insurance models that can benefit from solar project development. Finally, local stakeholder populations have an incentive to ensure that the sustainable operation of solar projects proceeds to satisfy their various interests. The aim of the development of the risk insurance cash flow model of the comprehensive solar project is to enable financial stakeholders to assess and spot potential risks, and measure the value of risk insurance. Then, return on very large investments, lower cost of solar projects and expedite financing. Furthermore, for certain selected observations, market-based mechanisms have the potential to reduce risk of financing costs in mind.

1. Introduction The majority of financing of solar projects is secured with relatively high financial costs that are finally starving potential sustainable projects. This is particularly valid in the case of private investment. The risk insurance cash flows of solar energy projects play a significant role in the establishment of cash flows and investments. Addressing associated technological risks, policy risks, and key features of installation and design is necessary by creating extensive risk insurance packages covering such aspects. In this chapter, we first identify typical solar project financial stakeholders who would benefit from integrated risk insurance services. Moreover, we come up with a detailed list of solar project risks categorization. After that, we provide an in-depth analysis of the risk by giving its description and suggesting measures to reduce the risk. We make comments during the study on the existence of solar project risk insurance cash flows forming part of the cost of financing, and reduce the costs of finance.

4. Case Studies and Best Practices in Solar Project Finance

The theory in the attached paper has been crafted into two comprehensive model offerings. One for Solar Project Finance, and the other for the Valuation of Solar & Wind Assets. The negotiations surrounding this paper have involved the development and use of a new financial language that facilitates the structuring of what is quite complex, multinational infrastructure project finance. Resident in this is the extensive financial mathematics crafted to price the combined output of solar & wind installations. In dissecting what are already well-established legal contracts, we have added value through the use of a benefit-cost analysis creative techniques that enable the leverage of both the installed capacity and project financing.

“Case studies” in solar represent anything but pure theoretical exercises. We have decided to use this concept to explain the best financial practices in solar project finance learned in “real life” deals. After having acquired the appropriate terminology and formulas from the previous chapters, the hope is to advance a sophisticated understanding of the complexity of these models and the techniques presented. What might this lead us to in purely financial terms? The tools are already advanced enough that the devilish details of these case studies could be tackled with elegant models to lower the cost of capital for the renewables industry; why can’t they be adopted with the more problematic nature of long-term investment in schools, housing, urban mass transit systems or inner city jobs programs? Case studies like these are used to illustrate the various sources of project finance and their associated financial contracts.