free solar project finance model xls

free solar project finance model xls

Developing a Comprehensive Solar Project Finance Model in Excel

1. Introduction to Solar Project Finance

This chapter discusses the development of a comprehensive solar electricity project finance model in Excel. The authors share their firsthand experience developing a comprehensive solar project model preceded by the lowest LCOE (levelized cost of electricity) spreadsheet that allowed understanding and comparing the economic impact of the project’s best drivers/levers. After that experience, a lack of severe caution by financial institutions that are planning in the spread of these business possibilities became apparent.

When a solar developer or a solar firm plans to invest in a solar electricity project, the biggest concern is how much cash flow will be realized and how much return on investment (ROI) will be achieved. In many discussions with solar developers and oil and gas developers who will make a switch to solar energy, it becomes apparent that most companies are aware only of a rough business development and an approximate ROI calculation of solar projects. Many companies lack understanding of the model used in the calculation of their projects’ ROIs. In order to help developers estimate their ROI from the solar energy projects, this work develops a robust financial Excel model that has been highly credited through a number of international workshops and training courses. The work is part of solar project finance modeling expressed elsewhere.

2. Key Components of a Solar Project Finance Model

This Excel finance model is called “YaLEM for PV,” or YaLEMPV, which stands for Yet another Lite Excel Model for Photovoltaic systems. The model is applicable for photovoltaic (PV) projects with or without a storage device. Relying on a mix of input and output tables, YaLEMPV is pre-loaded with assumptions that might fit the individual business prospects of various developers carefully. Prompt requests for all needed information and even gives hints, making it different from SAM which requires a good grasp of the special guidance. While the model comprises a handful of complicated macros for advanced users, many are existing Excel functions and VBA codes structured in a modular manner. Even though this will perplex the novice consumers by their long tabs, each component of interest for the usual user must be evenly practical. In response, users could conveniently add, erase, or modify sheets into a model such as a regular Excel file.

To evaluate the feasibility of any solar project, potential developers need to run a financial model to estimate the construction costs and recurring operational costs, end-user revenues, as well as the internal rates of return (IRRs) and net present values (NPVs). In due course of time, many developers use technologies like SAM, Homer Pro or RETScreen to model solar projects that require more than just plugging in numbers. Opportunities also exist for simpler forms of financial models using Excel spreadsheets in situations where specialized software like ARM may not provide a satisfactory resolution in a rapid time under a business development setting. For this reason, as well as for the better flexibility and transparency in understanding the underlying financial supply calculations in a revenue model, a more transparent and simple solar project finance model in Excel will be developed in this case.

3. Building a Financial Model in Excel for Solar Projects

In this chapter, the modeling process is not complex. The aim is to build a comprehensive but simple model and present an investment case for developing the solar project, as well as its financial structure. The user may have a better understanding of the information about the project and is hereby expected to alter, add or reduce the number of model inputs as the project under review may require. The overall goal can always be at odds with a complex model — emphasis must always be placed on keeping financial models simple and transparent.

If you build a model that is transparent and easily comprehensible, then it is a sign that you are clear and have a structured thought process. And that is a great advantage! This can easily lead to better and quicker decision making. While this process can sometimes be time-consuming, in the long run you will save time and reduce stress by quickly briefing stakeholders and having a clear understanding and confidence in your personal capacity for judgment. The true value of a financial model is not in its inherent complexity but in its ability to simplify decision making.

4. Sensitivity Analysis and Risk Assessment in Solar Project Finance Models

This section provides a comprehensive discussion on the role of sensitivity analysis and risk assessment in project finance models for solar energy systems. It explains the core elements in any risk assessment or sensitivity analysis and provides the spreadsheet model that gives an analysis based on the Monte Carlo simulation of an investment in a PV array. The PV simulation model provides a practical demonstration of how risk and variability in solar energy yields can be taken into account. It provides a foundation for other related applications. There are a large number of uncertainties in any project to develop a power-producing asset. These risks and uncertainties can be associated with costs, workmanship, grid connection, resource, technological evolution, regulations, the power market, etc. It is important to survey a wide spectrum of risks to make the finance project successful. The level of analysis may depend on the specific case and the applicant’s experience in the sector. Providing a wide range of project-related information will allow investors or banks to develop customized risk assessment and mitigation plans.

For financial valuation models to be of practical use, they must be able to reflect the variability in the project’s generating capacity and the variability in the market to which it is exposed. In all instances, this is carried out using a technique known as sensitivity analysis. When seeking finance for a renewable energy project, or carrying out investment appraisal, sensitivity analysis should be carried out allowing tradeoff analysis between specific power outputs and levels of variability of generation at the point of connection and financial structures. Another key issue that is related to the market is the levels of risk involved, which will greatly influence the decisions made by potential investors. In many instances, it is the level of risk that is more important than the average expected return.

5. Case Studies and Real-World Applications

The term “project finance” is used to describe any vehicle where project risk is isolated from the balance sheet of the investment sponsor or developer. In some sectors, such as telecommunications, the term is used to describe a development phase where the principal output consists of “off-take” or subscriber contracts for services yet to be delivered by construction and operation of a technology asset. In the context of traditional renewable energy project finance, a guiding principle is the importance of supports such as regulatory rates or restrictions in combination with credit guarantees or longer-term guarantees, such as through long-term service contracts or a long-term power purchase agreement.

High-quality analysis does not guarantee investment, and nothing holds the decision maker’s attention like hard dollars at risk. A finance model, first and foremost, offers a view of cash flows, rate of return, and risk over an investment’s life. Understanding the relationship among these three variables is not only the underpinning of the decision-maker’s quest to enhance return or manage risk, but it is also the ultimate lens through which the success of a project is measured. The finance model is truly the bridge between policy, technology, and investment. Without the tools to reveal and manage these dynamics and quantify uncertainty, policies or financial initiatives are unlikely to achieve the desired support or succeed long-term.