Case Study/Renewables Financial Qs Flashcards
How did you reliably estimate development costs?
- Started with general data for initial budget estimation.
- Refined planning fees via the tender process.
- DCF used costs from past projects and research.
- Technical consultations further refined the costs.
What were the key outputs of your DCF?
Net Present Value (NPV)
Internal Rate of Return (IRR)
Payback Period
Was the financial viability of the development directly proportional to the size of the development/number of fields used?
Initially yes, as I thought there was ample connection capacity.
But, as more data arrived it did not.
It would be the case if their was grid capacity and more local private off-taker.
varies due to factors like size, location, grid capacity, financing, and operational costs.
Why didn’t you undertake sensitivity analysis on the initial appraisal, to see the impact of a smaller scheme?
- Focused on 18MW scheme for SSE JV.
- Initial goal: maximize JV profits and meet energy demands.
- Informal sensitivity analysis showed positive outcomes.
- Assumed full 18MW planning approval.
- Later, detailed analysis on alternative scales was needed due to challenges.
Tell me about the special assumptions in your DCF.
Assumed planning permission is granted and grid connection stays the same. Electricity rates from private wire stable.
Contamination issues non-existant
No incentives applied or BESS as too complex, TC will look into this.
What was the target level of profitability?
8%
* Why: It’s more than what current business makes.
* Use in DCF: Helps decide if the project is worth it.
* Criteria: Project needs to hit 8% or it’s a no-go.
* Goal: Boost overall profits and value for shareholders.
How did you select an appropriate discount rate?
8% discount rate chosen as client’s target profitability level.
Exceeds current business returns.
Enhances profitability.
Allocates resources wisely.
Would tax normally be included in a DCF development appraisal? Why was it included in this case?
No
Tax can be included in DCF but isn’t typically in my company’s appraisals.
- Included tax in this case for more precise and comprehensive analysis.
- Always clarify to client when tax is included.
Reasons for not including:
* Simplifies the analysis.
* Avoids speculative tax implications.
* Focuses on pre-tax cash flows for uniformity in analysis.
- Next time, will consider tax benefits related to projected cash outflows, like capital allowances, when using after-tax inputs.
Enhanced Capital Allowances (ECAs) that allow businesses to claim 100% first-year capital allowances on qualifying energy-saving technologies.
What Government Incentives could the scheme apply for?
Smart Export Guarantee (SEG)
- Compensates small-scale renewable energy generators for electricity exported to the grid.
- overseen by Ofgem, the UK’s energy regulator
CfD (Contracts for Difference)
- provides long-term price stabilization for large-scale renewable energy projects by paying the difference between the market price and a set strike price.
- administered by the Low Carbon Contracts Company (LCCC) on behalf of the UK government’s Department for Business, Energy & Industrial Strategy (BEIS).
However, with most energy supplied to a local business via a private wire and potential battery storage, reliance on SEG and Contracts for Difference (CfD) is reduced, emphasizing direct business supply for stable revenue.
How did you determine the rates applicable?
A Ratings consultant informs this figure.
I understand ratable value is determined by output and if theres a government incentive.
Could there be difficulties in securing financial backing and insurance for the solar farm due to the landfill
No
as a secured loan can be achieved, against recently valued property by RICS Registered Valuer.
Hire purchase:
* Lower rate than unsecured loan.
* Bank takes a charge in property or plant.
* Up to 7 years.
Difference between CPI and RPI
CPI:
* Broader measure of inflation.
* Excludes housing costs like mortgage interest payments and council tax.
* Generally reports lower inflation rates.
RPI:
* Includes housing costs.
* Generally reports higher inflation rates. Used for wage negotiations and index-linked bond
What RICS guidance or professional standards did you use?
I utilized the RICS professional standard Valuation of assets in the commercial renewable energy sector (2018).
However, it wasn’t to redbook standard:
- Ensured DCF model was robust and aligned with best practices.
- Applied sensitivity analysis for comprehensive financial overview.
What is a real options valuation?
- Evaluates investment opportunities as options.
- for projects with multiple possible future paths and decisions.
- build small, build large
Pros and Cons of Real Option Valuation
Pros:
* Accounts for uncertainties and contingencies.
- Suitable for expanding the solar farm
Cons:
* Complex and requires sophisticated modeling.
- May be data-intensive and speculative.
- No RICS guidance.
was a suggestion from TC.
Tell me about the Income Capitalisation method
- Expected annual Net Operational Income / capitalisation rate = capital value
- Suitable for valuing businesses where the income is tied to the property.
Pros and cons of the Income Capitalisation Method
Pro:
* Simple and less data-intensive.
- Quick, high-level assessment of value.
Effective for stable and predictable incomes.
Con:
* Doesn’t account for variations in cash flows over time.
- Not accurate for irregular incomes or complex financial structures.
Less comprehensive in risk assessment compared to DCF.
how did you use a DCF to determine the highest site value?
- Projected future cash flows for the solar farm’s operational life.
- Discounted cash flows to present value using a chosen discount rate.
- Calculated Net Present Value (NPV) to represent today’s site value.
- Optimized parameters to yield the highest NPV.
- Highest NPV indicated the highest site value.
Pros and Cons of DCF
Pros:
* Detailed valuation using future cash flows.
* Fits projects with fluctuating cash flows.
* Accounts for time value of money.
Cons:
* Sensitive to assumptions.
* Needs accurate cash flow projections.
* Can be complex and lengthy.
What is residual valuation
value of a development site = total cost of development - end value of the development.
Pros and Cons of Residual Valuation
Pro:
* Useful for valuing land for development projects.
- Provides a clear indication of the maximum land value a developer should be willing to pay.
Con:
* Highly sensitive to changes in cost and value estimates.
- Requires accurate estimation of development costs and end values, which can be uncertain.
What is Profits Valuation
determines an asset’s value based on its ability to generate profit. It uses historical data and future profit forecasts, often applied to businesses or assets with a track record of profitability.
Pros and Cons of Profits valuation
Pro:
* Directly based on asset’s profit potential.
- Useful for assets with profit history.
- Easy to understand.
Con
* Depends on accurate profit forecasts.
- Might miss future market changes.
- Needs comparable profit data for accuracy.
What is NPV
Represents the present value of future cash flows.
Positive NPV means project is profitable.
Relies heavily on the chosen discount rate.
