Class 9: Project Finance

Risk/Return

More risk, more return

Risk Free Rate

Lowest risk investment one can make

Cost of Capital

How much does it cost one to provide funds to build this project?

Non-/Recourse

Risk for parent company and its project are different/ if something goes wrong, who is on the hook

Default

Guide to Finance

1. Minimize risk

2. Maximize return

Project Finance

Financing a standalone project, such as a power plant, limited to no recourse to the ownership

Why Project Finance?

Parent Company

EIP is the parent company, and every project is its own company or LLC

Renewable Project Finance Structure

Risk Factors

Off-take (who is paying you), technology (what type of technology are you using), construction (who will build it), permitting (is the local community ok with it), interest rate (what is your cost of financing), costs (how much will it cost to build)

Return Factors

• WACC (Weighted average cost of capital): the investor’s cost of capital

• IRR (Internal rate of return): what is the average annual return to the investor

• NPV (Net value present): based on the hurdle rate, what is the current value of the project

• MOI (Multiple of invested capital): how much cash will the project return relative to the investment

Determining NPV

Discount of the annual cash flow back at the risk adjusted hurdle rate

Tax Equity/ Accelerated Depreciation

All money spent that the IRS was going to slowy deprciate over time, you can do that all upfront. Pay less in taxes earlier. A dollar in 10 years is less valuable than a dollar now

ITC vs PTC

ITC probably better for projects with higher upfront costs

PTC probably better for projects that are projected to produce a high amount of energy