RENEWABLE ENERGY VALUATION & TAX EQUITY VALUATION
Renewable Energy Valuation & Tax Equity Valuation
Renewable Energy Valuation & Tax Equity Valuation
Renewable Energy Valuation & Tax Equity Valuation
Uniqueness of Renewable Energy Valuation & Tax Equity Valuation
The Renewable Energy industry is very unique due to the heavy dependence of government-driven tax credits and depreciation benefits. There are many different types of tax equity structuring and strategies so that there are many stakeholders such as sponsor/developer, tax equity investor, and lender.
We apply all known appraisal methodologies, however it depends on the market economic/legislative forces and its related assumptions and hypothetical conditions depending on who will use the appraisal report.
Lenders may heavily rely on the fair market value, but some investment fund may rely on more of future cash flows. Tax Equity Investors are more concerned on the tax benefits and viability of the projects.
When the sponsor/developer wants to sell the working-in-process project, the valuation is very critical. When the investor wants to buy the 99% stake, overall enterprise valuation is more critical. We can help all different stake holders based on their goals and objectives with a third-party supportable and defensible opinions.
This valuation or appraisal is the independent and unbiased process of determining a supportable opinion of the value of a renewable energy enterprise, business ownership interest, security or intangible asset as of a specified date.
Valuation Methods used include:
Market Approach
• More than just sale price p/KW
• Each Installation is different
• Variables include: Power Purchase Agreement, State Credits or incentives, Terms of Ground Lease, Interconnection
Note:
The usefulness of the Market Approach may be limited by the dissimilarity in the risk profiles unique to each asset or renewable energy project, which may be difficult to reflect under this approach. For this reason, the Market Approach is generally not relied upon by valuation analysts when valuing renewable energy assets.
Cost Approach
• Cost Approach methodology only considers cost to build and install
• Does not consider ITC or State incentives
• Revenue generated by System exceeds cost to connect
• Some Lessors desire/require a blend of Cost and income approaches
Note:
The Cost Approach tends to be omitted in the valuation of income-producing assets such as renewable energy assets. However, this approach will be the base line showing all tangible and intangible assets are placed.
Income Approach
• A revenue generating systems over established EUL (Effective Useful Life).
• Considers impact from several factors including ITC (Investment Tax Credit) and State/local incentives if applicable.
• Considers costs associated with the operation/management of the System.
• Considers contracted price of electricity based upon Power Purchase Agreement (PPA).
Note:
As the benefits to the owner(s) can generally be reliably estimated, the most often used method to estimate the value of a renewable energy project is the discounted cash flow (“DCF”) method, a widely used method under the Income Approach. Through the DCF method, complexities such as reflecting Power Purchase Agreements (“PPA”), Feed-in-Tariffs (“FiT”) and merchant price exposure, can be reflected in detail throughout the life of the project. This allows for sharpened consideration of both the risks and rewards relevant for investors and owners of the asset.
Revenue:
• Initial year energy generation from an independent Engineer Drops approximately 0.5% annually • Annual PPA rate throughout term of agreement • Include State/local incentives if applicable (check with www.dsireusa.org) • Assume annual cost of electricity post PPA term, and potential annual inflation. • Verify whether pricing information includes Capacity Payments, adjustment for battery storage, or “peak shaving” rates.
Expenses:
• Operation & Maintenance • Interconnection • Ground of Property Lease – consider initial plus renewal terms • Property Tax • Insurance • SCADA (Supervisory Control and Data Acquisition) System – controlling industrial processes • Inverter Replacement, frequency • Monitoring
Income Approach Necessary Information
• Operation & Maintenance Contract
• Interconnection Agreement (if applicable)
• Ground of Property Lease and all Addendums
• Independent Engineers Report
• Support for any SRECs (Solar Renewable Energy Credit) or additional incentives
• Power Purchase Agreement (PPA)
• Pro Forma, to include Annual Insurance Amounts SCADA System (if applicable) Monitoring or Management Fees (if applicable)
• Itemized cost of system installation
• Description of Modules and Inverters
Cases of Valuation Needs
Renewable Energy Valuation & Tax Equity Valuation
Renewable Energy Valuation & Tax Equity Valuation
Income Approach Qualified Equipment
• Property depreciated under MACRS with a recovery period of 20-years or less • Certain computer software • Water utility property • Qualified film or television productions • Qualified live theatrical productions • Specific plants.
Income Approach Investment Tax Credit (ITC)
• In 2022, 26% of eligible costs associated with cost to construct solar installation.
In August 2022, Congress passed an extension of the ITC, raising it to 30% for the installation of which was between 2022-2032. (Systems installed on or before December 31, 2019 were also eligible for a 30% tax credit.) It will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. The tax credit expires starting in 2035 unless Congress renews it.
• Eligible costs include: Equipment Costs (except fencing, building improvements, new roof, etc.) EPC (Engineering, Procurement, and Construction) except prepaid O & M, landscaping, painting, re-paving parking lot, etc. Development Costs (except land restoration, ground lease payments before COD, land options, etc.) Finance Costs (except permanent loan and syndication fees, legal fees, IE report, appraisal, etc.) • Placed in-Service Guidelines: IRS issued “Safe Harbor” guidelines in 2018 Pays of incurs 5% of total cost to construct Makes continuous efforts to complete construction of installation and continuing in each year with delay (allowances made for weather, parts/labor shortage, etc.)
In reconciliation,
• Calculate annual cash flow over entire EUL of the System • Include annual changes to inputs for both revenue and expenses • Build in costs to replace inverters at least twice during EUL • Present value back to day-1 using appropriate rate (WACC for parties similar to off-taker under PPA)
Items to Consider
• Majority of US States and DC established “Green Mandates”, will they be achieved? • Recent bankruptcy filing by PG&E as a result of wildfires, will this impact existing PPA’s where PG&E is the off-taker? • Recent Section 201 Tariffs specific to Solar Initial tariff at 30% for cells & modules imported over 2 MW Tariff drops 5% annually to 15% tariff in 2021 International Trade Commission perform mid-year review of tariffs Direct impact to overall cost to construct, will not impact value generated by an installation
Income Approach Tax Depreciation
• The Tax Cuts and Jobs Act (TCJA) changed depreciation for trade and business assets • Assets must be considered “Qualified Property” placed in service after 09/27/2017 and before 01/01/2023 • Qualified Property acquired prior to 09/28/2017 and placed in service after 09/27/2017 will remain at 50% bonus depreciation under previous law. • 100% Bonus depreciation is eventually scaled won 20% per year for Qualified Property placed in services after 12/31/2022 and before 01/01/2027.
Income Approach Qualified Equipment
• Property depreciated under MACRS with a recovery period of 20-years or less • Certain computer software • Water utility property • Qualified film or television productions • Qualified live theatrical productions • Specific plants
Our valuation team..
Our valuation team is comprised of certified and designated experts, some with over 35 years of experience, in the industry who service both national and international market segments. This level of experience allows us to consistently provide our clients with exceptional customer service. Our valuations are performed in compliance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation (USPAP) as well as the Business Appraisal Standards of the ASA and NACVA.
The scope of our VALUATION services includes:
Mergers & Acquisitions Valuation
Shareholder Liquidity Services
Bankruptcy & Restructuring Valuations
Corporate Transaction Services
Tax Related Services
Accounting/SEC Review