Modeling Your Solar Project’s Cash Flows – When to Increase Granularity

In this article, Chris Lord, expert instructor at HeatSpring, lawyer with deep banking experience, and the Managing Director of CapIron, Inc., outlines when it’s important for solar businesses to increase granularity in their solar project’s cash flow model.

Key Takeaways:

• When you are financing a project you need to look closely at the flow of cash – in and out – over a calendar year to ensure that the cash flow is sufficient to cover operating expenses and meet debt repayment or tax equity distribution targets throughout the year.
• More frequent payments reduce interest costs and marginally improve IRR.
• You also need the ultimate in granularity if you have time of day and seasonal pricing. Typically, this happens only in Utility scale projects.
• As a developer, in the early stages you need not worry too much about monthly or quarterly analysis. You are focusing on annual reults and meeting the investor hurtle.
• If you have a third party owner who will finance or a buyer using debt, you may want to do a quick quarterly model to see if the cash flows will work.

“When does the need for increased granularity in modeling a project’s cash flows really matter?” – Solar Executive MBA student

Chris Lord:

The answer, of course, is whenever you need to! But there are some good rules of thumb. As you point out, when you are financing a project you need to look closely at the flow of cash – in and out – over a calendar year to ensure that the cash flow is sufficient to cover operating expenses and meet debt repayment or tax equity distribution targets throughout the year. This need arises from the fact that in most places solar output varies from one month to the next based on seasonality, geography and weather. So the project’s top line or revenue will also vary from year to year, but your expenses probably won’t vary in the same way. And with that comes the potential for a mismatch – insufficient cash to meet payment obligations, however temporary such a situation may be.

As a project grows larger in size it becomes particularly relevant. More frequent payments reduce interest costs and marginally improve IRR. Careful though that you still take your tax benefits with at least a lag (e.g., December for the ITC) so that Tax Equity earns its full year return. Often, developers get excited when they see that monthly modeling shows an ITC returned in the first month of operation. The reality is that tax equity investor’s expect a return on their investment, and so the ITC has to show at year-end in order for it to collect the return. You also need the ultimate in granularity if you have time of day and seasonal pricing. Typically, this happens only in Utility scale projects. For those projects, you will have to take the PVSyst or other output data in all 8,760 hours of a year. You can then use SumIf and SumIfs to consolidate all that data into monthly or quarterly chunks.

Another way to look at this – as a developer, in the early stages you need not worry too much about monthly or quarterly analysis. You are focusing on annual reults and meeting the investor hurtle. As you get closer to a financing, however, and if you have a third party owner who will finance or a buyer using debt, you may want to do a quick quarterly model to see if the cash flows will work. Finally, for a utility scale project, particularly one with time of day pricing (e.g., peak or offpeak with or without shoulders) you will need to start with 8,760 hours of data and model it on at least a quarterly basis, but probably monthly as you get closer to financing.

Hope that helps – Chris

ADDITIONAL LEARNING RESOURCES

• Free Tool: Solar Success Principles Chapter 10
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• Course: Financial Modeling for Solar PV Projects 
• Course: Solar Executive MBA Training
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