FIN 430 Binghamton Find the Cost of Constructing Rooftop Solar Project Excel Task

Question Description

I’m working on a excel case study and need an explanation to help me learn.

Background

Bank X has been in touch with a solar PV developer, Developer Y, which is constructing a rooftop solar project on an affordable housing development. Developer Y has construction financing in place and wishes to take that out with long-term financing from Bank X at the start of operations. Developer Y is negotiating a Power Purchase Agreement (PPA) with the condo owner that would pass the price of electricity down to the residents. To share benefits of the project, Developer Y intends to offer a discount to the electricity price that residents currently pay. Developer Y would receive the PPA revenues in addition to revenues from sales of Solar Renewable Energy Credits (SRECs). Developer Y has informed us that they would like to achieve at least 60% leverage (Debt / Total Capital) on the build cost.

Deliverables

  • In a one-sheet printable Excel model, please respond to the following questions and provide backup calculations.
    • What should the starting PPA rate be if Bank X provides at least the desired amount of leverage? (quoted in $/kWh)
    • To optimize leverage and the discount to the ratepaying customers, is the Weighted Average Life of the loan likely to be higher or lower than mortgage-style financing? Why?

Assumptions

  • Start of operations: 1/1/2021
  • Project size: 1MWp
  • Build Cost: $3.50 / Wp
  • Revenues
    • Current Pepco rate that residents are paying: $0.12/kWh
    • PPA/Revenue contract: $XX/kWh (this is the discounted rate that you need to determine), 2% escalation, 20-year term
    • Solar Renewable Energy Certificates (SRECs) lender case estimates
      • 2021-23: $400/MWh
      • 2024-28: $250/MWh
      • 2029-30: $100/MWh
      • Thereafter: Zero
    • Annual solar production: 1,100 kWh/kW/Yr. 0.50% degradation per year
  • Expenses
    • O&M – $0.015/Wp/Yr, 2% annual escalation
    • SG&A, Insurance – $0.005/Wp/Yr, no escalation
    • No taxes (assume full offset due to incentives)
    • Depreciation – straight-line 10 years, with no salvage value
  • Debt Sizing based on minimum 1.25x Debt Service Coverage Ratio (DSCR) defined as (Net Income + Interest + Depreciation) / (Interest + Principal repayment), using “historical” DSCR (i.e. income and debt service from the same period)
  • 10-year tenor, fixed interest rate 6.00% (inclusive of all ongoing fees)
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