Renewable Energy

Increasing popularity of renewable energy

Driven by climate policy changes and risks in the supply of fossil fuels, renewable energy projects have become increasingly popular. Renewable energy projects are environmentally friendly and enable countries to reach the goals in their climate policy since they do not produce greenhouse gases like fossil fuels and reduce some types of air pollution.

Additionally, the energy supply is diversified and dependence on imported fuels is reduced.

Funding renewable energy projects

Although the construction of renewable facilities requires upfront investment, these facilities operate at a very low cost. As a result, renewable energy prices can be very stable over time. Therefore, these projects are extremely attractive for long-term investors.

As with most infrastructure projects, the financing of renewable energy projects is realized in the form of project financing. The future generated cash flows of the project serve as the sole source of funds through which the loans to the project company and the equity available to it are serviced.

In general, the funding of the projects takes place through several financing tranches, which are subject to contractually specified subordination.

The aim is to evaluate one or more financing tranches on the liabilities side of the project company

The subordination of the tranches, taxation and complex compensation rules (such as public subsidies or special PPAs) create a non-linear dependence of the value of a particular tranche on possible risk factor scenarios

Classic DCF methods such as the corporate finance method do not correctly represent the nonlinear risk profile of such financing

The valuation of renewable energy projects, such as investments in solar plants and/or wind farms essentially requires the quantification of the following external risk factors:

  • energy feed-in
  • captured electricity price
  • costs and taxation
  • discounting

Our hybrid stochastic model

To capture these risk factors, Value & Risk uses a hybrid stochastic model that adequately maps all relevant risk factors and takes into account possible subordination when servicing the financing tranches.

This is a novel approach in the evaluation of renewable energies and differs totally from the usual infrastructure financing valuation.

The company’s proprietary valuation library (scripting language) reflects the most challenging issues quickly, accurately and with agility

The model used and its inputs are audited and certified by KMPG on an annual basis. In addition, all quality assurance controls are ISAE 3402 Type II audited. As an add-on Value & Risk also offers an audited risk report according to the requirements by MA-Risk.

Several asset managers and well-known funds trust the valuation expertise provided by Value & Risk.

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