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This topic describes the inputs on the Financial Parameters page for the All Equity Partnership Flip financial model. For a general description of financial structures SAM can model, see Financial Models.

SAM displays results of the financial model in the cash flow.

Solution Mode

The Solution Mode inputs are where you determine how SAM calculates the PPA price, IRR, and other results that appear in the Metrics table on the Summary page.

The PPA price is the bid price in a power purchase agreement (PPA), and is the price that the project receives for each unit of electricity that the system generates. The internal rate of return (IRR) is a measure of the project's profitability, and is defined as the nominal discount rate that corresponds to a net present value (NPV) of zero.

The solution mode determines whether SAM calculates a PPA price based on an IRR target that you specify, or an IRR based on a PPA price that you specify:

Specify IRR Target allows you to specify the IRR as an input, and SAM uses a search algorithm to find the PPA price required to meet the target IRR.

Specify PPA Price allows you to specify the PPA price as an input, and SAM calculates the resulting IRR.

Solution Mode 1: Specify IRR Target

The Specify IRR Target option allows you to specify an IRR target value and the year that you would like the IRR to be achieved. SAM finds the PPA price required to meet the target given your assumptions including financial parameters, incentives and depreciation, and the project's installation and operating costs.

SAM uses an iterative algorithm to search for the PPA price that meets the IRR target in the year you specify. If it cannot find a solution, it finds the PPA price that results in an IRR and year as close as possible to the target values.

Note. For the Specify IRR Target option, SAM does not know the PPA price at the start of the simulation. In some situations, SAM requires knowledge of the PPA price when the simulation starts, so you must use the Specify PPA Price option:
 
1. For the PPA Price option on the Electricity Purchases page, SAM needs to know the PPA price as the simulation runs to calculate the cost of purchasing electricity to meet parasitic loads that occur when the system is not generating power, such as for photovoltaic inverter night-time consumption, battery charging, or concentrating solar power freeze protection.
 
2. For battery dispatch options on the Battery Dispatch page that charge or discharge the battery the battery in response to the power price.

 

IRR target

The desired IRR target as a percentage:

For the Single Owner model the required IRR is the project IRR.

For the All Equity and Leveraged Partnership Flip and Sale Leaseback models, the target IRR is the tax investor IRR. SAM calculates the developer IRR as a function of the value in excess of the tax investor IRR.

IRR target year

The year in which you want the target IRR to be achieved. For the partnership flip options, this is the flip year when project returns switch from the tax investor (pre-flip) to the developer (post-flip).

Solution Mode 2: Specify PPA Price

The Specify PPA Price option allows you to specify the PPA price. SAM calculates the resulting IRR:

For the Single Owner model, SAM calculates the project IRR.

For All Equity and Leveraged Partnership Flip, and Sale Leaseback models that involve two parties, SAM calculates two IRR values: One from the tax investor perspective, and one from the developer perspective. For the partnership flip options, SAM also calculates the flip year when project returns switch from the tax investor to the developer.

PPA Price

The power price in dollars per kWh. This is the price that would be negotiated as part of a power purchase agreement.

You can also click SS_AnnSched-valschedbutton and then Edit to use the Edit Schedule window to enter a different PPA price for each year of the analysis period instead of a single value.

Note. Regardless of the solution mode you choose, the PPA price is associated with the annual PPA price escalation rate if it increases from year to year, and the set of multipliers defined on the Revenue page. Be sure to use the "Uniform Dispatch" option for projects that do not involve time-of-delivery adjustments to the PPA price.

IRR target year

SAM reports the IRR at the end of the analysis period and the IRR in the target year that you specify. You can use the target year to see what the IRR is in a given year. You can also see the IRR for each year in the cash flow. In Specify PPA mode, the IRR target year does not affect the cash flow.

Escalation Rate

An escalation rate applied to the PPA price in Year One to calculate the power purchase price in years two and later in the project cash flow.

SAM does not apply the inflation rate to the PPA price. If you do not specify a PPA price escalation rate, SAM assumes that the same price applies in all years of the analysis period.

Equity Structure

The Equity Flip Structure variables determine how project income is divided between the tax investor and developer before and after the flip year.

The flip year is the year in the project cash flow that the tax investor IRR target is met. Typically, the majority of project cash and tax benefits is allocated to the tax investor before the flip year, and to the developer after the flip year. For example, the pre-flip tax investor share might be 98% (2% developer share), and the post-flip tax investor share might be 10% (90% developer share).

Tax Investor

The tax investor's share of the project investment, revenue, and tax benefits before and after the flip year.

Share of equity

The tax investor's share of the project equity requirement as a percentage of:

For Leveraged Partnership Flip, the total installed cost less the debt amount.

For All Equity Partnership Flip, the total installed cost.

Share of project cash, Pre-flip

The percentage of annual project cash returns allocated to the tax investor in years before the flip target is reached.

Share of project cash, Post-flip

The percentage of annual project cash returns allocated to the tax investor in years after the flip target is reached.

Share of tax benefits, Pre-flip

The percentage of taxable income and any tax benefits, including depreciation-related tax losses and ITC-related tax credits, allocated to the tax investor before the flip target is reached.

Share of tax benefits, Post-flip

The percentage of taxable income and any tax benefits, including depreciation-related tax losses and ITC-related tax credits, allocated to the tax investor after the flip target is reached.

Developer

The developer's initial capital contribution and share of cash and tax flows are based on the tax investor quantities.

SAM calculates these values by subtracting the tax investor quantities from 100%. You cannot directly edit these values. To change the values, edit values under Tax Investor.

Developer Capital Recovery

The Developer Capital Recovery options determine the timing of cash flows to the developer.

During the capital recovery period, the developer cannot receive an amount of cash greater than its initial investment.

Time

Choose this option to specify the duration of the developer's capital recovery period.

Full Capital Recovery

Choose this option to allocate 100% of the project cash flow to the developer until the developer recovers its investment. Note that there is no return on investment, just a return of investment.

Duration

The number of years during which the developer receives 100% of the project cash flow. If the number of years exceeds the time required for full capital recovery the developer only receives 100% of the project cash for years up to the year the developer recovers its investment.

Analysis Parameters

The analysis parameters specify the analysis period, inflation rate and discount rate.

Analysis Period

Number of years covered by the analysis. Typically equivalent to the project or investment life. The analysis period determines the number of years in the project cash flow.

Inflation Rate

Annual rate of change of costs, typically based on a price index, expressed as a percentage. SAM uses the inflation rate to calculate the value of costs in years two and later of the project cash flow based on Year One dollar values that you specify on the Operating Costs page, Financial Parameters page, Electricity Rates page, and Incentives page.

The default value of 2.5% is based on consumer price index data from the U.S. Department of Labor Bureau of Labor Statistics, and is the average of the annual average consumer price index between 1991 and 2012.

The inflation rate may be either a positive or negative value.

Real Discount Rate

A measure of the time value of money expressed as an annual percentage. SAM uses the real discount rate to calculate the present value (value in year one) of dollar amounts in the project cash flow over the analysis period and to calculate annualized costs.

SAM's financial model results are very sensitive to the real discount rate input. If you plan to compare metrics that depend on discount rate (NPV, PPA price, IRR, LCOE, etc.) to market values of those metrics, you should carefully choose the discount rate for your analysis. If you are comparing these metrics for different scenarios within SAM and use the same discount rate for each scenario, the value of the real discount rate input is less critical because you can evaluate the scenarios based on the relative values of the metrics, e.g., Scenario A with NPV =$1000 is worth more than Scenario B with NPV = $800.

SAM's default value of the real discount rate is based on a reasonable guess for renewable energy projects in the United States. Because discount rates are very subjective and project developers are typically reluctant to share information about discount rates, published documents on renewable energy finance typically do not include detailed information about discount rates.

Note. For projects with one of the PPA financial models, SAM includes both a discount rate and internal rate of return (IRR) in the analysis. For these projects, the discount rate represents the value of an alternative investment, and the IRR can represent a profit requirement or the risk associated with the project. For example, the IRR may be higher than the discount rate for a renewable energy project with higher risk than an alternative investment.

Nominal Discount Rate

SAM calculates the nominal discount based on the values of the real discount rate and the inflation rate:

Nominal Discount Rate = [ ( 1 + Real Discount Rate ÷ 100 ) × ( 1 + Inflation Rate ÷ 100 ) - 1 ] × 100

Note. Although the nominal discount rate is an input, SAM also reports its value in the results (see the Data Tables tab on the Results page)  .

Tax and Insurance Rates

Federal and State Income Tax Rates

The annual federal and state income tax rate applies to taxable income and is used to calculate the project's tax benefits and liabilities.

You can specify either a single annual tax rate, or use the Edit Schedule window to specify a tax rate for each year. The latter option is useful for modeling a tax holiday where the tax rate for the first few years is zero.

For all projects, taxable income includes income from any incentives marked on the Incentives page as taxable.

For residential and commercial projects, SAM does not consider the value of electricity saved by the system to be taxable income. For commercial projects, because those savings represent the value of electricity purchases that would have been a tax-deductible operating expense to the commercial entity, SAM does reduce the project cash flow by the amount of federal and state income tax on the value of the electricity. In other words, with the renewable energy system in place, the commercial entity must pay tax on that portion of its income that it would have deducted as an operating expense.

For PPA projects, taxable income includes earnings before interest, taxes, depreciation and amortization (EBIDTA) and interest earned on reserve accounts. EBIDTA is revenue from electricity sales revenue (PPA revenue) less annual operation and maintenance, property tax, and insurance expenses.

Sales Tax

The sales tax is a one-time tax that SAM includes in the project's total installed cost. SAM calculates the sales tax amount by multiplying the sales tax rate on the Financial Parameters page by the rate you specify under Indirect Capital Costs and the Total Direct Cost on the Operating Costs page.

For tax purposes, because SAM includes the sales tax amount in the total installed cost, it treats sales tax as part of the cost of property. For projects with depreciation (Commercial and PPA financial models only), SAM includes the sales tax amount in the depreciable basis. See IRS Publication 551, Basis of Assets, for more details.

Some states and other jurisdictions offer a sales tax exemption for renewable energy projects. To model a sales tax exemption in SAM, reduce the sales tax percentage as appropriate. For example, for a 100% sales tax exemption, enter a sales tax rate of zero.

For projects with debt, because SAM includes the sales tax amount in the total installed cost, the sales tax influences the debt amount and debt interest payment. For projects where debt interest payments are deductible from federal and state income tax (all financial models except Residential with standard loan), SAM includes sales tax in the calculation of the deductions.

Insurance Rate (Annual)

SAM treats annual insurance payments as part of the annual operating costs. The insurance cost in year one of the project cash flow is the insurance rate multiplied by the total installed cost from the Operating Costs page. The first year cost is then increased by inflation in each subsequent year. For commercial and PPA projects, the insurance cost is a tax- deductible operating expense.

Property Tax

Property tax is an annual project expense that SAM includes under Operating Expenses in the cash flow.

SAM treats property tax as a tax-deductible operating expense for each year. In each year of the project cash flow, the property tax cost is the property tax rate multiplied by the assessed value for that year.

SAM determines the annual property tax payment by calculating an assessed value for each year in the cash flow, and applying the assessed percent to that value. The assessed value may decline from year to year at the rate you specify. The assessed percent and tax rate both remain constant from year to year.

For residential projects, the property tax amount is the only operating cost that can be deducted from state and federal income tax.

Assessed Percent

The assessed value of property subject to property taxes as a percentage of the system total installed cost specified on the Installation Costs page. SAM uses this value to calculate the assessed property value in year one of the project cash flow.

Assessed Value

The assessed property value in Year One of the project cash flow:

Assessed Value ($) = Assessed Percent (%) × Total Installed Cost ($)

Where Total Installed Cost is from the Installation Costs page.

Assessed Value Decline

The annual decline in the assessed property value. SAM uses this value to calculate the property assessed value in years two and later of the project cash flow. For an assessed value that does not decrease annually, specify a value of zero percent per year.

Property Tax

The annual property tax rate applies to the assessed value of the project in each year of the project cash flow.

Salvage Value

SAM considers the salvage value to be project income in the final year of the project cash flow, and calculates the value as a percentage of the total installed cost from the Operating Costs page.

For example, if you specify a 10% salvage value for a project with a 30-year analysis period, and total installed cost of $1 million, SAM includes income in Year 30 of $100,000 = $1,000,000 × 0.10.

For residential projects, the salvage value has no effect on federal and state income tax.

For commercial and PPA projects, the salvage value is treated as a source of pre-tax revenue in the final year of the analysis period, increasing the federal and state taxable income.

Net Salvage Value

The salvage value as a percentage of the project's total installed cost from the Operating Costs page.

End of Analysis Period Salvage Value

The salvage value dollar amount that will appear in final year of the project cash flow.

End of Analysis Period Salvage Value ($) = Net Salvage Value (%) × Total Installed Cost ($)

Where Total Installed Cost is from the Operating Costs page.

Construction Financing

SAM allows you to specify parameters for up to five construction loans to approximate interest during construction (IDC) that SAM considers to be a cost to the project.

SAM assumes that 100% of the construction balance is outstanding for half of the construction period, which is equivalent to an even monthly draw schedule with an average loan life of half of the construction period. To approximate a different draw schedule, you could adjust the loan's interest rate accordingly.

Note. To model a project with no construction period loans, set the Percent of Installed Costs value for each of the five loans to zero.

The construction financing cost is part of the project's net capital cost. SAM includes the construction financing cost in the basis for calculating the basis for depreciation and the investment tax credit (ITC).

Construction Loans

SAM allows you to specify up to five construction loans. You can type a name describing each loan or use the default names.

Percent of Installed Costs

The amount borrowed for the construction loan as a percentage of the total installed cost, assuming that all construction costs are included in the installation costs you specify on the Installation Costs page. Specify a non-zero percentage for each construction period loan you want to include in the analysis.

The sum of the up to five percentage values you specify for each construction loan must be 100%.

Up-front Fee

A percentage of the principal amount, typically between 1% and 3% that SAM adds to the interest amount for each construction loan to calculate the total construction financing cost. Note that no interest applies to the up-front fee.

Up-front Fee Amount ($) = Principal Amount ($) × Up-front Fee Percentage (%)

Months Prior to Operation

The loan period for the construction loan in months.

Annual Interest Rate

The construction loan interest rate as an annual percentage.

Principal

The amount borrowed for each construction period loan:

Principal Amount ($) = Total Installed Cost ($) × Percent of Installed Costs (%)

Interest

The total interest payment due for each construction period loan, assuming that 100% of the construction balance is outstanding for half of the construction period.

Interest ($) = Principal Amount ($) × Loan Rate (%/yr) ÷ 12 (mos/yr) × Months prior to operation ÷ 2

Total Construction Financing Cost

The total construction financing cost is part of the project's capital costs included in the net capital cost value in the Metrics table.

Total Construction Financing Cost = Interest + Up-front Fee Amount

Cost of Acquiring Financing

The Cost of Acquiring Financing inputs represent the cost of securing debt or the participation of tax investors. SAM includes the financing cost and development fees in the purchase of property value reported in the project cash flow.

Other financing cost

A dollar amount for financing costs not included in the equity closing cost or development fee.

Development fee (Partnership Flip and Sale Leaseback models only)

A fee paid to the developer in Year 0, specified as a percentage of the total installed cost on the Installation Costs page. The developer is liable for tax on the development fee in Year 1.

Development Fee ($) = Development Fee (%) × Total Installed Cost ($)

Equity closing cost (Partnership Flip and Sale Leaseback models only)

A dollar amount representing costs associated with securing participation of a tax investor, such as consultants and legal fees.

 

Reserve Accounts

Reserve accounts are funds set aside to cover unexpected costs. Project financial partners may require that the project owner(s) establish and fund reserve accounts. Reserve account funding is a project cost. Interest on reserves contribute to the project's cash flow.

Interest on Reserves

Annual interest rate earned on funds in reserve accounts. The different financial models have different reserve accounts, and the interest on reserves rate applies to all of the accounts available for a given option:

Working capital reserve account, specified under Cost of Acquiring Financing.

Major equipment reserve account, specified under Major Equipment Replacement Reserves.

Debt service reserve account (Leveraged Partnership Flip, Single Owner), specified under Debt Service.

Lessee reserve account (Sale Leaseback), specified under Sale Leaseback.

Working Capital Reserve Account

The working capital reserve account covers cash flow delays, and is sized in months of operating costs. The account is funded in Year zero, earns interest in Years 1 through the end of the analysis period. Funds are released at the end of the analysis period.

The size of the working capital reserve in months of operation.

Working Capital Reserve Amount = Months of Operating Costs (months) / 12 months/yr × Year One Total Expenses ($/yr)

Debt Service Reserve Account

A debt service reserve account is a fund that may be required by the project debt provider. The account is funded in Year 0 and earns interest in Years 1 and later at the reserve interest rate specified under Reserves. The funds in the account are released at the end of the debt period.

The number of months of principal and interest payments in Year One whose value is equivalent to the size of the debt reserve account in Year 0.

SAM calculates the reserve account size in Year 0 based on the principal and interest amounts in Year One:

Year 0 Debt Service Reserve Amount = ( Year One Principal ($/yr) + Year One Interest ($/yr) ) × Debt Service Reserve Account (months) / 12 (months/yr)

Tip. Debt Service Reserve Accounts for utility-scale projects are typically sized to cover 6 to 12 months of principal and interest payments.

Major Equipment Replacement Reserve Accounts

Major equipment replacement reserve accounts are funds that the project sets aside to cover the cost of replacing equipment during the analysis period. You can specify up to three replacement reserve accounts.

SAM assumes that the cost of each major equipment replacement is capitalized rather than expensed. You can specify a depreciation schedule for each account.

SAM calculates the inflation-adjusted cost of each major equipment replacement based on the replacement cost you specify, and funds a reserve account in each replacement cycle. At the time of each major equipment replacement, funds are released from the reserve account in an amount sufficient to cover the cost in that year.

Note. In SAM, equipment replacement reserve funding is separate from the operating costs that you specify on the Operating Costs page. You should use either the replacement reserve account or the operating costs to account for equipment replacements.

Account Name

The name of the reserve account for your reference. SAM reports value associated with each account in the cash flow and other graphs and tables using the name Reserve Account 1, 2, and 3, regardless of the name you enter.

Replacement Cost

The cost in Year One dollars per kW of nameplate capacity.

Replacement Cost ($) = Replacement Cost (Year One $/kW) × Nameplate Capacity (kW)

Replacement Frequency

The frequency in years that the replacement cost occurs.

For example, a replacement cost of $10,000 and frequency of 5 years results in an inflation-adjusted major equipment capital spending amount of $10,000 occurring in Years 5, 10, 15, 20, etc.

Depreciation Treatment For All Capital Expenditure

Specify a federal and state depreciation method for the major equipment replacement cost.

SAM includes major equipment replacement reserves in the annual total depreciation amount in the cash flow.

System Advisor Model (SAM) Help © National Renewable Energy Laboratory

  

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