This topic describes the inputs on the Financial Parameters page for the Single Owner financial model. For a general description of the model, see Financial Models.
SAM displays results of the financial model in the cash flow.
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) .
Taxes 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
Project Term Debt
The Project Term Debt inputs determine the size of debt or amount borrowed, and debt-related costs. You can see the annual debt interest, principal and total payments on the Cash Flow tab of the Results page.
Debt Sizing Options
SAM allows you to size the debt as a percentage of the total installed cost or based on the debt service coverage ratio:
•For the debt percent option, you specify the size of debt as a percentage of the total installed cost plus any additional fees and incentives. This option is appropriate for projects with mortgage-style debt, where annual total principal and interest payments are constant, and the annual debt-service coverage ratio (DSCR) varies from year to year.
•For the debt-service coverage ratio (DSCR) option, you specify the DSCR, and allow SAM to size the debt based on the annual cash available for debt service from the project cash flow. The size of debt depends on annual revenue and operating costs rather than the total installed cost. This type of debt is sometimes called sculpted debt, where the total annual debt payment varies from year to year, and the annual DSCR is constant throughout the debt period.
Project Term Debt
Debt percent, % of total installed cost
The size of debt as a percentage of the installed cost.
size of debt = debt percent / 100 × ( total installed cost + total construction financing cost - total IBI amount - total CBI amount )
SAM displays the weighted average cost of capital (WACC) for reference (see below).
SAM reports the size of debt and minimum debt service coverage ratio in the Metrics table on the Summary page after you run simulations.
DSCR
The debt service coverage ratio is the ratio of annual cash available for debt service (CAFDS) to the sum of the annual principal and interest payment. For a given year, the total annual debt payment (principal and interest) is:
annual debt payment = CAFDS ÷ DSCR
Annual cash available for debt service is equal to the earnings before interest, taxes, depreciation, and amortization (EBITDA) less cash used to fund the major equipment replacement reserves.
For this option, the size of debt (amount borrowed) is the present value of the annual CAFDS discounted at the debt interest rate.
SAM assumes that the debt service coverage ratio remains constant over the analysis period.
SAM reports the size of debt in the Metrics table on the Summary page after you run simulations.
Notes.
For the DSCR option, because the size of debt depends on annual revenue, if the project revenue is very high compared to its costs, the resulting size of debt can be unrealistically high. This may be an indication that the PPA price or incentives are too high, or that project costs are too low, or that there is a problem with some other financial parameter. Be sure to check the values in the Metrics table on the Summary tab of the results page to make sure that the debt percent, NPV, PPA price, and IRR are reasonable.
The DSCR generally ranges between 1.40 and 1.50 for proven wind technology. For solar, the ratios are slightly lower: In the 1.30 to 1.40 range for PV, and perhaps slightly lower for CSP and CPV technologies.
Equal payments (standard amortization)
Available only with the debt percent option. The size of annual debt payments remains constant over the debt payment period, the annual interest payment decreases each year with the unpaid balance, and the annual principal payment increases.
Fixed principal declining interest
Available only with the debt percent option. The size of annual principal payments remains constant over the debt payment period, and the size of annual interest payments decreases with the unpaid balance so that the total annual payment decreases over the payment period.
Maximum debt fraction, %
Available only with the DSCR option for the Single Owner financial model. The maximum size of debt as a percentage of the total installed cost you want to allow.
Check the box to limit the debt fraction for a project with relatively high revenue compared to costs.
This option adjusts the debt service coverage ratio so that the resulting size of debt is less than the maximum debt fraction you specify. If the DSCR you specify results in a size of debt greater than the limit, you can use the Minimum DSCR output on the Data Tables tab of the Results page to see the adjusted DSCR.
Tenor, years
The debt period in years.
Annual interest rate, %
Annual nominal debt interest rate.
Moratorium, years
Defines a grace period before debt payments begin, available for debt percent option only. The number of years starting at the beginning of the debt payment period (Year 1 of the project cash flow) before debt principal payments begin. For example, for a moratorium of 5 years and a 20-year debt period, principal payments would begin in Year 6 and end in Year 20.
Debt closing costs
A dollar amount representing debt closing costs. The debt closing costs are part of the project's capital costs included in the net capital cost value in the Metrics table.
Up-front fee, % of total debt
A percentage of the total debt representing debt closing costs. The up-front fee is part of the project's capital costs included in the net capital cost value in the Metrics table.
WACC
SAM displays the WACC for projects with debt when you specify the debt size as a debt percent. It is shown for reference and not used in any calculations.
This is a calculated value that you cannot directly edit. To change its value, change one of the parameters in the following equations:
WACC = [ Nominal Discount Rate ÷ 100 × (1 - Debt Percent ÷ 100)
+ Debt Percent ÷ 100 × Loan Rate ÷ 100 × (1 - Effective Tax Rate ÷ 100 ) ] × 100
See the Nominal discount rate variable description for its equation. The effective tax rate is a single number that includes both the federal income tax rate and state income tax rate. SAM uses the effective tax rate for several calculations requiring a total income tax value:
Effective Tax Rate = [ Federal Tax Rate ÷ 100 × ( 1 - State Tax Rate ÷ 100 ) + State Tax Rate ÷ 100 ] × 100
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.
