Key elements of a strong renewable energy valuation report

A comprehensive valuation report based on best practices provides accurate and reliable information to help make informed decisions. It takes into account the unique considerations of each project which could vary by location, technology, build costs, PPA prices, expenses, incentives, remaining development risks, and other project characteristics.

As the renewable energy industry landscape continuously changes, it is critical to have an independent valuation report to assess the financial viability of, and attract funding for, renewable projects.

With the Inflation Reduction Act (IRA), the economics of the renewable energy industry has changed. The IRA includes a number of new factors that can increase the amount of both the production tax credits (PTC) and the investment tax credits (ITC) generated by renewable energy projects. For a renewable energy project utilizing an ITC, the conclusion of a valuation report can impact the amount of the ITC. From our preliminary review, a 10% increase in the ITC rate can increase the value of a project from 4-8%. For both PTC and ITC projects the valuation conclusion is a critical element in assessing project feasibility and obtaining third-party financing. The valuation will indicate the project is economically feasible if the economics of the completed project (usually represented by the income approach) support the investment required to develop/build and bring the project online (usually represented by the cost approach). It will also indicate the most likely sales price that an arm’s length unrelated buyer and seller might transact at in a transfer of the project. Stakeholders require appraisers whose valuations are both reliable and defendable from which they can make confident decisions.

A reliable and defendable valuation report utilizes inputs and assumptions from reputable and reasonable sources such as engineering reports, detailed EPC quotes, market price forecasts, project contracts and comparable project contracts, audited financial statements (if operating), and public research sources such as National Renewable Energy Laboratory, Lawrence Berkeley National Laboratory, S&P Capital IQ, Wood Mackenzie, and the Energy Information Administration, to name a few. This data is researched and analyzed to develop confidence around inputs and assumptions such as expected production, contracted and uncontracted power prices, operating expenses, indicated EBITDA margins, build costs, depreciation forecast, long term inflation expectation, and ITC estimates and other available project incentives such as renewable energy credits.

Valuation due diligence

• Project metrics: The appraiser should understand the project specifics like location, capacity, technology employed, and overall project economics. These should be part of any valuation report as well as an overview of the regulatory environment, permits obtained, any contractual agreements in place, and renewable energy credit programs that might be available to the project.

• Market analysis: A comprehensive market analysis is vital to assess the potential value of a renewable energy project. This includes evaluation of expected demand for renewable energy, government policies, available incentives, and an analysis of comparable projects in the market.

• Financial analysis: The valuation report should develop a detailed assessment of the project’s financial feasibility and its key components like capital costs, operating expenses, revenue projections, and cash flow. Additionally, sensitivity analysis may be considered to analyze the potential impact different inputs might have in assessing a project’s financial viability.

• Risk assessment: Identifying and assessing risks is crucial for stakeholders considering an investment in renewable energy projects. Both external and internal risks should be evaluated. External risks include fluctuations in energy prices, market competition, or changes in government policies. Internal risks include equipment failure, project management issues, or regulatory noncompliance.

• Best practices: The Uniform Standards of Professional Appraisal Practice (USPAP) is the generally recognized ethical and performance standards for the appraisal profession in the United States. It is critical to follow best practices per USPAP and the American Society of Appraisers (ASA). This will help ensure adherence to IRS/GAAP requirements and that the valuation is performed in a way that is widely acceptable and reliable in the market for various purposes.

• Value reconciliation: Appraisers utilize three approaches to valuation: income, cost, and market approach. A valuation report should consider all three approaches to value, perform the applicable approaches, and then reconcile the value indications into a value conclusion. This allows for an accurate and reliable picture of the project valuation as discussed in more detail below.

Conclusion

A reliable valuation report is one that is well thought-out and considers all of the key elements of a rigorous valuation analysis. By employing widely accepted valuation methodologies and following industry best practices, valuation reports can provide a solid foundation for decision-making and should withstand scrutiny from the IRS or other arbiters. A comprehensive analysis of financial feasibility, market dynamics, financial projections, and regulatory compliance will help ensure that all critical factors are taken into account during the valuation process. A credible report is one that can pass all scrutiny tests and provide an accurate/holistic view of a project.