Solar is like Any Other Business for Investors
On the surface, the world of solar might be perceived as a very different business, as a business that is about to save the world and the environment through reducing carbon emissions etc., but to investors, solar power projects are like any other business investment – they evaluate solar power projects with pretty much the same yardsticks as they evaluate any other business project
What are These Yardsticks?
The following are the key yardsticks used by solar investors. Note that yardsticks of highest priority differ from one financing company to another.
- Capital Cost – denotes the total upfront cost involved in starting off the project
- Cash Flows – while investors are OK with negative cash flows for a few years, they would like these to be as few as possible, and would like to have projects with positive cash flows for as many years as possible
- Project IRR – this in a way represents the returns that the investor gets on the overall investments into the project (capital costs + other operating expenses)
- Equity IRR – this represents that returns that the investor gets on the equity that he invests in the project. Please note that this does not include the debt component
- Pay Back Periods – though this is not crucial for many large and professional financial investors, some investors do look at the number of years for the equity to be paid back through the returns from the project
While the capital costs have come down significantly in the last few years, owing to the drastic reduction in the tariffs that many solar investors get paid, all the other parameters, viz., the cash flows, IRRs and Pay back periods, have been adversely affected as well.
However, as solar projects typically have lifetimes of 25 years, solar investors are quite OK with moderate returns for the equity and project IRRs, and a reasonably long pay back period. They are however quite wary of the cash flows turning negative too many times, especially in the first few years, as that can adversely affect their working capital requirements.
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Dear Sir,
Usually Equity IRR is larger than the Project IRR. But can the former be lesser than the latter? I have build a financial model and under Accelerated Depreciation scenario, Equity IRR, both: Pre-Tax & Post-Tax is coming lesser.
Regards,
Ankur