Overview

In the last decade, solar has experienced an average annual growth rate of 50%. Installations surged in 2016 ahead of potential expiration of the ITC, but an extension in late 2015 has created federal policy stability through 2021. Solar project costs have continued their rapid decline; the cost of utility-scale solar projects has declined by 80% during 2010-2018. The political environment has promoted rapid development of solar energy – the climate change crisis, the Paris climate agreement, the rapid politically-motivated closure of coal and natural gas power plants, and the increasing political incorrectness of nuclear power.

The solar industry is booming, with reduced prices for solar installations driving a lot of the growth and causing a lot of the growth through increased economies and reduced manufacturing costs. These 40-year assets are an attractive place for leasing and investment. Valuation of solar assets, facilities and projects, is best accomplished by the income approach, as the production of the commodity of power can be relatively straightforward to value – discount the value of the megawatts of power produced for 7-10 years and the value emerges.

PV solar projects are designed to produce power for 25+ years. Due to the newness of this industry long term data is not yet available. Traditionally solar developers had assumed at the outset of a new project annual degradations of 2.0% in solar project DC output, but recent studies have demonstrated that this level of degradation assumption had been far too conservative. Studies of 20 and 30 year old solar panel output have shown degradation only on the order of 0.5% per year or less. As the industry matures, it is becoming apparent that the average economic useful service life of solar arrays is 30+ years.

While PV solar panels are available for purchase on eBay and on other equipment sales websites, the sale and redeployment of mature operating solar arrays is actually quite common. Sale as an operating project is the only reasonable outcome for a large project. Power is a commodity with readily determinant value. Many large developers commonly purchase operating facilities when the offtaker goes bankrupt or otherwise has no further need for the project. Solar farms generally stay in place and stay in operation. Most solar projects have PPAs, which are easily transferrable to the new owner, so that the value of the project is specifically spelled out by the 25-year PPA pricing schedule. But for the fewer project without PPAs, the value of the future power is pretty easy to compute. Developers will discount the value of the future 7 or 10 years of power by 6-7% and that is how much they will pay for an operating project.

Solar Asset Valuation

Capital assets such as construction equipment and trucks and trailers are most typically valued by the market approach, by examination of the sale of comparable forklifts, cranes, or class 8 tractors which are widely available in the market. Solar assets are generally not subject to valuation by market comps. A typical 1.5 megawatt (“MW”) solar project consists of $525,000 of solar PV panels plus $1.2 million of racking, inverters, electrical installation, engineering costs, and profit for the developer. There is some market developing for used PV solar panels, but the highest and best value is sale of the system as is, one big operational project since you can’t sell electrical installations and big metal racks.

The developer is the primary manager of the project and is usually the project operator as well. The “offtaker” is the entity using and paying for the power and the entity that hires and pays the developer. Almost all solar projects have underlying “PPAs”, or power purchase agreements, which are 25 year contracts by the utility to purchase the power for escalating prices.

The total value of the renewable energy market has been in the $230 billion – $310 billion range in the last ten years, with the peak of $312 billion occurring in 2016 as US tax credits were threatened to expire on 1/1/2016. The credits were extended for at least another five years, and the growth has resumed. Over 10 GW of new solar capacity has been added in the US in each of the last four years 2016-2019. In 2008, new solar projects were being built for over $7 per watt, now under $1.50 per watt. The US solar market is now at approximately $30 billion, the majority of which is project financed. Banks, investors, developers, and other stakeholders have a need for appraisals of these projects.

Cost Analysis for PV Solar Project

A typical 1.5 MW PV solar project built in 2019 might cost $1.95 million, or $1.30 per watt. The nearby chart shows project cost, the value of power in California, the host state, and other basic facts about the project. When valuing the solar project it is important to understand and verify that the costs are reasonable and customary. Overpaying for an asset does not make it more valuable.

Two important cost items to review are cost per watt, the bottom line cost of the project, and soft cost percentage. Soft costs are typically 15% – 25% of the cost of a solar project, and includes the considerable cost of the electrical contractors to install the PV panels, the string of inverters, and other power components of the system. The PV panels, leading OEMs including Jinko, Canadian Solar, Trina, and Hanwha, generally comprise a third of the cost of a PV solar installation. “BOS” stands for “balance of system”, and this cost includes the electrical work, developer profit margin, and other costs.

Here is the cost breakdown for that typical 1.9 MW PV solar project:

The future value of a PV solar project can be estimated by value of the components on the secondary market, and by value of the power produced by the project – the income approach. Because most developers and off-takers are not efficient taxpayers and the huge 30% tax credit is there, most solar projects are lease financed. It is important to have an efficient taxpayer there to monetize the tax credit. The typical tenor of an operating lease financing, one that leaves ownership of the asset in the ownership of the big bank and not the small developer, is 7-12 years. The asset must stay in place for 5 years for the ITC to remain valid. The lessor takes the ITC and applies it to the lease payments. 90% of projects have a PPA in place.

PPA – Guaranteed Income for the Project

A PPA, power purchase agreement, is a contract between the offtaker and the local utility for the utility to purchase the power, usually for an escalating price, for, say, 25 years. It is like guaranteed income for the project. The PPA buyer receives stable, low cost electricity and the ability to claim green bragging rights and fulfill any government contractual requirements to be “renewable”. Importantly, the PPA income stream stays with the project and is transferable to any new owner. PPAs are allowed in most states but are explicitly prohibited in a handful of states including Florida, Alabama, Oklahoma, and Kentucky. In some states, there are certain restrictions on municipalities with respect to PPAs.

PV Solar Array – Determination of Value

The first step in valuation of solar assets is to understand the project and to ensure that it is a viable, economical project. Many firms, including developers, do engineering studies of solar projects which project detailed costs and exact power output by month and by hour of each day. The “PVsyst” is a commercial software system that accepts all the project inputs – latitude/longitude, average temperature, elevation, illumination intensity – and computes the likely project output in watts per day, per month, and per year. The PVsyst run is only as valid as the quality of the inputs, and so must be carefully evaluated for reasonableness. The PVsyst is used by developers, architects, engineers, researchers, and investors to evaluate the project value.

The PV solar project is a 30+ year asset. The appraiser must consider the ownership and control of the land the project sits on. For a 10-year lease, the appraiser should ensure that the offtaker has control of the land for at least 20 years – and the appraiser should review the lease to make sure this is true.

One way to recover value, and to determine value, of the solar project is through the sale of the PV panels independent of the operating project. The fair market value in exchange of a PV solar module is a concept that is emerging as the industry begins to mature. Some projects go bust, real estate deals go bad, and sometimes panels are sold. You can go to eBay right now and buy used solar panels, and independent value for used solar panels is beginning to have some meaning. Prices for used solar panels on eBay and on other equipment trading websites have come down as the price of new solar panels has come down. The price of new solar panels has come down drastically over the last ten years – a 315 watt panel that cost $7 seven years ago can now be purchased for around $0.62 per watt, so used prices have to come down as well. The price per watt for a new solar project is leveling off at around $1.00 – $1.25 per watt, so the dramatic price declines of the past will not be repeated. Since the price of the panels are only about a third of the price of the total PV project, if the used price of the panel is 30% of the original price of the panel then the total amount recovered will be about 10% of the cost of the project. A more realistic approach to valuation is to value the whole project, using the income approach.

PV Solar Project – Valuation of an Operating Solar System with PPA

Power is a commodity – everyone needs it and the grid has an insatiable need for more power. Developers own and operate large portfolios of projects, employ central monitoring stations to track performance and problems with projects in real time. As such, there is a robust and active market for sale of operating solar projects. Active developers will calculate the value of a project by taking the PV of the power over the next 7 or 10 years, then discount by 7% – 10% and that’s how much they will pay. The value of the power if covered by a continued PPA is easy to calculate; if no PPA then the value of electricity in that state is pretty well known, from 10 cents per watt in some states up to 20 cents per watt in New England.

Here is an example of valuation of an operating 1.5MW PV solar project. Estimate how much power will be produced each year, using the PVsyst estimates, and multiply by the value of the electricity. Select or negotiate the term to determine the exact value.

PV Solar Project – Valuation of an Operating Solar System – Market Pricing

When there is no PPA, the value of the power is calculated using average electricity prices for the subject state. The following example values the output from a 1.5MW solar facility based on the present value of 7 years of power, a typical planning horizon for a developer investor.

Conclusion

The solar market is experiencing strong growth, and production of electricity by coal continues to fall. Investors, banks, and leasing companies have a need to evaluate the value of the project to compute the appropriate financing rates. The value of an operating PV solar project can be calculated in the developer market by estimating the value of the power which will be produced in the next 7-10 years, then discount at the investor’s / developer’s required return rate to present value.

By: Christopher Nugent, ASA

Managing Director
Bluechip Asset Management

Mr. Nugent is Managing Director of Bluechip Asset Management, an appraisal and asset management services company. Mr. Nugent has over 25 years of experience in valuation, leasing, and financial services, focusing on equipment appraisal, residual management, asset remarketing, and portfolio management, including positions with Key Equipment Finance, Babcock & Brown, Comdisco, US Leasing, and other companies. Mr. Nugent has equipment management expertise in IT, healthcare, technology, semiconductor, energy, business equipment, construction equipment, and a variety of other industries, and has managed staff and transactions in the US, Europe, and Asia.

Mr. Nugent is an Accredited Senior Appraiser of the American Society of Appraisers. He holds a BA in Statistics from the University of California, Berkeley, and an MBA from Santa Clara University.

BlueChip Asset Management is an appraisal and asset management services company which serves the ABL, banking, equipment finance, legal, and turnaround industries. Members of TMA, ELFA, and CFA. Contact us for asset valuation assistance at 415-515-1110, www.bcamasset.com, or schedule a free 15-minute consultation.

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