Best Practices in Valuing Solar Energy Projects

Valuing Solar Energy Projects

According to appraisal standards, when valuing equipment like solar facilities, appraisers should consider three valuation approaches: the market approach, cost approach, and income approach. Then they can determine their final opinion of value.

Because solar power facilities involve building costs, electrical work, management services, and more, the income approach is usually best. It values the solar farm based on the present value of the power income it will produce over time, often 7-10 years. While used solar panels can be resold, that market value often doesn’t capture the full potential value. The income approach does, which is why it’s the most appropriate way to value solar farms.

Valuation Approaches Explained

1. Cost Approach

The cost approach evaluates the asset’s value by calculating the costs associated with replicating an identical asset (reproduction cost) or developing an asset of similar utility (replacement cost). This approach is most applicable for estimating the value of new or “as if complete” solar assets. However, it becomes less reliable for in-service assets due to challenges in estimating obsolescence and depreciation.

2. Income Approach

The income approach estimates value based on the expected economic earnings capacity of the solar asset. It is generally considered the most relevant method for estimating fair market value (FMV), especially when the asset generates consistent income over time. The discounted cash flow (DCF) method is commonly used in this approach, considering economic benefits, risk, and the time horizon.

A good example of assets that are typically and most efficiently valued by the Income Approach is solar project valuation. Solar farms are generally valued by taking the present value of ten years of power that is expected to be produced by the solar facility.

3. Market Approach

The market approach relies on comparable transactions to estimate FMV. This method is most effective when there are enough recent comparable transactions with accessible valuation metrics. It involves analyzing the reported price per capacity unit for similar systems and applying a selected cost per capacity unit to estimate FMV. Common pitfalls of the market approach encompass using price data from non-comparable transactions, relying on outdated transaction data, and overlooking adjustments for system-specific factors.

To value solar energy-generating assets most accurately, pay close attention to the following:

  1. Expected power production over the next year – This provides the energy yield forecast for the next 12 months based on the system’s historical performance, equipment specifications, and solar resources at the site. It sets the projection baseline.
    • 3 years production history – The actual energy output data from the past 3 years shows production trends and variance. It provides a backup for validating the next year’s forecast.
  2. PVsyst estimates for new systems – For a new solar facility without operational history, PVsyst modeling predicts the expected energy yield based on system design, equipment, and location.
  3. Degradation rate – This accounts for the gradual decline in solar panel productivity over time, usually 0.25% annually. It informs the long-term production forecast.
  4. System size in kWh DC – The total installed solar array capacity in kilowatts DC represents the system scale for production modeling.
  5. PPA details or energy pricing – The power purchase agreement or local energy pricing provides the revenue rate per kWh and escalator assumptions for sales projections.
  6. O&M costs – The actual or contracted operations and maintenance costs over the next 3 years inform the expense forecast. A copy of the O&M service contract is required.
  7. Ground lease costs – If sited on leased land, the ground rent payments must be included in expenses.
  8. Inverter specs – The inverter equipment specifications like capacity and warranty inform replacement assumptions.
  9. Facility location – The solar resource and energy markets at the site impact production and revenue projections.

In summary, understanding the intricacies of solar asset valuation, adhering to best practices, and being mindful of common pitfalls are essential to ensure that solar energy projects are valued accurately and fairly. Rigorous appraisals are pivotal for sound decision-making in this dynamic industry.

Our team has valued over 1 GW of solar projects. We conduct site inspections, PVsyst modeling, power purchase agreement analysis, land lease reviews, and income approach valuations. For equipment financing, we value solar systems based on 20 – 25 year useful lives that align with PPA terms. Operating leases with tax credits are commonly used for these assets. By partnering with developers and engineering/construction firms, we understand the broad secondary market dynamics for solar facilities. Our experience covers the full range of solar asset appraisals.

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