
Power generation projects are often contracted with stable cash flows, leading to de-risked returns over the project lifespan. However, a power project involves several financial aspects that need to be assessed with detailed financial analysis to effectively understand the project’s risk-return profile and evaluate its economic viability.
A robust financial model is critical to accurately forecast a project’s financial performance and determine if it can create sufficient value for developers and sponsors. A good model is user friendly and efficient, it has easy-to-understand calculation flows, and has insightful outputs. Key use cases for a project model include:
- Estimating per unit power price for quote / bid to customers
- Demonstrating customer savings in electricity usage cost to prospective customers vs. existing / alternate solution (if any)
- Conducting analysis that can show project’s feasibility and returns to investors and developers
- Raising the capital needed to finance the project
- Estimating carbon credits and tax benefits (if any)
A typical project model will include sections on inputs and drivers, monthly calculations, asset and depreciation waterfalls, debt amortization schedule, tax calculations, valuations and return analysis, and sensitivity and scenario dashboards. A schematic summarizing the main elements of a Project’s Financial Analysis Framework is presented below:
Figure 1) Financial Tool & Analysis Framework
The key components of Project’s Financial Analysis Framework that the model should capture include:
After a project model is built, it is also important to test the impact of variations of key inputs on project’s financials. The inputs for such testing may include – changes in pricing, capex cost overruns, raw material cost increases, O&M expense increase, construction, and commissioning delays etc. Overall, the recommended analyses for capturing these key variations are the following:
- Single-factor Sensitivity Analysis on key revenue and cost inputs
- Multi-factor Scenario Testing with multiple scenarios – ‘Base Case’, ‘Best Case’, and ‘Worst Case’
- Impact Analysis on specific situations, mainly extreme stress scenarios
Relevant outputs that need to be monitored in the above-mentioned cases may vary based on users. For instance, developers will be focused primarily on overall project profitability, ROI and ROA, breakeven, project IRR & NPV, whereas debt financers will be mainly interested in interest coverage, debt service coverage, leverage ratios. Equity investors will place more emphasis on free cashflows, equity NPV and IRR, income yield, tax benefits, cash waterfall. Coming up with the best analysis involves a series of iterations on the various factors considered in the analysis framework.
Finally, beyond the project model, it is also important to assess the overall company model by combining the various ongoing projects and expected project pipeline. This will not only help in maintaining a healthy balance sheet at the parent level, but will also assist in optimizing the resources and maximizing ROI on the overall project portfolio.