Decentralization

There will be positives and negatives of greater decentralization of power generation. There will be an increase in competition with new and/or smaller companies being able to enter the market and this could drive price in either direction. Usually when there is more competition in a market it drives the price down because consumers have options. But if there are only a couple options for consumers to get energy from, then prices could actually been driven up. Decentralization will also lead to an upgrade in the electrical grid. There will be more renewable power that will need to be put on the grid and in order for the grid to handle that, there will need to be improvements made. This will most likely lead to a more stable grid.

The new businesses that will evolve are renewable energy businesses and all the parts that go along with it. Smaller renewable energy businesses will be created to supply the energy to the consumers and these alone will range in all shapes and sizes. There will be businesses that specialize in wind and/or solar and probably biofuels. With that we will see technology evolving around those businesses. There will be companies that are created so make wind turbines smaller for homes, and PV’s that are durable but less expensive. Construction companies will evolve that specifically specialize in the installation of these products.

The business that I see myself creating is the business I have wanted to create all along: working with developing countries to survive off the grid. I want to have a business that builds renewable energy grids for communities in developing countries so they can live healthier lifestyles. By building a grid for each community that relies of solar and wind power it will supply communities with more electricity than they have and is self-sustainable.

Smaller is Better- Decentralizing Power Generation

• What will be the effect of greater decentralization of power generation?
o With cleaner, more efficient technology available for power generation, decentralizing the industry may become more of an issue than most anticipate. Natural gas reserves in the U.S. create a great opportunity to fuel smaller localized generation facilities and returns the option to use the expelled heated water for purpose as opposed to wasting it in cooling towers. The overall effect of decentralization could eventually eliminate some of the remote power generation facilities.
• What new businesses will evolve in this changing landscape?
o The obvious new business would be installation companies of such equipment. Other business might be maintenance companies to maintain and repair these centralized facilities. Extension employment will trickle down as companies or building management teams will need to hire people to manage any equipment as well.
• What business can you see yourself creating to serve this market?
o I could see the opportunity to create a consultation business to help communities, building owners and businesses evaluate the possibility to install such a centralized facility and release from the grid.

Loyd_Dencentralization of Power Generation

Times have changed, and if we do not diversify our energy sources today, we are all heading down the road of infinite environmental troubles and consequences. The importance of energy security and energy stability is the nation’s top priority in order to promote economic growth and remain in accordance with current and future environmental policies. Decentralization of power generation will lead to considerable effects on the environment, economy, efficiency, security, and reliability of the current network. First, a decentralized energy system will expand energy sources with new renewable energy companies, expanding the field of renewable energy and thereby reducing the environmental impacts such as CO2 emissions. Second, a DE system will increase competition as it will be more so based on a free market system with limited regulation. The greater number of players in the field of embedded generation will encourage firms to operate in the most cost-effective, efficient manner as possible. In essence, the companies want to offer energy at lower costs than competitors to become successful. Therefore, companies will create or adapt new technologies that increase the efficiency and profitability of the firm. Such techniques that may be considered could be more improved storage infrastructures for renewable energy plants to sell electricity during peak hours. Currently, a significant hurdle in the distribution system is that the supply must be generated as needed. Thus, when supply exceeds demand (as with the case of most renewable energy sources) the excess energy is sold at very low prices on the flooded market. Therefore, I believe that we can expect to see large advances within storage technologies such as improved batteries for PV (Photovoltaic) units, and hydro storage infrastructures that would store energy more efficiently to sell during peak hours. In addition to storage technologies, there will be a higher demand for smart infrastructures such as smart meters and smart grids to manage grid stability. These types of technologies would become invaluable in a decentralized energy system for it would allow real-time monitoring and communication between the producers and the consumers.
Implementation of a DE system would spawn job growth and create numerous market possibilities within the energy and technical sector. I can imagine myself creating a business that would either focus on improving a plants efficiency by improved technology that is original to the market or becoming a consulting business to educate future investors and companies. The renewable energy market is growing at a remarkable pace and with the help from renewable energy payments and rebates, it is only expected to increase. Thus, two years from now, equipment used today may be outdated and not as efficient. Therefore, I believe that there is a niche in the market to keep firms updated and educated in the technological advancements. Perhaps, I could create a sale representing company that conducts business audits as well to ensure that they are operating at an optimum level. If and only if renewable energy technology continues to improve, I could present companies with new more efficient technologies. I also could offer discount rates if they would sell me the old equipment. Then, I could sell this used equipment to start-up businesses or residential units that are searching for less expensive systems. Another niche would be to start a consulting company to help new businesses learn the “ropes” of the decentralized control system to diminish the chance for failure and increase the potential for success. Overall, there are significant opportunities in starting a business catered to the decentralization of power generation; but I feel that these activities would lead to great success for the fact that they both focus outside the industrial market and power plants. The companies can be integrated on a full scale both commercially and residentially increasing the likelihood of expansion.

Low carbon Green Road map for Asia and Pacific. “Decentralized Energy Systems” UNESCAP. Nd. Mozilla Firefox. November 05 2014. Found here: http://www.unescap.org/sites/default/files/14.%20FS-Decentralized-energy-system.pdf

Klitgaard, Thomas. Reddy, Rekha. “Lowering Electric Prices through Deregulation”. Federal Reserve Bank of New York. December 2000. Mozilla Firefox. November 5 2014. Found here: http://www.newyorkfed.org/research/current_issues/ci6-14.pdf

Lesson 11 – Deregulation – Jackson

The goal of deregulating energy markets is to create competition in a market that was previously controlled by monopolies. According to standard economic reasoning, this increase in competition should lead to lower prices. Unfortunately, this has not always been the case. In reality, deregulated power plants can sell power at higher prices because they are not held in check by governments. Although there is slightly more competition, most regions are still dominated by one large utility, eliminating any real retail choice. The average price of power in deregulated states is 48% higher than in regulated states. The lack of continuity also means that power grids are less reliable because several different companies need to work together to keep the electrical balance.

The business opportunity that can take advantage of deregulated energy markets is in microgrids. A report by Robert Liam Dohn defines mircogrid as,”a discrete energy system consisting of distributed energy sources (e.g. renewables, conventional, storage) and loads capable of operating in parallel with, or independently from, the main grid. The primary purpose is to ensure reliable, affordable energy security for commercial, industrial and federal government consumers.” Microgrids can provide backup to unreliable grids. They were used in New Jersey after Hurricane Sandy Hook to immediately provide electricity to damaged areas. They also have potential in underdeveloped regions of the world, with no grid access. A microgrid tied to a renewable energy source has the potential to supply critical electricity to areas of the world which are lacking. As energy markets deregulate, a market for microgrid technology should develop rapidly.

“The Business Case for Microgrids” – Siemens

http://w3.usa.siemens.com/smartgrid/us/en/microgrid/Documents/The%20business%20case%20for%20microgrids_Siemens%20white%20paper.pdf

“How Solar-Based Microgrids Could Bring Power to Millions” – MIT Technology Review

http://www.technologyreview.com/featuredstory/429529/how-solar-based-microgrids-could-bring-power-to-millions/

“Microgrids Keep Power Flowing Through Sandy Outages” – MIT Technology Review

http://www.technologyreview.com/view/507106/microgrids-keep-power-flowing-through-sandy-outages/

Marielle Martin – Lesson 11 – Decentralization

Decentralizing power generation will likely increase the implementation of smart infrastructure to the existing grid. The existing grid allows for a simple relationship in which energy producers send energy to consumers. With the influence of decentralization, upgrading the grid will offer the opportunity for an interactive exchange of energy between consumers and producers. In addition, a larger range of energy sources are likely to sprout up across communities, including residential energy applications known as distributed energy resources (DERs). Net metering will be more available in this scenario, making residential energy costs lower for consumers interested in an investment in a DER. These changes will allow companies focused on commercial energy production and residential energy system technology to both find niches. In addition, a need for construction companies to install the expected increase in DERs and energy production infrastructure will emerge.

I would be interested in creating a company that caters to small businesses interested in installing DEPs to net meter and power their businesses. I would choose the either operate in consulting or installation, probably not both – at least not at first. As a consulting firm, the ability to assess a business site (analyzing energy production potential for multiple renewable sources – like wind and solar), predict costs, and coordinate with installation companies would be the bulk of the company operations. However, if I would choose to create an installation company, I would need some ability to market the product and find customers on my own or through a consulting firm of some sort. Personally, the consulting end seems more interesting. I would have less capital to invest in, less people to hire, and greater freedom to run the business in response to public interest, energy prices, and other factors related to the economic viability of renewable energy.

Lesson 08 – Understanding the Cost of Capital

1  Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?

The main detail that needs to be tied down before doing a renewable energy project is capital. Capital is the main driver in any major project. Countless projects in business a year are never completed due to the lack of planning of what if’s and give very little wiggle room with over capital budgets. Typically one would want at least 50% over the budget available in case unfortunate circumstances come with the build. Having that capital in place will save a lot of headache in the end. The last thing a business investor wants to hear is they are not going to see a return on their investment due to bad planning.

Another aspect one must consider is the payback time one will see their investment start generating positive revenue. In terms of scale, the bigger the out the faster the return in investment whereas the small the output the longer it would take for the investor to see a return. Some business plants have as short as a 5 year plan while others have a 20 year payback plan. Whatever the case explaining when the funder will see their payback is critical. A smart investor knows it could take some time to see their investment generate revenue but once the project crosses the payback mark, they will be glad they funded.

The funder must know they are in this project for the long haul. The energy business is not a quick buck business. I would let the funder know there is a lot of education that is needed on a daily basis in the energy industry and I would encourage them to look into places they usually wouldn’t. Say for instance the regulation part of the business. Having a solid foundation of the regulations from NERC and FERC and the EPA will keep costly planning mistakes from coming up. The more information the better for all. Communication is imperative in the energy business.

 
2.  What finance-based processes would I use to explain our potential for success?

I would use the Return On Investment (ROI) process because every smart investor wants to know how long it will take to see a return on their investment.

Understanding the Net Present Value (NPV) calculation will also help the investor to see the math behind the return on investment and understand what debt he or she will be obligated to and what the potential return calculations are being used to determine e when his or her investment will be in the positive and net gain threshold.

Understanding the net gain of capital and asset based profits will give a clear representation of the math that’s being used to come up with the assumptions. I would also create a sheet to show where the debt is going to look for ways to reduce the debt the business sees on a daily basis.

 

Understanding the Cost of Capital

Financial backers of my renewable energy project would generally want to know how much return on their investment I can make them.  I would first show them relevant historical data on energy potential at my chosen site location. Then, I would explain any tax credits and incentives that help speed up the initial payback period. I would also explain why the investment is better than the average “T-Bond” using NPV, WACC, ROE and other accounting formulas. I would explain the effects current geopolitical events have on energy markets i.e. shale boom, ISIS, Russian Natural Gas. I would research and explain all recent and proposed legislation that might affect demand for my renewable project. I would explain the triple bottom line theory of People, Planet, Profit and how they (the investors) could see similar monetary results investing elsewhere, but investment in my project would guarantee “environmental return”.

http://energy.gov/public-services/funding-financing

Cost of Capital

1  Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?

There are a number of obstacles that will surround any project, and raising the up-front capital needed to fund a project is certainly the most crucial.  In terms of renewable energy, the project not only needs to be equitable, but it needs to be even more equitable than alternatives.  For example, a company may consider installing solar PV with a large up-front cost at a 20 year payback period, but if they can save a few dollars immediately by converting to natural gas and applying some low-cost efficiencies around the facility, they may implement the latter if only to avoid the up-front cost while still being able to demonstrate a savings.  Even though long-term the solar PV technology would have a significantly greater return, it’s that instant gratification and the fear of the initial large investment that may deter the project.

I think it’s extremely important not only to explain the long-term benefits of the project, but also to explain the long-term negative impacts for not pursuing it.  Using the example above again, we must also take into consideration that natural gas is relatively cheap for the time being and that electricity rates are steadily on the rise in most places.  In fact, they’ve risen about 50% since 2003.(1)  In the end, it all comes down to the volatility and unpredictability of fossil-fuel driven energy rates versus the stability and assuredness of renewable energy costs.  Once that solar PV array is installed, one won’t have to worry about the sun sending a higher bill next month.

Insofar as funding a renewable energy startup, I think the crux of funding success can be found in the potential of the market.  Energy is a colossal business, and as long as oil is expensive and coal is dirty, there are going to be gains made in the renewable energy sector.  But the cost comparison of renewables vs. fossil fuels is growing slimmer as the technological advances of renewable energy technologies drives its price of adoption down while the increasing scarcity of “conventional” oil and natural gas sources drives their costs of extraction up.  It would also be important to discuss the increasing efficiencies of many renewable energy technologies, because as they become more efficient the more viable an option they become.

For either renewable energy projects or startups, government incentives will be crucial to their near-term successes.  The high up-front costs of adoption will continue to temper the industry’s growth until innovative new ways of allowing consumers and businesses to adopt at a lower cost are implemented.  Elon Musk’s SolarCity just recently built financing into their installations, allowing consumers to simply pay a stable monthly rate to SolarCity instead of their utility company, and other companies have used leasing to confer the same effect.  The only difference is that SolarCity’s method allows the consumer to eventually own the solar array, whereas with the leases the array is owned by the installation company.  Either way, these innovative ideas have found a way to eliminate the deterrent of that high up-front investment.


2.  What finance-based processes would I use to explain our potential for success?

In order to explain our potential for success I would certainly use, for simplicity, Return on Investment (ROI) in order to illustrate that the project is equitable.  For a clearer understanding of the potential for the project I would also provide a Net Present Value (NPV) analysis.  Using the NPV, I can clearly illustrate the year by year accumulation of capital after the original investment has been paid off, which I think is a very powerful tool.  Because the NPV analysis takes into consideration a host of limiting and contributing factors like taxes, inflation, and stable investments, it makes it very clear the true potential of the investment.  In the case of a renewable energy projects, assumptions will need to be made in order to design the outlook of the project–namely year-over-year savings, yearly current utility cost increases, etc.–so it won’t be a perfect representation of the return on the investment.  However, the more factors that are taken into consideration the more concise the outlook will be.

 

Reference:

  1. EIA, 2014.  “Short-Term Energy and Winter Fuels Outlook.”  eia.gov.  Accessed:  https://docs.google.com/document/d/1Zn6XamC2DNkOAIsMd5p8_G0aGhGOlZBWAJWsFpbOPl0/edit#

Brian Hillard

Regardless of the successes that renewable energy has had in the past decade, there is little doubt that it is still an industry (or subset of an industry) that needs assistance to be viable. Much of the strides have come via government grants, loans, and subsidies. This continues: the wind energy sector has seen a significant drop in installations, due to the federal government’s expiration of the wind energy tax credits. So as the renewable energy industry continues, the biggest question is: will it remain financially viable?

There are still many government incentives available. One key factor is location. Many states provide incentives for renewables, some of them significant. In addition, a reduction in capital costs, especially solar, has led to cheaper installation costs and competitive market rates.

What the funder wants to see is, then, is competitive renewable technology that will quickly recoup the investor their investment and provide a decent return in the following years. If government incentives are a part of the equation, they must be reliable: an investment cannot count on tax breaks or grants that might phase out or expire the next year. In addition, many Pennsylvania solar installations were partially financed by SRECs, or Solar Renewable Energy Credits. These credits were sold by the owner of a solar installation to companies that needed to meet state standards for renewable energy, and provided a big incentive for solar power installers. Any type of government incentive should be guaranteed for the investor to feel confident they will get their investment back.

On top of the financials, an investor will want to have trust in the company itself. A company with a solid, reliable history (10-15+ years), and proven track record and sound accounting will give that much more strength to their request for funding.

There are several finance-based figures that will assist both the company and the investor to know what kind of footing the company is on and whether a large scale investment is viable. Cash on hand, total debt, cost of debt, and percentage of debt all can give an initial look into the state of the company. The lower the debt rates, and the more the cash on hand, the better footing a company has and the investor is more assured the company practices sound financial habits and good chance of remaining in business. Other figures, such as WACC (Weighted Average Capital Cost) and APV (Average Present Value), will give further insight into the company financial standing and how it will be able to finance its own projects. Return on Investment will also be an important figure, so the investor can ascertain just how quickly their money is recovered and how much the company will benefit in the years to come.

Understanding the Cost of Capital – Amy Johnson

Understanding the Cost of Capital

In the ever-evolving realm of sustainable energy and entrepreneurship, there are many things that need to be considered when a person begins the process of starting a business.  When anyone starts their own company or business, they all need the same things: an idea or concept to offer others, ways to produce the idea or concept, and CAPITAL.

My idea for a company would be one that offers education to the public and consulting on energy efficiency. Because this is an idea that has been done, but on a much smaller scale, I would need to convince a potential funder that my company would be capable of reaching a much larger community. This would mean that there would be a much larger number of customers, which, in turn, leads to more profit.

Some of the key things that I need to be able to explain to a potential funder of my project are that this concept is not offer education and consulting, which will actually pay off everyone in the long run. When people use less energy, due to energy efficiency, the entire planet will benefit. Also education is an invaluable thing that would be helpful in working toward other future goal in creating a more sustainable future.

            I would use the Return on Investment calculation to explain our potential for success in the market.  This calculation is:

I would also have to take into consideration additional costs such as licensing of educators and counselors, to get a certification to advise and teach.

Important of Financing

  1. Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?
  2. What finance-based processes would I use to explain our potential for success?

Key items to discuss with financiers would be the break even point, at what time will the investment have paid off and is that time length acceptable?  What will the return on investment look like to the potential funder, is there a specific interest rate and is it compounded continuous, annual, does it begin after the break even point?  Will additional funding be needed in 1 year, 5 years, 10 years?  And will the investor see one lump sum payoff or will annuities be paid out over time?  Additionally, the investor will need to see a solid business plan that outlines how the owner/entrepreneur plans on making money, their marketing strategy, and all attempts to perform successfully.

First, the investor will need to know up front purchase price of any products, how many people will be needed to help run the company to determine payroll, what is the cost of overhead, will any facilities need to be rented or specific automobiles or machines, etc.  Second, the investor will need to see an outline of what the accounts payables and receivables expect to determine if the investment is wise.  Finally, a look at the general ledger or quarterly tax filings to confirm the investment is paying off.

Danielle DeBoer

Raxter’s Understanding of the Cost of Capital

For the most part renewable energy generation sites require minimal maintenance and are fairly reliable and predictable in regards to production. Considering what I know about renewable energy, the largest hurdle with renewable energy projects is the bankability of the components that you are utilizing and the upfront cost.

With a reputable company that offers a production guarantee, once the upfront cost is compensated it is a guaranteed return on investment with minimal risk.

To explain our potential for success I would calculate the Weighted Average Cost of Capital for my company to help the investor understand the reliability of my company. Then I would show them the net present value of their investment over the 30 year operating period of an average solar photovoltaics system.

Lesson 8: Bethany Steiner

Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?

There are many key things potential funders need to know before they invest in a project. A business plan is something every new business needs. Without a business plan, there would be complete chaos and nothing would get accomplished. A business pitch could help sell an idea to the funders but one has to make sure they want to invest in you as a person. If they don’t trust or like a person, then why would they invest in that person’s business? It is a complete package of selling the business, the product and yourself as well. Additionally, you need to know how much money you need from an investor. You need to know where this money is going, as the investor would probably like to know as well. Finally, you will need to know how long it will take to break even and make a profit. The demand for the specific product would have to be examined and explained. The investor needs to know that the business will be successful and they will get their money back at a profit. These steps are important for any business, not just in the renewable energy field. An investor should understand renewable energy and its benefits if he/she does not know about it already.

What finance-based processes would I use to explain our potential for success?

There are many finance-based processes to explain the potential for success. One way is by measuring the return on investment (ROI). A more detailed and effective way would be to calculate the return on equity (ROE). A ROE analysis is a process encompassing all sales, cash, and other transactions a business may make. Figuring out the cost of capital is also a good process to outline success. There are two parts in figuring out the cost of capital which are calculating the cost of debt and cost of equity. When doing this you would get the weighted average cost of capital or WACC. Finally, you could also calculate the net present value (NPV) or net present worth (NPW).

Works Cited

Berry, T. (n.d.). How to Get Your Business Funded. Retrieved October 21, 2014, from Bplans website: http://articles.bplans.com/how-to-get-your-business-funded/

Understanding Cost of Capital – Michael Pittman

Outside of starting a consulting firm, starting any sort of business within the sustainability of renewable energy field will be highly capital intensive. To start a renewable energy business you must have the working capital or credit to finance the high startup costs. Many firms will take on investors to help with startup costs. These investors will have certain needs, most specifically “Will this venture offer me a good return on my investment?” What are the chances that the risk of the investment will result in a large enough reward? If there is a positive return, will the return be greater than investing in equities or sitting on my cash for the next best opportunity?

The three most common ratio’s used to determine the returns a company generates are return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) (Khan 2014). ROA is calculated by taking net income and dividing by net assets. This can be skewed very easily by a firm that holds on to excess assets or cash. ROE is calculated by net income divided by shareholder equity. This provides the level of profitability that is achieved from money provided to the firm by investors. This number can also be skewed because it does not take into account any preferred shares that the firm may have issued. ROIC is calculated by taking net operating profit after taxes divided by invested capital. This would let investors know how well the business turned invested capital into profits.

Each one of these ratio’s is important because knowing all three will offer a much better understanding of a firm and its financial position. Investors need to know that you will be able to offer them solid performance under each metric and return on their investment.

A factor that for some reason that is always overlook and should be an important part of any investment discussion is “How good are you at sales?” You can have the best product. You can have the most efficient operations side of the business. You can have the best and brightest talent working for you. You can be a part of the newest and fasted growing market segment in business. None of these matter if you cannot sell your product. As an investor, I would need to have extreme confidence in the entrepreneur’s ability to sell or confidence that he could employ a strong sales force before I would invest.

 

 

 

 

 

 

Khan, Saliq. “ROA vs. ROE vs. ROIC .” The Johns Hopkins Carey Business School Equity Analyst Team . Johns Hopkins Carey Business School, 9 July 2011. Web. 21 Oct. 2014. <http://jhuanalystteam.blogspot.com/2011/07/roa-vs-roe-vs-roic.html>.

A Hypothetical Business using WACC

I’m going to take a different approach here to answer the questions. Here is a hypothetical business: Acme Electric Inc. I have used the WACC approach to prove that the project is viable.

Here is a brief description of the business.

  • 20 years in the Electrical maintenance, installation and design of electrical systems
  • Very small debt ratio
  • Gross sales 2.5 million /year
  • Privately owned corporation
  • 50 + employees

Project: Installation and ownership of a 75 megawatt wind farm in the Pocono Mountains, Pa. Owner and operator of the wind farm will be Acme Electric. Land is owned by Acme Electric Inc. Total cost of the project will be 450 million with the following.

Using the XL spreadsheet I came up with the following: Cost of Equity (CAPM)

  • Equity Risk Free Rate – 3%
  • Nova Beta – 1.5
  • Expected Market Risk Premium – 6%
  • Cost of Equity – 12%
  • Market Rate of Return – 9%
  • WACC – 11.1%

The WACC is good enough to get investors to look into the project. Acme Electric will need to get investors to finance 350 million of the project.

They have a few options here.

  1. Apply for government financing or grants
  2. Have a financial company issue 20 year non-rated bonds
  3. Sell stock in the company
  4. Go public and have and ISO
  5. Apply for a conventional loan

They may need to do a combination of some of them.

Acme will also need to supply a financial statement done by a CPA to any institutions looking to invest. This is a doable project with a profitable return and according to a Bloomsburg’s article, “Equity buyers qualified for a tax benefit and one of the debt components offered a yield of about 7 percent, he said. “We raised the money in about six weeks,” he said. “There are a lot of opportunities for smaller-scale wind farm operations.” [1]

Understanding the weighted average cost of capital (WACC) is key to determining if investors will consider financing the project. The investors want to know what the rate the company is expected to pay. Anyone that invests wants to know two things, what is my rate of return and what are my risks? Doing a WACC gives an estimated return on the project. Supplying a certified financial history of the company along with knowing the Beta supplies a good understanding of the risks

[1] http://www.bloomberg.com/news/2012-05-15/small-u-s-wind-farms-to-grow-as-tax-incentives-expand.html

Convincing Investors

The major point to make to a potential funder is that by investing in my renewable energy project, they will make a profit. Renewable energy is the future, but I do believe that most people already know that. To convince an investor to put money into my project I need to show that my renewable project will make them money. To do this I need to have a complete business plan drawn up. The equipment that I need and the cost, projected number of employees, a marketing campaign to get my project known to the public and an estimated time period of return. I think another great thing to show would be that there are other investors willing to invest. By having more investors that gives each investor a little security that other people believe that the idea is profitable and they aren’t as much at risk.

 

Return on Equity is the best process to explain the potential for success. Return on Investment is good, but ROE encompasses everything that goes into a business, therefore giving investors a more realistic idea of how profitable a business will be. Net Present value would also be great to show since it portrays cash flow over a period of time. This is great because then investors can see what cash flows are going to look like over short or long periods of time to assess if the business will be successful in the long run.

Investing in Renewable Energy: Hammonds

Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?

The biggest thing to focus on when explaining a renewable energy enterprise to a potential investor is the growth the industry is expected to experience in the near future.  As the supply of non-renewable energy sources dwindle and their cost to the consumer rises, the demand for renewable energy sources will rise.  This guarantees a demand for my product and a very strong chance of a return on their investment.  After establishing the demand for my product, I would need to demonstrate my experience in the industry and my ability to turn invested capital into profit and grow my enterprise.  It would also be wise to explain how investing in renewable energy reflects well upon the investor.

What finance-based processes would I use to explain our potential for success?

Return on Investment (ROI) and net present value (NPV) are two simple and easy to understand calculations that reflect the funds invested and the gains on said investment.  Keeping the calculations simple in the short term with ROI is beneficial as it simplifies the figures to what amounts to the viability of a project .  Using NPV clearly shows the money invested, when the investment begins to turn positive returns, and how much value is added to the enterprise after the investment.  These two figures combined can illustrate a strong incentive to invest in a renewable energy enterprise.

Lesson 8: Invest in My Company – Rob Fulton

One important point to make is that renewable energy will become increasingly critical to meeting the energy demand of the world. As more people become educated on sustainability, the demand for clean energy will increase. At this point in time, clean energy points towards renewables, which are naturally replenishing and work to reduce carbon emissions. Show the investor that you have a plan for growth. Explain how ongoing mitigation efforts are changing strategies in various parts of the nation – with REC policies stimulating the use of renewable energy.

Why is this important for an investor to know? They must have confidence that they are putting money into a viable product; one that will have an expanding customer base, producing profits. For example, solar PV energy is growing in demand. Presently, it is largely dependent on governmental subsidies/incentives. This information can turn an investor away. However, having a business model that will not rely on incentives can influence potential investors to invest. Showing that a company can sustain sales and operations, by providing not only sales, but continual service in maintenance and repairs can boost revenues. Also, material costs are projected to decrease in the next decade, lowering financial outlay for supplies. Furthermore, showing that maintaining good personnel on the payroll is a model for success, less turnover will reduce training costs and shows stability within the company. When talking with investors I need to talk in “specifics” when pointing out the profit potential of my company.

Even more importantly, when talking with potential investors, I need to convey that I know exactly what they expect from their investment. This can be done by providing projections for sales growth and calculating a positive NPV for an investment will entice investments. Additionally, I must tell the investors what I intend to do with their money. If I am going to use it for advertising, I need to demonstrate an effective advertising plan, with minimal costs, that will also show how marketing the business will grow sales.

Bottom line is to show that my business is in line with expanding into a larger customer base and that the company will be run as lean as possible while maintaining customer satisfaction. This is important to preserve a good reputation for more business opportunities, hence more revenue and more profits for investors.

Lesson 8 – Considerations for Financing Renewable Energy

If I am asking someone to finance my renewable energy project, I need to be able to show them that I know how much it will cost and how much revenue it will earn in the future. I should have the following pieces of information to present to them:

  • System design including specified equipment and pricing
  • Quotes from several contractors for constructing the project
  • Project management timeline for the project showing the permitting process, procurement, construction, and commissioning
  • A Power Purchase Agreement with a utility or other off-taker that specifies the price at which my energy will be purchased and what the requirements are that must be met
  • A resource assessment that establishes how much potential energy production is anticipated throughout the life of the asset
  • Evidence of site control (land purchase or land leases fully executed)
  • A maintenance plan for keeping the asset online and available in order to produce energy
  • A financial analysis that shows the various sources of funding, the total up-front costs, expected maintenance costs, and expected revenues from energy production. This should contemplate insurance, taxes and interest payments, as well as incentives, rebates, and accelerated depreciation strategies. This will yield the Return on Equity for the project.

The project financials should tell the entire story for how much it will cost including all intangibles like taxes, permit fees, and insurance as well as how much revenue it can potentially earn. The resource assessment provides a guide for evaluating the potential energy production. By presenting a full accounting of costs as well as revenue, the investor can effectively calculate their Return on Investment and Return on Equity. A developer should also include credentials for all the parties involved in the project such as the contractor to assure investors that the estimates provided are reliable and that the project will be completed on time and produce energy as expected.

David Westsmith Lesson 8 Blog

 

David Westsmith                                                                                  ENGR 312

Lesson 8

Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?

A Solar Installation Business

The “sell” to the investor is just as critical as the sell to the buyer.  Both has similar concerns however with a few exceptions.  The sell to the investor I would begin with discussions on the market  I would begin by trying to answer what are influences are now and what they are likely to be.  The local market will be highly influenced by the cost of local utilities.  Here in El Dorado County, there is no natural gas.  Two options are available to homeowner’s and both are expensive, propane and electricity provided by PG&E.  Both are disliked and the customer base is constantly complaining.  This is a tool and works in the business’s favor and needs to be disclosed to the financier.  :People are looking for alternatives so doors are open to the customer base.  Moving to labor, there are no more than three personnel needed to install even a large array.  For the sake of this paper, the average array is 5 kilowatts.  One install I participated in was  a 10 kilowatt array in Lodi, California and still there were no more than 3 of us on the job at any time.  Labor typically consists of a higher paid electrician and two laborers and lasts 3 days for a roof mount and a week or more for a ground mount.  For our business, we want to focus on roof mounts if possible as material and labor costs are significantly cheaper.  Discussing materials, it can be said that the cost is rapidly falling. Panels are much cheaper as are inverters, fuse boxes and other components. “The cumulative installed capacity of solar PV grew by around 70% in 2011. Combined with the high learning rate for solar PV and overcapacity in the manufacturing base, this growth has resulted in significant price declines over recent years.” (1) Copper wiring is the only cost that remains expensive.

 

What finance-based processes would I use to explain our potential for success?

Capital Budgeting and Net Present Value

 

Net Present Value formulas will show the basic investments made to begin and can give a decent example of future earnings.  As long as material supplies remain consistent with current trends and labor doesn’t increase   In other words, other numbers need to be considered but NPV will show what we need to have in returns with current inflation.  I do not see labor costs increasing out of proportion with the increase in installs.  Meaning that labor in installs can be very flexible.  A project can begin and while waiting for inspections and permits your crew can be moved to another install.  This eliminates labor investments when the business is expanding. Capital Budget is extremely important while in operation.  Fixed assets are trucks, tools and other sturdy, reliable measurement devices that have long term durability.  Fixed assets are unlikely to largely effect your bottom line in the short term. However, fixed costs will be considered in the capital budget.  In spite of that, I don’t see high replacement or maintenance costs effecting the capital budget severely.  Additionally, I believe the profitability index will be above one.  I also need to mention that already possess most of the fixed assets so start up is significantly lower for me.

Works Cited

(1)”Renewable Power Generation Costs in 2012: An Overview.” Www.irena.org. The International Renewable Energy Agency, 2013. Web. 20 Oct. 2014.

 

Lesson 8 – Marielle Martin

I considered this blog assignment from the perspective of a generalized renewable energy company.

Considering what I know about renewable energy, what are some of the key things I need to be able to explain to a potential funder of my project?

Long run outcomes are crucial to ‘selling’ a business idea to a potential funder. Renewable energies are luckily the perfect representative for long run focused projects. Explaining the benefits of an investment relative to competitive enterprises is important. The cost of non-renewable energies will rise a supply falls, and there is little control to be had over supply available. As a renewable energy entrepreneur, that notion, compared to expected growth in renewable energy use and a decrease in cost of implementing renewable energies, is a selling point. Getting down to the ‘nitty-gritty’ is also important to investors though.

What finance-based processes would I use to explain our potential for success?    

Using Return on Investment is a simple, straightforward approach to showing the viability and reason for doing a project, however it does not account for many variables related to taxes and extraneous fees. The Return on Equity accounts for these variables though, and is useful to potential funder persuasion. In addition to simply understanding the return, having an estimate of the value that a project adds to a business is very important. The Net Present Value shows cash flow after a certain period of time from project undertaking. Many renewable projects receive government grants too, so incorporating expected discounts further lowers the time required to achieve positive cash flow.

Solar System Investment – Mark Moore

Renewable energy projects need to be carefully researched and analyzed in order to interest any potential investors. Investors need to know how much energy the renewable source has the potential to generate and how the calculations were derived. Solar energy is infinite, so the risk of running out of this resource is essentially nil. The maintenance of a solar energy system is  less than that of other renewables, and considerably less than that of fossil fuel energy. The lifespan of solar panels are on average 30-40 years, and most warranties of solar panels cover an average of 25 years. Investing in solar energy is also very beneficial to the environment. The investment in solar will expand any investor’s portfolio to show environmental awareness, and reduction in their carbon footprint. The solar energy system will also qualify for Solar Renewable Energy Credits (SREC), which earn income through their sale to electrical suppliers in the grid. A federal tax credit of 30% for the system is another important deduction in capital cost. Solar’s extensive lifetime of producing energy make it an attractive investment option for any investor, considering demand for energy and government energy policy.

 

The potential for financial success is present for investing in solar energy. The federal tax credit reduces the upfront investment by 30% and the IRS allows for accelerated  depreciation over a 6 year span. Of course, the most important financial concern to an investor is return on investment (ROI). The US T-Bill has a yield of 2.98% for a 30 year investment. The S&P 500 has an average return of approximately 10%. There are many risks involved with any investment, but the risk analysis for energy demand has a low beta. The internal rate of return (IRR) is a good metric to determine the rate of growth a project is expected to generate. The weighted average cost of capital (WACC) is another analysis to show how capital structure is used, which will help make the decision to invest. The net present value (NPV) is possibly the best financial analysis to determine the value and profitability of an investment. NPV gives results based on cash flows discounted at WACC and proves whether a project is financially worthwhile.

 

According to the National Renewable Energy Laboratory (NREL), the long-term decline in installed PV system prices is clearly the result of reductions in both module and non-module costs, and module costs have declined at a faster pace, especially over the past several years. In addition, the NREL states that analysts project that PV price trends will remain in their downward trajectory in the near term (NREL, 2012). Technology is reducing the cost of capital for solar investment and the government has incentives in place to reduce upfront costs. The investment in a solar renewable energy system is a good, sound investment decision.

 

National Renewable Energy Laboratory (NREL). (2012). Photovoltaic (PV) Pricing Trends:       Historical, Recent, and Near-Term Projections. Retrieved October 13, 2014,

from http://nrel.gov/docs/fyosti/56776.pdf.

 

The Cost of Capital and Why It Matters

When presenting a business proposal to savvy investors, there are several key criteria they will want covered.  First of which would be the sources of my existing funding, if any.  Am I reinvesting money from existing cash flow generating projects or is this all a brand new investment offering?  Investors will also want to know how much experience I have in the chosen field.  Do I have a portfolio of previous projects on which I’ve worked?  A proven track record means a lot especially in a field such as renewable energy where people with significant experience can be hard to find.  With renewable energy requiring more of a venture capital investor, I may also be asked my thoughts on the role of renewables and whether I am more interested profit or principle.  Also the corollary, if I believe renewable energy investment is something that must be “wanted” beyond the potential for positive return; therefore, I need an investor whom shares that vision.  If not, I will find myself battling for investment dollars with traditional investments that could early exhibit a track record of higher return on capital expenditure.

As far as finance processes I would use to sell my project, I believe the main two would be return on investment and net present value.  Return on investment, or ROI is a simple calculation of the percentage gain or loss of a particular investment over a period of time.  ROI is calculated using three criteria, cost of investment, gain on investment, and the difference between the two values.  It is a quick and dirty calculation that does not take into effect the effects of inflation or the opportunity cost of investing in a higher-return investment.  ROI works best for short-term projects.  Complementing ROI is net present value (NPV), which gives the investor a tangible figure of the overall value of their investment discounted back through years of inflation and opportunity cost via a hurdle rate into a value given in “today’s dollars.”  This discount rate could vary from project to project depending on scope and even from investor to investor as one may demand a rate of 12% versus 8% for another.  Regardless of the investor, the value will almost certainly be significantly greater than the expected inflation rate since sane investors could simply open a savings account if he or she desired to watch their money’s value erode.  NPV is an excellent tool for comparing longer term investments.  No matter how good the sales technique for an investment is, it always comes down to what I will make of the investor’s money.

http://tipenergy.com/energy-blog/2013/8/23/net-present-value-solar-development-basics

http://www.investopedia.com/terms/r/returnoninvestment.asp

Returning Profits

Obviously, much of what most investors are going to be interested when investigating a renewable energy company will be the same as if they are looking at any type of business – financial statements.  An investor is going to be most interested in their potential ROI (return on investment).  If this is a new company, the business plan should include financial projections that clearly define what the balance sheet and income statement expectation may be along with outlines of the goals and exit strategy (if one exists).

In the renewable energy industry, it is likely the sales projections will depend largely on available incentive programs.  It is imperative that a new company understand what those incentives, the details on the life-cycle and the estimated value and how those incentives will affect sales.  If sales can be expected to be cut in half if the incentives are withdrawn, then that information must also be relayed to the potential investors.  Also, it is critical to provide the potential investor with a thorough risk assessment and analysis.  Although the fossil fuel industry understands and has been working with such assessments for a long period of time, it is something that the renewable energy industry needs to address.  Properly conveying the risk and mitigation solutions could take an investor off the fence and make him or her want to invest in your project (Altran GmbH & Co, 2011).

With risk management addressed, it is imperative to show potential investors how the business makes money and, most importantly, has a significant rate of return.  The best accounting method to do this, after the actual and future estimated balance sheets and income statements are prepared, is to run a return on equity (“ROE”) which takes the net income realized divided by the shareholder’s equity.  This effectively shows how much profit has been and will be generated per dollar of investment.  With some historical information, this number can also so the company’s efficiency levels.  A rise in ROE each year would indicate a strong and efficient company.  There is, however, the potential to artificially affect the ROE by having a large amount of debt or buying back shares (Financial Statement Analysis, 2014).

References

Altran GmbH & Co. (2011). Risk Quantification and Risk Managment in Renewable Energy Projects. Hamburg, Germany: Author. Retrieved October 15, 2014, from http://iea-retd.org/wp-content/uploads/2011/11/RISK-IEA-RETD-2011-6.pdf

Financial Statement Analysis (2014).  Investing Answers.  InvestingAnswers, Inc. Retrieved October 15, 2014 from http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/return-equity-roe-916

Sustainable Business Meeting

First a potential funder of a project should know the purpose of your business.  What is your method of sustainability, will you be building / and or installing PV grids, are you in the car market, SREC’s, alternative fuels?  There are so many opportunities out there; therefore your mission should be clear to the potential financier. He/ she would not want you be distracted.

Second, what is your company’s background?  Have you taken on a large similar project before and been successful.  If not…why not?  This is a good time to use a SWOT analysis.  What are your strengths, weaknesses, opportunities and threats?  What are the projects?

Next, real money and business can be discussed:

If you had any years or quarters of loss….be prepared to explain.

Be sure to explain

The rate of return of the project
 • Present, annual, and future worth of the project
• Before tax vs after tax cash flow of the project
• Net Present Value vs Projected Value of the project

Finally close the meeting by expressing the significance of the project to your market (and if possible the investor!)  Make sure that they know that there is a demand for your project.  

Ask if there are any questions, explain, and be sure thank everyone.

http://www.consultants-on-line.com/img/SWOT%20Analysis%20Example%20Template.jpg.  

-Reichart