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.

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

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#

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.

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

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.

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/

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>.

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

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.

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.

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                                                                                  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.

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.

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