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.

 

Whats Behind the Wheels of Investing: Loyd

Any project in renewable energy must first begin with implementations and feedback for economics, social, and environmental policies as these are the driving forces behind sustainable development. The key elements towards successful funding and ongoing operations are analyzing the risks, costs, evaluations, and monitoring guidelines. The risks of renewable energy come with any business venture for if the objectives, costs, and effectiveness are overvalued or undervalued the system can be a failure to the bottom line. As we know, renewable energy projects must make sense to the bottom line for the opportunity cost of investments are high. “Will this project help my business more than, let’s say additional capital, technology, etc.?” Therefore, it is extremely important that the funder knows what the business is up against in terms of risk and potential costs associated with the installations and operations. In addition to understanding and evaluating the costs and risks, it should be established that continuous monitoring and evaluations are carried out and reported to compare to the primary targets. Evaluations of renewable energy systems could be as simple as keeping track of the energy base load that is collected and comparing it to the initial targets agreed to by the project funder. This would ensure the funder that the system is operating at expected targets and is operating at peak efficiency. The key elements of any large investments are understanding the costs, evaluating risks, and comparing the expected outcomes with the real outcomes to gain a complete analysis of the project.

The key elements of finance-based procedures that ensure success are evaluating and understanding the system’s return on investment, weight average cost of capital and net present value. Although, there are other cost analysis procedures that can be performed, these three should be largely used to gain strategic results reliant on the investment. First, the return on the investment (ROI) is simply the total of gain of the investment minus the cost of the investment divided by the cost of the investment. The return of the investment gives the institution a measure of efficiency to analysis or compare to other investments. Second, the evaluation of the weighted average cost of capital (WACC) displays the firm’s capital proportional weighted value which validates the risk according to the rate of return. Third, the net present value (NPV) should be calculated to determine the value and profitability of an investment. The calculation can be derived from the results of the WACC by taking the present values of the cash flows discounted at WACC. Overall, these three procedures would provide the firm to analyze the future profitability and costs of the investment.

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