Technical Questions - Renewable Project

For a renewable (solar) project that has a finite life (50 years, that is the useful life of assets), how does a PE firm determines the following:
Entry multiples
Exit multiples.
Is there any consideration given the assets have a finite life?

  1. Entry multiple
  2. Exit multiple

Is there any consideration given the assets have a finite life?

 

By evaluating the cash flow profile of the project. Contracted cash flows are awesome as provide more revenue visibility. Your hurdle rate / required return determines the price you pay and then divide that price by the first year net production (mwH) of the project and its EBITDA to benchmark against the market.   

 
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If an asset has a finite life then you only value it until the end of its life. There might be some residual value (the metal from the physical solar panels and interconnection lines) and some residual costs (labor to take apart the project). You would take a rough view of that residual value / cost and that would be your “exit value” on the project - it would not be based on a multiple. If you wanted to get really aggressive then maybe you would take a view on repowering the project at the end of its useful life instead and assume some set of costs, a new contract, etc… which you could translate to a “multiple” on the projects last regular-way useful life year, but that would be an unusual approach.

The entry would be based on a hold-to-life dividend discount model, not based on a multiple. In general, multiples are just an approximation of value as a shortcut to a proper DCF. With a defined useful life you just focus on the cash flows of the project during its useful life. Also, as a side note, multiples in the renewables space are particularly noisy and complicated because of tax equity. 

The one change to this broad comment would be a renewable platform as opposed to a single project. THEN you might treat everything as more of a going concern and think about it in terms of growth of the platform, replenishment of the project pipeline, etc... I’d always cross-check against a hold to life version based on the operating and known development projects to understand what I am assuming about value attributable to steady-state vs. growth and not accidentally overpaying for speculative growth.

 

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