How do you value alternative energy companies?
I was wondering if someone can explain how does one value alternative energy companies (solar for example). Considering that most of them have negative EBITDA, we cannot really use EV/EBITDA unless we somehow account for it. What are the statistics that we look at in order to recognize which company is better than the other. Also, if someone can explain how do they become profitable after government subsidiaries (with actual examples, if possible) that would be great.
Valuation
Best - Income Approach - DCF
2nd Best - Market Approach
i. Use Transactions Comps,
ii. for the Comparable Companies method, use forward Earnings estimates for the comps. I.e. - EV/EBITDA 10, 11, 12 = Multiple apply to Target EBITDA.
If you are valuing companies with projects in the pipeline then do a sum of parts DCF. Ensure in the DCF you account for the Generation, NCF, Merchant Energy Prices, Capacity Prices and REC's, or PPA contracts
Government Incentives
If the company is a manufacturer then the gov't incentives are irrelevant, except if is also in the development business.
The gov’t incentives are for generators, I.E. a Wind/Solar Farm Owner. Wind - PTC Production Tax Credits or Federal Grant, PTC = 2.1c/kwh, Fed Grant same as Solar (see below).
Solar (PV and Thermal) - Federal Grant, reverts back to ITC in 2012, 30% (cash back) of Equipment part of Solar Power Gen.
This is actually very incorrect. Government policy has recently changed and allows manufacturers to apply fot ITC/cash grant credit. The majority of alternative energy companies are private (excluding traditional silicon PV manufacturers, which is a mature market) so there is really no way to value them. For the public companies, EBITDA valuation is the most relevant - it is not true that most are cash negative. If you want more specific insight message me. These posts are incorrect.
DCF if possible. Depending on what it is, may not be difficult. I.e. for wind farms, most of them have PPA's so it's pretty easy.
Comp doesn't have to be EV/EBITDA, can also do EV/MW (megawatt of capacity)... if they have a pipeline you usually just do sum of the parts - DCF what you can and give value to the pipeline by using comp and then risking it (25% etc.)
Gov't incentives can come in many forms... tax credits etc. For developers, they can also incentivize an industry (i.e. solar) but having a mandate to purchase solar energy at a certain price (i.e. sign a PPA for a price for 20 years).
“If the government is going to be giving away money, it’s our fiduciary responsibility to take it on behalf of our investors,”
How do you value alternative energy companies? (Originally Posted: 09/17/2009)
I was wondering if someone can explain how does one value alternative energy companies (solar for example). Considering that most of them have negative EBITDA, we cannot really use EV/EBITDA unless we somehow account for it. What are the statistics that we look at in order to recognize which company is better than the other. Also, if someone can explain how do they become profitable after government subsidiaries (with actual examples, if possible) that would be great.
That’s a good explanation. I have also taken to doing an EV/Actual Generation, in addition to EV/MW(Name plate). EV/Actual Gen gives me an idea of the efficiency of a system and the necessary starting PPA to make a deal viable. This worked very well when I was comparing PV and Solar Tower systems for a pitch to a CA utility.
That’s a good explanation. I have also taken to doing an EV/Actual Generation, in addition to EV/MW(Name plate). EV/Actual Gen gives me an idea of the efficiency of a system and the necessary starting PPA to make a deal viable. This worked very well when I was comparing PV and Solar Tower systems for a pitch to a CA utility.
Not an expert, but I'm really interested in the sector so I've done some reading. I'll answer your second question, since it's the least vague of the two.
First, you're going to have to be more specific. Is this a solar power developer or panel manufacturer? Government sponsorship of these two types of companies is very different. A panel manufacturer might get cheap capital (i.e. Solyndra) from a government-run fund, or tax incentives. Manufacturing is NOT where the money is, since panels have become commoditized. The caveat is that there is an incredible amount of room for innovation in solar panel manufacturing. Solar panels generally only convert a fraction of the energy from the sun, so companies that can break efficiency barriers (i.e. convert more solar energy into power) may have a bright (sorry) future. Still, since these efficiency gains will likely be incremental and non-localized, I'll stick with my initial claim that there is no money in panel manufacturing. So, as a partial answer to your first question, if you're looking to value a panel manufacturer, DON'T, it's a shit investment (i.e. Solyndra).
The money is all in solar power development - actually buying panels and land, and generating energy. Government assistance can come in the form of cheap capital, tax incentives, cheap land, and preferential power rates (look up "Feed-in Tariff"). The two most important methods of assistance are cheap land and preferential power rates. To really understand alternative energy, you have to think of it as a real estate investment. Instead of earning rent from tenants, you earn it from power distributors. So an important form of assistance is providing cheap government-owned land to developers to lower startup costs. This is really one of the biggest barriers to full-scale solar power development in the US.
The most important method of support is preferential power rates. Renewable energy would not be viable for private investors without preferential rates. Again, just look up feed-in tariffs (FiT) on Wiki - it has everything you need to know. The gist of FiT programs is that governments guarantee above-market rates to solar power developers. In Ontario (Canada... where I live), the government guarantees a 20 year contract for $0.82 per kWh to any owner of a residential property who builds a
can you pls expand a bit more on the execution risk? Thanks.
Thank you guys, it was really helpful.
currently, i believe most equity research analysts use a P/E or EV/Rev multiple on 2010 numbers. I have not seen EV/MW being used, but would greatly appreciate it if someone could give me examples of analysts using that metric.
But arent't most earnings negative even in 2010. Many companies also have good revenue but still margins are negative. I was wondering if someone could give me an idea of where I can get a better understanding of how to value solar and update myself on government regulation easily. Do we get Actual Generation and MW from the company's websites or is there an easier way?
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