2019 Deloitte Renewable Energy Seminar...2019 Deloitte Renewable Energy Seminar Powering a bright...

2019 Deloitte Renewable Energy SeminarPowering a bright futureOctober 2-4, 2019

Valuation of renewable

energy projects

Patty Tuite, Managing Director, Deloitte Transactions and Business AnalyticsPeter Hannagan, Senior Manager, Deloitte Transactions and Business Analytics

Copyright © 2019 Deloitte Development LLC. All rights reserved. 32019 Deloitte Renewable Energy Seminar

Contents

Context for discussion

Estimating fair market value

Review of ITC, cost segregation, and implications on value

Implications of partnership structure

Review of Alta Wind and Invenergy cases and their implications on value

Battery storage valuation


Valuation considerationsContext for discussion


Valuation of a new solar or wind facility in the context of a tax equity financing

Context for discussionValuation considerations


Valuation considerationsEstimating fair market value


Fair market value, as defined in U.S. Treasury regulations (Reg. §20.2031-1(b)), is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts”


Rationale and key inputsApproaches to value

Income• Rationale—Buyer would pay for

present value of economic benefits

• Key assumptions

‒ Output/yield

‒ Power price—during and after PPA

‒ Operating expenses

‒ Income tax—ITC and depreciation

‒ Life

‒ Discount rate

Cost• Rationale—Buyer would pay for

cost to replicate asset of comparable utility

• Key assumptions

‒ Replacement cost of individual components

‒ Profit on panels and EPC contract (integrated manufacturer/developer/EPC)

‒ Developer’s profit

Market• Rationale—Buyer would pay

similar price (per watt) as comparable assets have sold for recently

• Key assumptions

‒ Facility capacity (watts)

‒ Multiple ($ per watt) based on recent sales of comparable facilities


Strengths and weaknessesApproaches to value

Income• Strengths

‒ Real buyers focus on income-generating potential

‒ Reflects project-specific assumptions (PPA price, output/yield)

• Weaknesses

‒ Results can vary widely based on key assumptions (discount rate, post-PPA power pricing)

Cost• Strengths

‒ Cost assumptions typically based on actual costs—supportable and project-specific

• Weaknesses

‒ Actual cost may not be reflective of current replacement cost

‒ Little objective evidence for magnitude of developer’s profit

Market• Strengths

‒ Uses market evidence

• Weaknesses

‒ Wide ranges of value indications

‒ Difficult to capture unique characteristics of the subject project


Reconciliation of value indicationsConclusion of value

Need to come to a conclusion of fair market value• Point estimate or range

• Typically focus more on income and cost with market as a corroborating approach

• Consider project-specific facts and circumstances

•Where value indications are very different:

−Consider revisiting key assumptions

−Be able to explain difference and consider whether one approach is more reliable

−Simply calculating the average of two very different value indications is unlikely to be the right answer

Concluding on FMV by calculating the average of two very different value indications is unlikely to be the right answer Point estimate or range

Concluding on FMV by calculating the average of two very different value indications is unlikely to be the right answer Point estimate or range


Valuation considerationsImplications of partnership structure


Implications of partnership structure

What is the partnership structure and how does that affect the tax basis? Is the project based on Fair Market Value or is it based on the Capital Project cost.

• Partnership Flip

• Inverted Lease

• Sale Leaseback

Partnership Structure


Purchased Projects Example #1

For example, assume the sum of the asset fair values equals the total purchase price:

Asset Fair Value Allocated Purchase PriceSolar panels $ 60.00 $ 60.00Solar racks 12.00 12.00Wiring 7.85 7.85O&M building 0.25 0.25Furniture and fixtures 0.25 0.25Fencing 0.15 0.15Access roadways 1.50 1.50Substation / switchyard 5.00 5.00Interconnection agreement 1.00 1.00PPA with Public Utility, Inc. 12.00 12.00Total Project $ 100.00 $ 100.00



Assume the sum of the asset fair values exceeds the total purchase price (e.g., project was a “bargain”) and the assets did not constitute a trade or business:

Asset Fair Value Allocated Purchase PriceSolar panels $ 75.00 $ 65.22Solar racks 9.00 7.38Wiring 7.85 6.83O&M building 0.25 0.22Furniture and fixtures 0.25 0.22Fencing 0.15 0.13Access roadways 1.50 1.30Substation / switchyard 5.00 4.35Interconnection agreement 1.00 0.87PPA with Public Utility, Inc. 15.00 13.04Total Project $ 115.00 $ 100.00



Assume the sum of the asset fair values exceeds the total purchase price (e.g., project was a “bargain”) and the assets did constitute a trade or business:

Asset Fair Value Allocated Purchase PriceSolar panels $ 75.00 Class V $ 75.00Solar racks 9.00 Class V 9.00Wiring 7.85 Class V 7.85O&M building 0.25 Class V 0.25Furniture and fixtures 0.25 Class V 0.25Fencing 0.15 Class V 0.15Access roadways 1.50 Class V 1.50Substation / switchyard 5.00 Class V 5.00Interconnection agreement 1.00 Class VI 0.06PPA with Public Utility, Inc. 15.00 Class VI 0.94Total Project $115.00 $ 100.00



Assume the sum of the asset fair values is less than the total purchase price (e.g., project was a “bargain”) and the assets did constitute a trade or business:

Asset Fair Value Allocated Purchase Price

Solar panels $ 50.00 Class V $ 50.00

Solar racks 10.00 Class V 10.00

Wiring 7.50 Class V 7.50

O&M building 0.50 Class V 0.50

Furniture and fixtures 0.25 Class V 0.25

Fencing 0.10 Class V 0.10

Access roadways 1.15 Class V 1.15

Substation / switchyard 2.50 Class V 2.50

Interconnection agreement 1.00 Class VI 1.00

PPA with Public Utility, Inc. 12.00 Class VI 12.00

Goodwill No separate value Class VII 15.00Total Project $ 85.00 $ 100.00



Assume the sum of the asset fair values is less than the total purchase price (e.g., project was a “bargain”) and the assets did not constitute a trade or business:

Asset Fair Value Allocated Purchase Price

Solar panels $ 50.00 $ 58.82

Solar racks 10.00 11.76

Wiring 7.50 8.82

O&M building 0.50 0.59

Furniture and fixtures 0.25 0.29

Fencing 0.10 0.12

Access roadways 1.15 1.35

Substation / switchyard 2.50 2.94

Interconnection agreement 1.00 1.18

PPA with Public Utility, Inc. 12.00 14.12 Total Project $ 85.00 $100.00


Valuation considerationsReview of ITC, Cost Segregation, and implications on value


OverviewCost segregation

Cost SegregationSystematic process of investigation and allocation of capital expenditures into identified cost recovery periods.• Capitalized Costs

‒ Indirect Cost Allocation

‒ Depreciable Costs

‒ Non-depreciable Costs

‒ Amortizable Costs• Expensed Items

Results in increased depreciation benefits by properly classifying costs by distinguishing long-lived property from short-lived property based on IRC § 168 and Rev. Proc 87-56.

Examples

5-year• Wind Turbine Generators

• Solar Modules

15-year• Access Roads

• 345 kV Transmission

39-year • O&M Building

Allocated• Engineering

• Construction Permitting


OverviewProduction Tax Credit and Investment Tax Credit

Production Tax CreditAn inflation-adjusted per kilowatt-hour (“kWh”) tax credit for electricity generated by qualified energy resources and sold by the taxpayer to an unrelated person during the taxable year.The duration of the credit is 10 years after the date the facility is placed in service for all facilities placed in service after August 8, 2005.The tax credit is being phased down for wind facilities and expires for other technologies commencing construction after December 31, 2016. The phase-down for wind facilities is described as a percentage reduction in the tax credit amount described above:

Investment Tax CreditThe Energy Policy Act of 2005 allowed taxpayers that construct or acquire certain energy property to claim an energy investment tax credit (“ITC”) for the taxable year in which such property has been originally placed in service by the taxpayer. The ITC was extended for solar projects that commence construction before January 1, 2022 and wind projects that commence construction before January 1, 2020 as follows:

Wind PTC Rate Reduction

2017 2018 201920% 40% 60%

Placed in Service

2016-19

2020 2021 2022 2023 2024

Solar Residential 30% 26% 22% 0% 0% 0%

Solar Commercial 30% 26% 22% 10% 10% 0%

Begin Construction 2017 2018 2019Wind 20% 40% 60%


Key considerationsCost segregation and PTC/ITC analysis

What should be included in the tax basis for the facility?

• Purchase Price

• Financing Costs

• Development Services Agreements

• Construction Management Agreements

• Reimbursable Expenses

If the early stage development was purchased from another entity, how should the purchase price be treated?

• 1060 Allocation

• Developer’s Profit vs. Fee

What is the appropriate treatment of costs associated with the various financing vehicles for the facility?

• Construction Loan

• Permanent Loan

• Backleverage Loan

• Tax Equity

What is the partnership structure and how does that affect the tax basis?

• Partnership Flip

• Inverted Lease

• Sale Leaseback

Tax BasisPurchase Price Financing CostsPartnership Structure

MACRS Classification Amortization Life ITC Eligibility Inside/Outside Tax Basis


Integrating the processesCost segregation and ITC analysis

Before Analysis After AnalysisMACRS ITC Eligible

Owner Indirect CostsEngineering /Other Fees Allocated Owner's Engineer Allocated Capitalized Overhead Allocated Geotechnical Investigations AllocatedOwner Direct CostsSolar Panel Purchase 5-Year Yes Solar Purchase & Transportation 5-Year Yes Solar Panel Final Commissioning 5-Year YesO&M Building 39-Year NoFF&E 7-year NoBOP Contractor

Civil Work - WTG Pads 5-Year Yes O&M Building Access Road 15-Year No Solar Maintenance Roads 15-Year Yes

Inverters and Electrical System 5-Year Yes Inverters 5-Year Yes AC / DC Electrical Equipment 5-Year YesOther Construction Met Tower Procurement & Installation 5-Year Yes SCADA System 5-Year YesSubstation 345 kV Switchgear 5-Year Yes Dead End Arrestor 15-Year No

Change Order #1 Building Revisions 39-Year No Distribution Line for Service Power 20-Year NoChange Order #2 Site Grading – Solar Array 5-Year Yes

MACRS ITC EligibleOwner Indirect CostsEngineering /Other Fees Allocated TBD

Owner Direct CostsSolar Module Purchase 5-Year Yes

O&M Building 39-Year No

BOP ContractorCivil Work Unknown TBD

Inverters and Electric System 5-Year Yes

Other Construction Unknown TBD

Substation 20-Year No

Change OrdersChange Order #1 Unknown TBD

Change Order #2 Unknown TBD


Treatment: Intangible assets such as PPAs, land leases, and interconnection agreements are not ITC-eligible and not eligible to be depreciated over a 5-year MACRS life

Typical Valuation in Cost Segregation: Often included at cost (small value)

Issue: Intangible assets (especially PPA) may have significant value over and above cost if they are priced above the current “market”

Implications for Valuation: Best practice to address issue up front by addressing the valuation of the PPA in the appraisal report.

Intangible assetsCost segregation


Valuation considerationsAlta Wind and Invenergy cases


Alta Wind case

• Alta Wind Energy Center – 6 completed wind farms• Transactions – five sale-leasebacks and one outright

sale• Plaintiffs claimed 1603 grant assuming grant-eligible

basis equated to purchase price less small amounts for land and other ineligible property

• Government denied grants in excess of $200 million - basis should have been cost, not purchase price

Case background

Plaintiffs Government

˜Approx. $2.5 Btotal basis ˜$700 MM

ineligible

˜$1.8 Bgrant-eligible


Alta Wind case

• Plaintiff sued government and won• Government appealed – U.S. Court of Appeals for

Federal Circuit reversed decision• Government argued value should have been allocated

using the residual method:

‒ Tangible assets (including “turnkey” value)

‒ Intangibles

‒ Residual goodwill

Case background

Purchase price should have been allocated using the residual method under IRC Section 1060 – Special allocation rules for certain asset acquisitions


Alta Wind case

Claims court yet to rule on valuation, however key points to note:• Government sees tangible property and intangibles as

separate assets

‒ Cannot assume that the value of a project is all attributable to tangible property

‒ Separately address valuation of tangible assets, PPA, other intangibles

‒ Section 1060 rules apply in a transaction

• Government recognizes turnkey premium for tangible facility value but magnitude still in question

Valuation implications

Cannot assume that the value a project = value of tangible property


Case backgroundInvenergy case

• Bishops Hill and California Ridge wind farms• Invenergy claimed cash grant• Government paid approx. $20 million less than claimed• Invenergy sued government• Government ultimately won – Invenergy could not substantiate $50-

$60 million in development services paid to parent company (“sham” transaction)


Valuation implicationsInvenergy case

• Expect government to be very focused on the magnitude of developer fees, especially for ITC deals

• Developer fees need to be substantiated based on developer risks and responsibilities


Valuation considerationsBattery storage valuation


Battery storage valuationValuation considerations

• Primary approaches – income and cost (for new batteries)• ITC-eligibility (solar)• Useful life • Discount rate – consider composition of income stream

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

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2019 Deloitte Renewable Energy Seminar...2019 Deloitte Renewable Energy Seminar Powering a bright...

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