Why "Debt Fraction" limits the LCOE?

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Ezequiel Ferrer
Why "Debt Fraction" limits the LCOE?

Hi,

I want to assess a Parabolic Trough plant, and when the debt fraction is above 60% the result for the levelized cost of energy with or without incentives (30% ITC) is exactly the same. Is this normal? I don't understand why this happens.

Thanks in advance.

Paul Gilman

The effect of debt fraction on the LCOE for the utility financing options can be confusing because it determines both the size of annual debt payments and the size of tax deductions (SAM assumes that debt interest payments are a tax-deductible expense). SAM also assumes that the project has sufficient tax appetite to benefit from the tax deduction. It looks like in your case, for debt fractions above 60%, the value of the annual tax deductions is much greater than the value of the one-time 30% tax credit (ITC), so its value is much less significant than the value of the deduction.

Do you think that explains what is happening with your analysis?

Best regards,
Paul.

tric

Hello!

I have encountered this behaviour as well.
In my case the reason was the debt service coverage ratio. For high debt fractions, which make the covering of the debt service from revenues more difficult, the LCOE need to remain high to cover these payments and to meet the specified DSCR value. In this case you will notice that the LCOE remain constant when switchting between 0% and 30% ITC, but the IRR will be vastly increased with ITC, as it will show up as a big tax saving/payment to the benefit of the equity holders in year one.
Maybe this helps as well.

Regards
Timo

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