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System Advisor Model (SAM)

Why is the All-equity option more expensive than debt options?

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mcs41
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02 Dec 2017 21:30 #5922 by mcs41

Why is the All-equity option more expensive than debt options? was created by mcs41

Hello,
I am having some trouble with explaining why the All-equity solar arrays would have a higher levelized cost of energy than projects with debt. Those are the results that I have found and I have read the same conclusion in some of NREL's published work that uses SAM (See reference below). It seems like the All-equity costs would be cheaper than the debt options.

Here are my guesses as to why they aren't. The All-equity option implies that outside players are buying equity from the project so the primary project owners have to pay out a portion of the profits. From what I have read in the description of the All-equity model, I don't think this is the case since.
My other hypothesis is that if the discount rate is higher than the interest rate the All-equity option becomes more expensive than a project with debt. What are your thoughts on why the All-equity option is more expensive?

Best,
Mahayla

Mendelsohn, M., Kreycik, C., Bird, L., Schwabe, P., Cory, K. (2012, March). The Impact of Financial Structure on the Cost of Solar Energy. Golden, CO: National Renewable Energy Laboratory.

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pgilman

04 Dec 2017 16:46 #5923 by pgilman

Replied by pgilman on topic Why is the All-equity option more expensive than debt options?

Dear Mahayla,

In general, the effect of debt on a project's cash flow is to reduce the capital cost in Year 0, and to reduce income taxes during the debt repayment period when the interest portion of the payments are tax deductible. For the partnership flip model, the pre-flip and post-flip percentages you specify for the tax investor and developer on the Financial Parameters input page determine how that tax benefit is shared between the two partners.

In an "all equity" arrangement where there is no debt, the tax burden is higher because there is no debt interest deduction available.

Best regards,
Paul.

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