- Posts: 1
IRR Help
- pgilman
27 May 2014 16:48 #2361
by pgilman
Replied by pgilman on topic IRR Help
Dear Jose,
Your model uses the Generic System performance model and Independent Power Producer financial model. The generic system model is unique among SAM's performance model in that the capacity factor is an input instead of a result -- changing the capacity factor changes the project's revenue from electricity sales.
The graph below from your file shows that capacity factors of 89% or greater, given the 12 cent/kWh PPA price with 2.5% annual escalation, 80% debt fraction at 6.5% interest over 10 years and other assumptions, the NPV and IRR increase linearly as you would expect. However, at capacity factors of less than 89%, the IRR drops to zero:
Unfortunately, I don't have a very satisfying explanation of exactly what is causing that behavior. What I can say is that, given your assumptions, the project has very high revenues compared to cost. The Year 1 after-tax cost is $9 million, and the annual after-tax cash flow in the first 10 years is between $6 million and $9 million, and much higher after that when the debt is paid off. These odd financial metrics (IRR is zero or very high, for example) tend to indicate that your assumptions are for an unrealistic project. In your case, the $0.12/kWh PPA price with 2.5% annual escalator for a project with a $1.20/W installation cost may be overly optimistic.
You can explore more by running the financial model in "Specify IRR Target" mode to see what PPA price SAM calculates for a given IRR target. In my test, with a minimum IRR target of 15%, the resulting PPA price is $0.965/kWh with an IRR of 23%, much higher than the target. These metrics are also very sensitive to the debt fraction, so you might want to experiment with different values for that assumption. For example, if I choose the "Allow SAM to pick debt fraction to minimize LCOE" option, SAM calculates a debt fraction of 70%, which is a bit lower than the 80% in your assumptions. (For the independent power producer model, SAM assumes that debt interest payments are tax deductible, so increasing the debt fraction increases both the debt cost and tax deduction benefit.)
I hope that's helpful, and sorry I could not give you a more specific answer.
Best regards,
Paul.
Your model uses the Generic System performance model and Independent Power Producer financial model. The generic system model is unique among SAM's performance model in that the capacity factor is an input instead of a result -- changing the capacity factor changes the project's revenue from electricity sales.
The graph below from your file shows that capacity factors of 89% or greater, given the 12 cent/kWh PPA price with 2.5% annual escalation, 80% debt fraction at 6.5% interest over 10 years and other assumptions, the NPV and IRR increase linearly as you would expect. However, at capacity factors of less than 89%, the IRR drops to zero:
Unfortunately, I don't have a very satisfying explanation of exactly what is causing that behavior. What I can say is that, given your assumptions, the project has very high revenues compared to cost. The Year 1 after-tax cost is $9 million, and the annual after-tax cash flow in the first 10 years is between $6 million and $9 million, and much higher after that when the debt is paid off. These odd financial metrics (IRR is zero or very high, for example) tend to indicate that your assumptions are for an unrealistic project. In your case, the $0.12/kWh PPA price with 2.5% annual escalator for a project with a $1.20/W installation cost may be overly optimistic.
You can explore more by running the financial model in "Specify IRR Target" mode to see what PPA price SAM calculates for a given IRR target. In my test, with a minimum IRR target of 15%, the resulting PPA price is $0.965/kWh with an IRR of 23%, much higher than the target. These metrics are also very sensitive to the debt fraction, so you might want to experiment with different values for that assumption. For example, if I choose the "Allow SAM to pick debt fraction to minimize LCOE" option, SAM calculates a debt fraction of 70%, which is a bit lower than the 80% in your assumptions. (For the independent power producer model, SAM assumes that debt interest payments are tax deductible, so increasing the debt fraction increases both the debt cost and tax deduction benefit.)
I hope that's helpful, and sorry I could not give you a more specific answer.
Best regards,
Paul.
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