Debt Fraction

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ebleckin
Topic Author

04 Aug 2014 23:40 #2454 by ebleckin

Debt Fraction was created by ebleckin

I am noticing that the commercial PPA price for a project seems to be most sensitive to the debt fraction of the project, and I am not sure I understand exactly what is occurring when a large percentage of the project is financed? I see a small initial capitol investment or down payment, and a large 2nd year cash flow reflecting tax incentives, but why are the following yearly cash flows negative? Are the taxes and maintenance etc. greater than the small revenue generated by such a low ppa price? Why is the PPA price so low? I know that since the NPV is negative this is not a feasible project, but I am wondering if you could explain intuitively what is occurring when you finance large portions of the project.

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Paul Gilman

05 Aug 2014 16:09 #2455 by Paul Gilman

Replied by Paul Gilman on topic Debt Fraction

The answers to your questions depend on the assumptions you've made. For PPA projects, SAM assumes that the debt interest payments are tax deductible, so a higher debt fraction means a lower initial investment cost in Year 0, and higher debt payments in out years, but also higher income tax deductions in the out years.
Here are some other support forum discussion that might help:
sam.nrel.gov/content/why-debt-fraction-limits-lcoe
sam.nrel.gov/node/68894
Also, you may be interested in the webinar we gave on SAM's PPA models:
sam.nrel.gov/content/power-purchase-agreement-ppa-financial-models-sam-2013115-webinar-june-2013
Best regards,

Paul.
 
 

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