As a developer of renewable energy projects, it is essential to understand how the value of your project is determined. But how do you determine the value of a project that is not yet operational? The answer often lies in the potential of the project. There are ways to calculate value even before an energy project is actually in operation, for example by looking at expected revenues, risks, location, availability of subsidies and the financial structures used.  

The key to a successful renewable energy project has to do with smart financing. With the right mix of financial resources, the project becomes not only feasible, but also attractive to investors. We guide clients through complex financing processes, identify available subsidies, guide acquisition processes and optimise financial strategies.

In this blog, we discuss a number of ways to determine the value of an existing or future renewable energy project. The choice of a valuation method depends on the purpose of the valuation and the characteristics specific to the project, and in many cases two methods are better than one. We list here the three most commonly used valuation methods: Historical Cost, Discounted Cash Flow and Market Value. 

Historical costs

Applying this method, the starting point is: how much did the project cost? Costs include, for example, land acquisition, infrastructure, equipment and labour hours. While this gives an insight into past costs, it does not consider future cash flows. For this reason, this method is not often used if the goal is sale of the project, but is used for accounting or tax reasons.

Discounted Cash Flow (DCF)  

This method calculates the value of future cash flows discounted to the present. The DCF method therefore takes into account the time value of money and presents the cash flows. This makes the method ideally suited to long-term projects such as wind or solar farms with predictable cash flows. The accuracy of the DCF method depends heavily on the assumptions made about future cash flows and the discount rate. Small adjustments in the assumptions can have a big impact on the outcome.

Market value

By determining key metrics of the project (such as EUR/MWh), it is possible to compare the project with other energy projects. This makes this method mainly a relative valuation, so to compare projects with each other. The applicability is limited to projects with stable and predictable revenues, without unique risks, because otherwise the comparison will quickly fail. In the absence of reference transactions or in highly fluctuating markets, the DCF method could be a better alternative then.

Valuation requires tailor-made solutions

The most commonly used method for valuing renewable energy projects is definitely the discounted cash flow (DCF) method. This approach helps calculate value based on a project's future cash flows, taking into account risks and time. In addition, the historical cost and market value methods can provide valuable additional insights, especially when comparing projects or establishing the market value at a particular stage. Every project is unique and a valuation remains bespoke, depending on the specific circumstances, risks and opportunities involved.  

At Pondera, we are experts in renewable energy and understand the context needed to arrive at a correct valuation. Whether it's a new project to be developed or an operational project, we will help you to optimally identify and realise the value. For more information, contact Financial Advisors Casper Hogendoorn, Jorn Donders or Janno Heger.