Striking an accurate valuation on solar energy projects is a perennial source of tension and disagreement between industry regulators, developers and debt and equity investors. It is a topic that is often complex and always important and one that has been comprehensively explained in a recent white paper published by U.S. trade association, Solar Energy Industries Association (SEIA).
Vouching best practice and warning of the most common pitfalls that arise during solar assets valuation, the white paper delivers a thorough analysis of the importance of accurate valuation, the purposes of valuation, and the various means by which such a valuation can be achieved.
SEIA report that the most common valuations of solar assets utilize the Fair Market Valuation (FMV) approach, and it is from an FMV standpoint which their white paper draws its hypotheses.
Valuing solar assets that do not already possess a readily available quoted market price can be best achieved via three approaches, the paper reports: a cost-based approach; an income-based approach, or a market-based approach.
Each approach has its own strengths and weaknesses, and the SEIA paper carefully explains and dissects these three tenets.
For example, a cost-based approach to valuing solar generation assets is useful for estimating FMV "under the premise that a market participant would pay no more for an asset than their cost to develop an asset of equivalent utility." However, such an approach can be unforgiving and rigid in an industry where power purchase agreements (PPA), local incentives or state jurisdictions, and projected future earnings must be taken into account.
Equally, the paper reports, an income-based approach (generally developed using the discounted cash flow method, or DCF) also brings inherent valuation difficulties, such as a reliance on projection "covering the estimated useful life of the system," or estimating the long-term equity and debt weighting of an installation.
Finally, SEIAs white paper examines a market-based approach, concluding that although this is often the most widespread manner in which solar assets are valued, there are obvious pitfalls involved. Chief among them is an over-reliance on market price data that is not reasonably comparable because of differences in location (state differences, local demand etc) and asset size.
SEIAs white paper concludes that "accurate, rigorous, third-party appraisals are critical to proper evaluation of solar energy generation assets," and that reaching an accurate conclusion that pleases all parties is often extremely difficult. If all three approaches (cost, income and market) result in a reasonable range of indications, SEIA advises, then all three should be given equal weighting when valuations are being calculated.