On-shore Wind farm Simple Cashflow Model Example in Norway
Updated: Apr 11, 2022
What is a Cash Flow?
The cash flow model is a valuation method used to estimate the value of an investment based on its expected future cash flows. Cash flow model analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. This applies to the decisions of investors in companies or securities, such as acquiring a company or buying a stock, and for business owners and managers looking to make capital budgeting or operating expenditures decisions.
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Cash flow Model Assumptions
General, Technical and Financial assumptions considered in this cash flow model example are listed below in Tables 1 to 3.
General Assumptions
Assumption | Value | Unit | Description |
Currency - Euro | EUR | € | Whilst the legal currency in Norway is the Kroner, all financial values shown herein are given in EUR unless stated otherwise. |
Inflation rate | 2.0 | % | Norway 2026 Projected inflation rate is assumed at 2% as found in (Statista, 2021). |
Taxation | 22 | % | Norway 2026 Projected inflation rate is assumed at 2% as found in (Statista, 2021) |
WTGs life expectancy | 16.5 | Years | The WTGs expectancy of 16.5 years is assumed for the purpose of determining asset depreciation of the WTGs |
Table 1 - General assumptions of the base cash flow model
Technical Assumptions
Assumption | Value | Unit | Description |
Annual energy production | 750,000 | MWh/annum | Annual energy production assumed for the base cash flow model is: P50 - 750,000 MWh/annum Annual energy production assumed for the purpose of sensitivity analysis is: P60 - 725,000 MWh/annum & P50 - 750,000 MWh/annum |
Long term power purchase contract (PPA) with Norway-based industrial groups and/or utilities | 52.5 | EUR/MWh | A PPA possible value agreed is ranging between EUR45.00/MWh to EUR60.00/MWh An average value of EUR52.5/MWh was chosen to allow a sensitivity test to be carried out later in this report. |
Wind turbine yearly performance decline | 1.57 | %/annum | As found by Byrne et al., performance deterioration is nonlinear as years pass by but an estimate average of 1.57% is accounted for this cashflow (Byrne, et al., 2020) |
Table 2 - Technical assumptions of the base cash flow model
Financial Assumptions
Assumption | Value | Unit | Description |
Construction costs | 300,000,000 | € | Construction of WTGs foundations, maintenance facilities, transmission facilities, etc. |
Pre – development costs | 15,000,000 | € | As per Deloitte, site feasibility studies account for 3-7% (Deloitte, 2014). For this base model a 5% of the construction cost was assumed as pre-development costs which total to €15million. Procurement and financial advisory services are also included. |
Operating and Maintenance (O&M) costs | 35.7 | EUR/kW/annum | The O&M costs are calculated based on Norway average value of 35.7 EUR/kW as given in the IRENA Renewable power generation costs in 2020 report (IRENA, 2020). O&M costs are automatically calculated based on the energy production of P50 or P60 as selected in cashflow model spreadsheet. |
Decommissioning cost | NOT INCLUDED | N/A | Since the cashflow model is carried for a period of 20 years and a total operational period of 16.5 years (before the decommissioning of WTGs) decommissioning costs are not included in this cashflow model. |
Financing structure | 75D/25E | ratio | A gearing ratio of 75% was selected, found reasonable as indicated in (Blaiklock, 2014). It could be considered a conservative gearing ratio, however as it is used for the base model, further adjustment is possible in further analysis of the cashflow bankability. Also as found in the financing and investment trends of Wind Europe, since 2013, 90% of onshore wind farm projects were based on project finance which suggests the technology maturity and represents a safe investment to debt providers (Wind Europe, 2020) |
Debt service – Commercial bank | 50 | % Of total capital | A 50-50 Commercial to Development bank debt service is assumed for the base model, with grace period and repayment schedule being aligned for both banks |
Debt service – Development bank | 50 | % Of total capital | >> |
Interest rate -Commercial bank | 3.5 | % | Standard interest rate as provided in the project brief. However, in a real-life situation this rate would potentially increase slightly in the upcoming years |
Interest rate -Development bank | 2.0 | % | >> |
Loan tenor | 12 | Years | The loan tenor is set as fixed for 12 years as per the project brief |
Arrangement and front end-fees | 1.5 | % | |
Salvage rate | 20 | % | Depreciation of the asset could be written off from taxation. Norway salvage rate in 2020 is at 20% (KPMG, 2020) |
Interest payments and asset depreciation are tax deductibles | N/A | N/A | As per PwC, “As a general rule, interest expenses are deductible irrespective of whether the debt has any connection with the earning of income or not”(PwC, 2021) |
Debt grace period | 2 | Years | As the first year of construction (2023) and first year of operations (Q3 2024), the SPC doesn’t make any profit, no loan repayment is going to be made till 2025 |
Dividends to shareholders | 90 | % | 90% of the net cash flow goes to shareholders profit |
Cash reserve | 10 | % | Cash reserves are going to the SPC accounts, purposed for either unpredictable maintenance or further expansion of the project in the future years |
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Table 3 - Financial assumptions of the base cash flow model
Cashflow Model
Cash Flow Model Results
Base Cash Flow Model results in summary
Based on the cash flow model shown above the project under investigation is deemed viable and profitable to the equity investors involved. As shown in Table 4, an equity IRR of 11% and project IRR of 5.33% is calculated in the overall 20-year period assessed in the model. A low DSCR of 1.03 is found in year 5 due to the first loan repayment happening that year (see Table 3).
The DSCR however increases to a high of 1.57 in the last year of the loan tenor. The minimum interest cover ratio of 2.93 as seen in Table 3, indicates that the SPC has sufficient revenues to pay interest payments. Figure 1 shows the net and cumulative cash flow of the project which converges to positive for both in the period the model was considered.
As found in literature a minimum DSCR of 1.21 is suggested for onshore projects of base case P90 confidence of forecast with no dividends paid when DSCR is less than 1.14. Also, a gearing ratio of 75D/25E is suggested to be common with wind projects (Blaiklock, 2014).
Overall, the project is deemed medium risk however due to the low DSCR of the first year of operations it is suggested that further debt sculpting is implemented to increase the minimum DSCR and minimize the risk of debt service default.
References
Statista, 2021. Norway: Inflation rate from 1986 to 2026. [Online] Available at: https://www.statista.com/statistics/327359/inflation-rate-in-norway/
KPMG, 2020. Taxation of wind power - 2020. [Online] Available at: https://assets.kpmg/content/dam/kpmg/no/pdf/2020/12/The_Power_Of_Nature_Taxation_Of_Wind_Power_2020.pdf
Byrne, R., Astolfi, D., F. C. & Hewitt, N. J., 2020. A Study of Wind Turbine Performance Decline with. MDPI - Energies 2020, 13(2086).
Deloitte, 2014. Establishing the investment case of Wind power , Copenhagen: Deloitte.
IRENA, 2020. Renewable power generation costs in 2020, s.l.: International Renewable Energy Association .
Blaiklock, M., 2014. Infrastructure Finance Handbook : Principles, Practice and Experience. London: Euromoney Books.
Wind Europe, 2020. Financing and investment trends - The European wind industry in 2019. [Online] Available at: https://windeurope.org/wp-content/uploads/files/about-wind/reports/Financing-and-Investment-Trends-2019.pdf