Feb 7, 20222 min read

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.

info from Investopedia

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

Table 3 - Financial assumptions of the base cash flow model

Cashflow Model

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Cash Flow Model Results

Figure 1 - Net and Cumulative cashflow of base model

Table 3 - Debt service cover ratio (DSCR) and Interest cover ratio (ICR) of Base Model

Table 4 - Equity IRR and Project IRR (leveraged and unleveraged) of Base Model

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.