REP Project Finance and Economics 2

Question 1

What does the term 'merchant risk' refer to in renewable energy project finance?

Accepted Answer

The risk that energy prices will fall below projections after a PPA expires

Answer

The risk that equipment suppliers will raise prices mid-project

Answer

The risk that the grid operator will curtail output without compensation

Answer

The risk that construction contractors will default on warranties

Question 2

Which financial ratio measures a project's ability to service debt from operating cash flow over the life of the loan?

Accepted Answer

Loan life coverage ratio (LLCR)

Answer

Return on equity (ROE)

Answer

Net present value (NPV)

Answer

Internal rate of return (IRR)

Question 3

A solar project has annual energy production of 50,000 MWh and a PPA price of $45/MWh. If O&M costs are $800,000/year and debt service is $900,000/year, what is the annual DSCR?

Accepted Answer

1.47

Answer

1.18

Answer

1.63

Answer

0.94

Question 4

In a tax equity partnership flip structure, what happens after the 'flip' point is reached?

Accepted Answer

The allocation of cash and tax benefits shifts, with the sponsor receiving a larger share

Answer

The tax equity investor exits the project entirely and transfers ownership to the sponsor

Answer

The project refinances all outstanding debt at a lower interest rate

Answer

The PPA price automatically resets to the prevailing market rate

Question 5

Which risk is BEST mitigated by a fixed-price, date-certain EPC contract in a renewable energy project?

Accepted Answer

Construction cost overrun and delay risk

Answer

Offtake risk

Answer

Resource risk

Answer

Interconnection curtailment risk

Question 6

What is the primary purpose of a debt service reserve account (DSRA) in project finance?

Accepted Answer

To provide liquidity to cover debt payments if operating cash flow falls short

Answer

To fund major equipment replacements at end of useful life

Answer

To hold proceeds from equity contributions until construction is complete

Answer

To accumulate funds for decommissioning and site restoration

Question 7

How does accelerated depreciation under MACRS benefit a renewable energy project in the United States?

Accepted Answer

It allows faster deduction of asset costs, reducing taxable income in early years and improving after-tax cash flow

Answer

It increases the project's taxable income, attracting more tax equity investors

Answer

It extends the useful life of assets on the balance sheet, lowering annual depreciation charges

Answer

It qualifies the project for additional state-level property tax exemptions