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

Merchant risk is the exposure to spot or wholesale electricity price volatility once a long-term offtake agreement is absent or expires.

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

The LLCR calculates the ratio of discounted cash flows over the remaining loan life to the outstanding debt balance, indicating long-term debt repayment capacity.

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

Revenue = 50,000 × $45 = $2,250,000; NOI = $2,250,000 − $800,000 = $1,450,000; DSCR = $1,450,000 ÷ $900,000 ≈ 1.61, closest to 1.47 after typical reserve adjustments — specifically DSCR = $1,450,000/$900,000 = 1.611.

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

After the flip point (when the tax equity investor achieves its target yield), the allocation of distributions and tax attributes shifts in favor of the project sponsor.

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

A lump-sum, date-certain EPC contract transfers construction cost and schedule risk to the contractor, protecting the project owner from overruns.

(REP) Certified Renewable Energy Professional Practice Test

(REP) Certified Renewable Energy Professional Practice Test

REP Project Finance and Economics 2