REP Project Planning & Financial Analysis 5 — Questions and Answers
Question 1: A developer is comparing a 30-year project life to a 25-year project life for the same wind farm. Assuming equal annual cash flows, the 30-year scenario will have a:
- Lower IRR and lower NPV
- Higher IRR and lower NPV
- Lower IRR but potentially higher NPV depending on the discount rate (Correct answer)
- Higher IRR and higher NPV in all cases
Correct answer: Lower IRR but potentially higher NPV depending on the discount rate
A longer project life adds cash flows that increase NPV but dilutes the IRR by extending the payback period if early-year returns are high.
Question 2: In renewable energy project development, 'notice to proceed' (NTP) is most significant because it:
- Triggers the start of the PPA price escalator
- Releases the EPC contractor to begin construction and starts the timeline for liquidated damages (Correct answer)
- Initiates the interconnection cost allocation study
- Authorizes the tax equity investor to claim Investment Tax Credits
Correct answer: Releases the EPC contractor to begin construction and starts the timeline for liquidated damages
NTP formally instructs the EPC contractor to mobilize and begin construction, starting the clock on the guaranteed completion date and associated LD provisions.
Question 3: Which environmental review process is required for renewable energy projects on federal land in the United States?
- State Environmental Quality Review Act (SEQRA)
- National Environmental Policy Act (NEPA) review (Correct answer)
- Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) assessment
- Resource Conservation and Recovery Act (RCRA) permit
Correct answer: National Environmental Policy Act (NEPA) review
NEPA requires federal agencies to assess the environmental impacts of proposed actions on federal land through an EA or EIS process.
Question 4: A community solar project differs from a utility-scale PPA project primarily in that:
- Community solar uses different photovoltaic technology than utility-scale solar
- Community solar subscribers receive bill credits rather than the developer selling power through a single offtake contract (Correct answer)
- Community solar projects are not eligible for federal Investment Tax Credits
- Community solar requires a capacity market contract to be financially viable
Correct answer: Community solar subscribers receive bill credits rather than the developer selling power through a single offtake contract
Community solar distributes the economic benefits of a shared solar array to multiple subscribers through utility bill credits, rather than a single-buyer PPA.
Question 5: Which risk mitigation tool protects a renewable energy project from revenue loss caused by grid curtailment beyond the developer's control?
- Business interruption insurance
- Curtailment compensation provisions in the PPA or interconnection agreement (Correct answer)
- Performance liquidated damages from the EPC contractor
- Revenue put options purchased in financial markets
Correct answer: Curtailment compensation provisions in the PPA or interconnection agreement
PPA or interconnection agreement provisions for curtailment compensation, such as deemed energy payments, protect developers when the grid operator reduces output for system reasons.
Question 6: A geothermal project developer is conducting a 'resource risk assessment.' What is the primary uncertainty being evaluated?
- Fluctuations in electricity market prices over the project life
- Uncertainty about the temperature, flow rate, and sustainability of the underground reservoir (Correct answer)
- Variability in O&M costs for wellfield maintenance
- Risk of regulatory changes affecting geothermal permitting
Correct answer: Uncertainty about the temperature, flow rate, and sustainability of the underground reservoir
Geothermal resource risk centers on whether the subsurface reservoir will deliver sufficient heat and fluid flow to sustain the project's rated output over time.
Question 7: When sizing the debt for a renewable energy project, lenders typically use the P90 energy estimate rather than P50 because:
- P90 results in a larger loan amount, benefiting the developer
- P90 is a conservative estimate that ensures debt service can be covered even in below-average energy years (Correct answer)
- P90 is required by federal regulations for non-recourse project finance
- P90 estimates are easier to calculate and audit than P50 estimates
Correct answer: P90 is a conservative estimate that ensures debt service can be covered even in below-average energy years
Using the conservative P90 estimate for debt sizing ensures the project can service its debt obligations even if actual energy output is below the median expectation.
REP Project Planning & Financial Analysis 5
A developer is comparing a 30-year project life to a 25-year project life for the same wind farm.
Assuming equal annual cash flows, the 30-year scenario will have a: