Financing

To view the Financing page, click Financing in the main window's navigation menu.

The Financing page displays the variables that Solar Advisor uses to calculate the project cash flow and other related financial metrics that appear on the Results page. The variables that appear on the Financing page depend on the financing option specified in the Technology and Market window.

Note. If the Financing button does not appear in the main window's navigation menu, check that the No Financials option is not the active option on the Technology and Market window. The Financials page is available only for projects with an active financing option.

For more details on financing options, please refer to the list of publications under Project Economics and Financing in the References section. You can also download an Excel workbook for each financing type that includes formulas emulating Solar Advisor's financial calculations. The workbooks are available on the Solar Advisor website's support page, https://www.nrel.gov/analysis/sam/support.html.

Contents

►	Financing Options describes the project financing options available in Solar Advisor and specified in the Technology and Market window.

►	Input Variable Reference describes the input variables on the Financials page.

►	Calculated Values describes the equations used to calculate the Principal Amount and WACC variables.

Financing Options

The six financing options specified on the Technology and Market window represent the financing options typically available to projects in the residential, commercial and utility markets for renewable energy projects.

Solar Advisor assumes that residential and commercial projects are on the customer's side of an electric utility's meter, and that the electricity they produce offsets electricity purchased from the utility to meet the customer's electric load. Residential and commercial projects can buy and sell electricity at a flat rate (with or without annual escalation) or at rates determined by a time-of-use pricing schedule. For these projects, the electricity price is an input defined on the Utility Rate page.

Utility projects are revenue generating projects that sell electricity at a rate determined through a power purchase agreement. Utility projects sell electricity at a fixed rate with our without annual escalation. For utility projects, the electricity price is a result.

Table 7. Financing options for different project types. The financing options are also discussed in the Technology and Market topic.

Financing Option	Description
Residential Cash	The owner pays cash in the amount of the total installed cost in year zero of the project cash flow.
Residential Loan	The owner pays cash for the equity portion of the total installed cost in year zero of the cash flow, and makes an interest and principal payments in subsequent years.
Commercial Cash	The owner pays cash in the amount of the total installed cost in year zero of the project cash flow.
Commercial Loan	The owner pays cash for the equity portion of the total installed cost in year zero of the cash flow, and makes an interest and principal payment in subsequent years.
Commercial Third Party	The commercial project is owned by a third party that earns revenues through electricity sales at a fixed or escalating annual rate determined through a power purchase agreement to cover project costs. The owner pays cash for the equity portion of the total installed cost in year zero of the cash flow, and makes an interest and principal payment in subsequent years. Solar Advisor calculates a first year power purchase price that meets internal rate of return, minimum debt service coverage ratio and positive cash flow requirements.
Utility IPP	The project earns revenues through electricity sales at a fixed or escalating annual rate determined through a power purchase agreement to cover project costs. The owner pays cash for the equity portion of the total installed cost in year zero of the cash flow, and makes an interest and principal payment in subsequent years. Solar Advisor calculates a first year power purchase price that meets internal rate of return, minimum debt service coverage ratio and positive cash flow requirements.

The variable groups that appear on the Financing page depend on the financing option displayed in the Technology and Market window. For example, residential loan financing does not include the Depreciation group of variables, which is only available for the commercial and utility financing types. The variable groups are described in the input reference below.

Table 8. Financing variable groups for each type of financing. Variable groups are described in the input variable reference below.

Financing Option	Available Variable Groups
Residential Cash	General Taxes and Insurance
Residential Loan	General Taxes and Insurance Loan Type Residential Loan Parameters Weighted Average Cost of Capital
Commercial Cash	General Taxes and Insurance Federal Depreciation State Depreciation
Commercial Loan	General Taxes and Insurance Commercial Loan Parameters Federal Depreciation State Depreciation
Commercial Third Party	General Taxes and Insurance Third Party Ownership Financing Power Purchase Agreement Constraining Assumption Financial Optimization Federal Depreciation State Depreciation
Utility IPP	General Taxes and Insurance Utility IPP Financing Parameters Power Purchase Agreement Constraining Assumption Financial Optimization Federal Depreciation State Depreciation

Note. To model a utility project with cash financing when sufficient cash is available to fund the project with no debt, use the Commercial Cash financing option. Financing constraints do not apply to projects with cash financing.

Input Variable Reference

The groups of variables that appear on the Financing page depend on the financing option defined on the Technology and Market window.

General (applies to all financing options)

Variable Name	Description
Analysis Period	Number of years covered by the analysis. Typically equivalent to the project or investment life.
Inflation Rate	Annual rate of change of prices, typically based on a price index. Solar Advisor uses the inflation rate to calculate costs in the cash flows for years after year one.
Real Discount Rate	A measure of the time value of money expressed as an annual rate. Solar Advisor uses the real discount rate to calculate the present value (value in year one) of cash flows over the analysis period and to calculate annualized costs.

Taxes and Insurance (applies to all financing options)

Tax and insurance values are expressed as a percentage of the total installed costs shown on the system costs page. The Federal, state and property tax percentages apply applied in each year of the cash flow, and the sales tax and insurance is applied to year one of the cash flow.

Variable Name	Description
Federal Tax, State Tax	Federal and state income tax rate. Applies to annual income from incentives for all projects, and to revenues from electricity sales for utility projects.
Property Tax	Annual tax paid on project property, expressed as a percentage of total installed costs. Solar Advisor treats property tax as a tax-deductible operating expense for each year. In each year, the property tax expense is the property tax rate multiplied by the annualized installation cost.
Sales Tax	A one-time tax paid in year one on equipment purchases during installation, expressed as a percentage of the taxable portion of installed costs. Solar Advisor treats sales tax as a deductible expense. The taxable portion of installed costs is defined on the Costs page.
Insurance	An annual operating expense expressed as a percentage of total installed costs.

Loan Parameters (applies to all financing options except residential cash and commercial cash)

Variable Name	Description
Principal Amount	The amount of money borrowed to cover installation expenses. Solar Advisor calculates the loan amount based on the Loan (Debt) Fraction and the Total Installed Costs on the system costs page. See below for a description of the calculation.
Loan (Debt) Fraction, or Debt Fraction	Percentage of the total installed cost to be be borrowed. For projects with IPP Utility or Commercial Third Party Financing, when the financial optimization option is checked, the debt fraction is a result instead of an input variable.
Loan Term	Number of years required to repay a loan. Can be more or less than the analysis period.
Loan Rate	Annual loan interest rate.
WACC	The weighted average cost of capital (WACC) is defined as the minimum return that the project must earn to cover financing costs. See below for a description of the calculation.

Loan Type (applies to residential loan or mortgage projects only)

Option Name	Description
Standard Loan	Loan interest payments are not tax deductible.
Mortgage	Loan interest payments are tax deductible.

Federal Depreciation and State Depreciation (applies to commercial and utility IPP projects only)

Variable Name	Description
No Depreciation	The project does not claim a depreciation tax deduction.
MACRS Mid-Quarter Convention	Modified Accelerated Cost Recovery System depreciation schedule offered by the Federal government and some states. This tax deduction, expressed as a percentage of the total installed cost, applies to the first years of the project life as follows: 35%, 26%, 15.6%, 11.01%, 11.01%, and 1.38%.
MACRS Half-Year Convention	Modified Accelerated Cost Recovery System depreciation schedule offered by the Federal government and some states. This tax deduction, expressed as a percentage of the total installed cost, applies to the first years of the project life as follows: 20%, 32%, 19.2%, 11.52%, 11.52%, and 5.76%.
Straight Line (specify years)	A depreciation schedule offered by the Federal government and some states. This tax deduction is 20% of the of total installed cost and applies to the number of years you specify, starting with year one of the project life.
Custom (specify percentages)	Allows you to assign a depreciation deduction as a percentage of the total installed cost for each year in the project life. Click Edit to assign the values, and see Editing Annual Schedules for details on entering the values.

Power Purchase Agreement (applies to utility IPP and commercial third party projects only)

Variable Name	Description
PPA Escalation Rate	An escalation rate applied (above inflation) to the first year PPA price to calculate the electricity sales price in years two and later in the project cash flow. When the financial optimization option is checked, the PPA escalation rate is a result instead of an input variable.

Constraining Assumptions (applies to utility IPP and commercial third party projects only)

The constraining assumptions only apply to systems with IPP and Utility financing. Solar Advisor calculates the actual IRR, actual minimum DSCR, first year PPA price and LCOE that meets the constraints and reports them in the Metrics table on the Results page.

Variable Name	Description
Minimum Required IRR	The lowest value of the internal rate of returned required for the project to be financially feasible. The internal rate of return is the discount rate that results in a project net present value of zero.
Require a minimum DSCR	A requirement that the debt-service coverage ratio not be allowed to fall below the specified level.
Minimum Required DSCR	The lowest value of the DSCR required for the project to be financially feasible. The DSCR is the ratio of operating income to expenses in a given year.
Require Positive Cashflow	A requirement that the annual project cash flow be positive throughout the project life.

Financial Optimization (applies to utility IPP and commercial third party projects only)

Option Name	Description
Automatically minimize LCOE with respect to Debt Fraction	Instead of entering a value for the debt fraction, allow Solar Advisor to find the debt fraction value that results in the lowest levelized cost of energy.
Automatically minimize LCOE with respect to PPA Escalation Rate	Instead of entering a value for the PPA Escalation Rate, allow Solar Advisor to find the debt fraction value that results in the lowest levelized cost of energy.

Calculated Values

Solar Advisor calculates two values displayed for reference on the Financials page. The calculated variables appear on the page in blue type with a blue background.

Principal Amount

The loan's principal amount is calculated as follows:

Where,

ALoanAmount ($)	Principal Amount
CTotalInstalled ($)	Total Installed Costs (on the system costs page)
FDebtFraction	Loan (Debt) Fraction, or Debt Fraction

WACC

The Weighted Average Cost of Capital (WACC) is defined as the minimum return that the project must earn to cover financing costs.

The effective tax rate is a single number that includes both the federal income tax rate and state income tax rate. Solar Advisor uses the effective tax rate for several calculations requiring a total income tax value.

The effective tax rate calculation is:

The federal and state tax rates are input variables on the Financing page.

For residential and commercial projects, the return on equity is equal to the discount rate, which is an input on the Financials page:

For utility and commercial third party projects, the return on equity is the required internal rate of return, also an input on the Financials page:

Where,

FFederalTaxRate	Federal Tax
FStateTaxRate	State Tax
FDebtFraction	Loan (Debt) Fraction, or Debt Fraction
FLoanRate	Loan Rate
FDiscountRate	Real Discount Rate
FRequiredIRR	Required Internal Rate of Return (IRR)