In spite of the rapid global growth of the sector, determining the value of a wind, solar, biomass or hydro energy project is no easy feat.
How do you achieve a realistic estimate of cash flow? What is an appropriate discount rate? And, how useful is the weighted average cost of capital (“WACC”) in determining a discount rate when required returns are measured against stock market performance?
Given the unique characteristics of renewable energy projects, it is sometimes more appropriate to look at the prices paid for these assets as a basis of determining the appropriate discount rate. However, this data is historically hard to gather and, as a result, investors must frequently rely on their own experience and advice from valuation experts to determine appropriate cost of capital.
In an attempt to augment experience in this area, the valuations team at Grant Thornton have this month published a report drawing on the views of more than 100 investors, representing billions in AUM across 10 strong renewable energy markets. The report, which can be downloaded in full here, looks at cost of capital for renewable projects across hydro, solar, onshore wind and offshore wind.
Some of the key results include:
- Unlevered discount rates across Europe and North America average 6%, 6.5% and 7.5% for solar, onshore and offshore wind respectively;
- Unlevered discount rates in the Nordics average 5% for hydro; and
- Unlevered discount rates in Australia average 6.75% and 7.5% for solar and onshore wind respectively.
About the author: Tomas Freyman is Valuations Partner at Grant Thornton UK LLP