Why renewable energy projects need purpose-built financial models

Any renewable energy project – from wind and solar to battery storage – is a complex, lengthy and expensive undertaking. To successfully navigate these projects, you need to obtain regulatory approvals and secure initial capital investments, all while managing potentially long development timelines. 

Given these uncertainties, it is critical for asset owners and investors to understand the risks and potential challenges that may arise. This ensures they are well informed and prepared before embarking on the journey.

Any renewable energy project – from wind and solar to battery storage – is a complex, lengthy and expensive undertaking. To successfully navigate these projects, you need to obtain regulatory approvals and secure initial capital investments, all while managing potentially long development timelines. Given these uncertainties, it is critical for asset owners and investors to understand the risks and potential challenges that may arise. This ensures they are well informed and prepared before embarking on the journey.

A robust financial model is an essential element of this preparedness. This goes beyond entering a set of assumptions and potential growth rates into a spreadsheet. It requires a customised tool explicitly designed to consider the unique factors that can (and do!) impact renewable energy projects. 

Your financial model must be capable of performing scenario analysis, with the ultimate intent of:

• Equipping you with maximum insight.
• Enabling informed decision-making.
• Providing clarity on the best way forward.

Complex and costly projects like renewables require purpose-built financial models to clarify risks and highlight potential rewards.

Financial modelling is a starting point

To achieve the best results, integrate financial modelling into the initial project planning phase—before taking action. By establishing strong financial models upfront, you set the stage to discover the most effective structure for your project, paving the way for optimal outcomes. Don't just plan; plan smart!

Five ways financial models can support your renewable energy project

Here are five ways the right financial model can support your renewable energy project from the start:

1.    Capital structure

You want a capital structure that is clear, easy to understand, and suited to the nuances and risks of your project.

You need to document debt draws and ensure they are incurred at the expected times. This will help you understand the financing costs and other charges that may arise. 

Likewise, equity funding requirements should be clearly defined and drawn alongside debt per your specific financing requirements.  

Most importantly, when seeking debt and/or equity funding, you must feel confident that you are pursuing the most favourable strategy for the future. 

2. Financing

Along with traditional debt and equity arrangements, the renewable energy sector is well-supported with a range of sustainable finance options and the availability of grant funding for CleanTech. Sustainable finance includes the likes of green bonds and green loans, while government grants exist at both a state and federal level and can be quite substantial.

Modelling is an important way to fully assess the pros and cons of all finance options so you can decide on a course of action that will not compromise your project plans.

3. Tax efficiency

Tax compliance typically involves ensuring you've dotted your i's and crossed your t's. However, it's also important to set up your project in a way that boosts tax efficiency.

This means taking advantage of any deductions or rebates you're eligible for, so you're not paying extra taxes that could otherwise go back into the project.

4. Cashflow management

Because of the lengthy lead times in approval processes and development of renewable projects, cashflow management is vital.

Being equipped with detailed projections of income, expenses, and capital flows from your financial model will:

• Provide clarity on your liquidity position over time.
• Allow you to prepare for periods when cash may be tight.
• Enable more detailed and confident budgeting.
• Help guide decisions around capital expenditure and investments.

5. Exit strategy

The ideal time to plan an exit from any new business is before you launch it. This is especially important for a renewable energy project, which is capital-intensive, illiquid, and involves long lead times.

You need to consider key questions such as:

• Will I build and hold this asset, or will I build and divest it? 
• If I plan to divest, what valuation am I seeking, and when do I want to exit?

Thinking through your exit strategy in advance can significantly increase the likelihood of maximising your return on investment over the lifecycle of the project.

Building a fit-for-purpose financial model for a renewable energy project

RSM has extensive experience in financial modelling for businesses in the renewable energy and CleanTech sectors. We work closely with our clients to develop financial models that are tailored to their specific needs and that offer scenario analysis capabilities to support informed decision-making. 

Our financial models include: 

• Comprehensive financial, legal, and tax structures.
• Key business drivers and assumptions.
• Scenario and sensitivity analysis.

Together, these provide the metrics to enable a deep understanding of your future performance and the investment hurdles or stage gates you may encounter during the project's progression.

If you have developed your own financial model, we can conduct a thorough review to provide assurance of its integrity and consistency. We will also provide insightful suggestions for enhancements that could further strengthen your model.
Comprehensive support every step of the way.

In addition to financial modelling, you can engage RSM's diverse team to act as a trusted adviser throughout your project.

Having an experienced and objective sounding board who can keep you updated on potential legislative changes (such as thin capitalisation, debt deduction creation rules, and capital gains tax, which are all on the horizon) will help you better navigate the risks and opportunities that present as your project unfolds. 

To learn more about purpose-built financial models for renewable energy projects, contact our national Financial Modelling Services lead, Tim Linke.