The Hidden Costs of Valuation Mistakes
In today's market, small gaps in valuation can cost developers millions in project revenue, and they often don’t even see it happening.
Why? Because while you're focused on development milestones, your counterparties – sophisticated IPPs, tax equity investors, and lenders – are running detailed financial models with real-time market insights you might not see every day.
Your project's true worth – and ultimately your company's revenue – hinges on one critical factor: how convincingly you can demonstrate value to third-party investors.
With recent policy shifts creating even more uncertainty, the stakes have never been higher.
The Market Has Changed. Have Your Valuation Methods?
Today's renewable energy developers face unprecedented challenges:
- Policy Uncertainty: Recent executive orders have suspended key IRA funding streams and new tariffs – already inflating EPC costs by 8-12%.
- Information Asymmetry: Your counterparties may review dozens of deals each month, giving them real-time insight into market comps and discount rate trends that you might not have.
- Technical Complexity: Every assumption about construction costs, O&M expenses, and incentives is a potential negotiation battleground – one where unprepared developers consistently lose ground.
- Strategic Timing: When you present your first offer – and how you structure milestone payments – can mean the difference between a strong valuation and a lost deal.
To stand a chance, developers must have a transparent, defensible valuation framework. Below is the step-by-step valuation method we've used at BuildQ to help developers capture millions in additional value.
The BuildQ Valuation Framework
At BuildQ, we use a structured, 3-step approach to help developers capture millions in additional value:
- Begin at the End: Forecast the value of your project using revenues, costs, and tax benefits over its useful life, then subtract installation costs.
Why it matters: Sets the stage for term‑sheet leverage and earn‑out mechanics.
- Quantify Risk Systematically: Assign specific, defensible haircuts to each outstanding development risk (rather than blanket discounts).
Why it matters: Protects project value typically surrendered in "risk premium" negotiations.
- Allocate Value Strategically: Map exactly when and how value accrues across development stages, aligning with your capital needs.
Why it matters: Strengthens term‑sheet leverage and unlocks earn‑out mechanics.
This article unpacks Step 1 in detail. Part II (coming soon) will reveal advanced techniques for risk quantification and value capture strategies
Step 1. Begin at the End
Shortcut: Think of valuation like a maze – start at the exit and trace your way back.
The foundation of any credible solar project valuation is understanding what your project would be worth if it were operational today.
Sophisticated developers follow a simple formula:
Project Profit at COD (“Dev Fee”) = [A]Net Present Value (NPV) of all expected operating cash flows and tax benefits minus [B] Total Installed Costs
[A] Calculating a Defensible NPV
Let's break down the components that drive your project's operational value:
1. Forecast Revenue Potential
The revenue potential of the project is typically derived from:
- Energy Production: Projected MWh per MW, adjusted for real-world degradation and availability
- Electricity Sales: Contracted revenue (PPA) and/or merchant revenue assumptions
- Environmental Attributes: Renewable Energy Credits (RECs), either bundled with energy or unbundled
- Capacity & Ancillary Services: Payments for capacity commitments and grid services [1]
- Incentives: Performance-based incentives and state/local grants, rebates, and other upfront incentives [2]
- Battery Value (if applicable): Optimized charging and discharging revenue
Pro Tip: Arm yourself with current power curve forecasts before negotiations begin. If you don’t take a view on merchant tail value, your counterparty will – and it will be in their favor.
2. Map Operating Expenses
Next, estimate your operating expenses across six key categories:
- Site Control – Lease or mortgage payments
- Operations & Maintenance (O&M) – Maintenance, repairs, vegetation management
- Insurance – Property and liability coverage
- Property Taxes – State and local
- Asset Management – Monitoring, data collection, reporting costs
- Inverter Replacement – Cash reserves to replace inverters
Subtract total expenses from revenues, and now your financial model has an estimate of the project’s operating cash flow over its entire useful life.
3. Layer in Tax Credits
The third critical valuation driver is tax benefits – either the Investment Tax Credit (ITC) or Production Tax Credit (PTC).
- ITC vs PTC: PTCs are straightforward (based on projected generation), while ITCs require careful cost analysis. Model both paths –choose whichever generates higher value.
- IRA Adders: Determine which additional credit percentages your project qualifies for
- Eligible Costs: Not all capital expenditures qualify for the ITC – particularly interconnection costs and equipment on the utility side of the connection point. Need help finding a tax or legal advisor? We can connect you to the right people.
After thorough analysis, you should arrive at two key metrics:
- Your total ITC percentage (likely between 30% to 50%)
- Your eligible cost percentage (the closer to 100%, the better)
There’s a lot of industry discussion around the Inflation Reduction Act adders – specifically, how projects qualify for each, and how future policy changes could affect them. Model multiple scenarios to demonstrate your project’s valuation resilience.
4. Apply the Discount Rate
Finally, apply an unlevered discount rate to these future benefits to determine your project's estimated valuation at commercial operation. The appropriate rate should reflect your project's risk profile and current capital market conditions. This will be a key negotiation point.
Currently, a range of 7-9% is a reasonable place to start a discussion.
Pro Tip: Strong documentation reinforces a low discount rate [3] – but the real driver is your project’s underlying risk profile. If you can document each underlying assumption, you’ll be in a much stronger position to negotiate a lower discount rate.
Go back and apply a sanity check to all of your assumptions. Once you are comfortable, you have arrived at the indicative final valuation of your project at COD. Congratulations!
[B] Calculating Total Installed Cost at COD
Simply add up all the Hard Cost + Soft Costs required to get the project developed from the ground up, constructed, and commissioned.
Hard Costs
These are explicitly quoted in your EPC contract, and typically include:
- Equipment procurement
- Site preparation
- Installation labor
- Construction equipment rentals
- Security measures
- Testing and inspections
- Warranties
- Contingency allowances
- Contractor margin
If you don’t have an EPC quote, estimate based on similar recently built projects, or contact us. We’re happy to share what we’re seeing in the market.
Soft Costs
Developer-managed expenses often include:
- Site identification and acquisition
- Interconnection studies, fees, and upgrade costs
- Land entitlement
- Environmental, geotechnical, cultural, and biological studies
- Permitting fees
- Engineering and design (civil, electrical, structural)
- Insurance and bonding requirements
- General overhead
- Transaction costs (legal fees, financing costs, consultant fees)
Combine actual costs incurred to date with estimates for future hard and soft costs to get the total installed cost at COD.
Putting It All Together
Now that you have calculated [A] and [B], you can determine the Development Fee (“Dev Fee”). For example:
- NPV at COD (A): $10 million
- Total Installed Cost (B): $8 million
- Dev Fee (A - B) = $10 - 8 million = $2 million total
This $2 million represents the value available to those who invested in the project from development through construction.
The Bottom Line
Valuing your project accurately isn't guesswork – it's a disciplined process of managing data, clarifying assumptions, and strengthening your negotiating position. A clear, defensible valuation framework builds confidence at the table – helps you maximize returns.
In Part II, we'll explore how to turn your valuation into real dollars – maximizing your piece of the Development Fee and closing deals more efficiently.
Sources:
[1] mostly relevant for projects with battery systems
[2] i.e., SGIP in California and VDER in New York
[3] It is referred to as ‘unlevered’ because this rate is applied onto the project’s operating cash flows, before any financial structuring like debt or tax equity is layered in. The term ‘IRR’ is used interchangeably with ‘discount rate’ in the common parlance of these discussions.
