How the valuation approaches stack up for solar energy firms

As the solar energy industry grows, so will opportunities for appraisers.

Of the three valuation approaches, the income approach is most commonly applied for valuing a solar installation because it captures the impact of a system’s revenue-generating ability based on forecasted capacity factors, according to Rick Daubenspeck (BDO Consulting). The approach also enables the modeling of tax credit impacts. “You model what it is going to produce in Year 1, including the contracted PPA rate and any federal or local financial incentives. Then you run it out at a degradation rate over the system’s economic useful life while including the costs associated with operating the system,” he writes in the latest in the series of BVR’s What It’s Worth guides, Valuing Oil, Gas, and Alternative Energy Assets, 2nd edition.

The market approach is considered but typically not used in valuing solar companies, given the lack of comparable transactions in the market. “The people who buy and sell used modules, inverters, and so on purchase components from smaller installations like houses,” Daubenspeck says. In other words, they are small parts, not modules from large installations. People do not normally buy a large number of modules at one time.

The cost (net asset) approach is a calculation of value. “We consider it, but the approach only captures the initial cost outlay and not the added benefit of the tax credit and the PPA,” explains Daubenspeck. However, business appraisers need to ask whether the value is in the individual components or in the ability to generate revenue and income as an operating system.

As the solar industry continues to grow, so will the opportunities for business appraisers. “Appraisers have to consider each of the valuation approaches, but the income approach, in my opinion, is the only way to value a solar company,” he says.

In addition to Daubenspeck, other experts offer their perspective on the challenges, key valuation drivers, and opportunities in oil, gas, and alternative energy sectors. The guide also provides in-depth analysis of important court cases.