REP Project Planning & Financial Analysis 3 — Questions and Answers
Question 1: Which contract structure transfers the most construction risk from the project owner to the contractor in a renewable energy project?
- Cost-plus with a guaranteed maximum price
- Fixed-price, date-certain, full-wrap EPC contract (Correct answer)
- Time-and-materials with open-book accounting
- Design-bid-build with separate trade contracts
Correct answer: Fixed-price, date-certain, full-wrap EPC contract
A fixed-price, date-certain, full-wrap EPC contract holds the single contractor responsible for all cost overruns, delays, and performance shortfalls.
Question 2: An independent engineer (IE) is engaged during renewable energy project financing primarily to:
- Negotiate power purchase agreement terms on behalf of the offtaker
- Provide lenders with an independent assessment of technical and financial assumptions (Correct answer)
- Obtain environmental permits from state and federal agencies
- Manage the EPC contractor's construction schedule
Correct answer: Provide lenders with an independent assessment of technical and financial assumptions
The IE gives lenders confidence that energy yield estimates, technology performance assumptions, and cost projections are technically sound.
Question 3: A renewable energy developer uses a 'sensitivity analysis' in their financial model primarily to:
- Determine the optimal capital structure for the project
- Assess how changes in key assumptions affect project returns and viability (Correct answer)
- Calculate depreciation schedules for tax equity investors
- Establish milestone dates for the construction schedule
Correct answer: Assess how changes in key assumptions affect project returns and viability
Sensitivity analysis varies one or more input assumptions (e.g., energy price, capacity factor, O&M costs) to quantify their impact on IRR or NPV.
Question 4: Which federal tax incentive allows renewable energy project owners to depreciate most of the project's cost in the first year of operation under current US tax law?
- Production Tax Credit (PTC)
- Investment Tax Credit (ITC)
- Bonus Depreciation under MACRS (Correct answer)
- New Markets Tax Credit (NMTC)
Correct answer: Bonus Depreciation under MACRS
Bonus depreciation under MACRS allows immediate expensing of a large percentage of qualifying renewable energy asset costs in the placed-in-service year.
Question 5: A solar project has a total installed cost of $2,000,000 and generates 500,000 kWh annually over a 25-year life with zero residual value and no discount rate applied. What is the simplified LCOE?
- $0.08/kWh
- $0.10/kWh
- $0.16/kWh (Correct answer)
- $0.04/kWh
Correct answer: $0.16/kWh
LCOE = $2,000,000 ÷ (500,000 kWh × 25 years) = $2,000,000 ÷ 12,500,000 kWh = $0.16/kWh.
Question 6: In a renewable energy project, 'backfill risk' in the interconnection queue refers to:
- Soil erosion at the project site during construction
- The risk that projects ahead in the queue withdraw, changing cost allocation to remaining projects (Correct answer)
- Transmission line overload caused by new generation additions
- The cost of connecting underground conduit to the point of interconnection
Correct answer: The risk that projects ahead in the queue withdraw, changing cost allocation to remaining projects
When projects ahead in the queue drop out, cost allocations can shift to remaining projects, potentially increasing interconnection costs significantly.
Question 7: Which document legally obligates a renewable energy developer to deliver power to an offtaker at a predetermined price for a specified term?
- Letter of Intent (LOI)
- Interconnection Agreement (IA)
- Power Purchase Agreement (PPA) (Correct answer)
- Engineering, Procurement and Construction Contract (EPC)
Correct answer: Power Purchase Agreement (PPA)
A Power Purchase Agreement is the binding contract that defines the price, volume, delivery terms, and duration of electricity sales between the generator and buyer.
REP Project Planning & Financial Analysis 3
Which contract structure transfers the most construction risk from the project owner to the contractor in a renewable energy project?