Fascination financial modelling: The calculator in the background

16/10/2020 | Saskia Taag, Software Engineer

Those who have already engaged with the financial modelling of renewable energy projects know its complexity, which quickly pushes spreadsheet solutions to their limits. The experts in software development, project financing and financial modelling jointly developed the greenmatch financial model to accommodate this complexity.

The challenges of financial models

The following challenges tend to occur when creating and maintaining a financial model:

  • The financial model serves to capture various project stages, such as turnkey, construction and business projects, as well as different technologies like wind, solar, hydro, or biomass, in a single model.
  • The refinement of the financial model means that past projects were calculated using outdated models, resulting in a loss of comparability.
  • The model needs to be customisable, for example, to record additional operating costs or replacement investments. Spreadsheets tend to struggle as a result since the model needs to be expanded by a row or column.
  • If the creator of the model leaves the company, the needed know-how leaves as well.
  • The financial model should be accessible to all staff, not only the creators.
  • It must be ensured at all times that the entire financial model is calculated correctly. Spreadsheet solutions pose a significant hurdle since it is challenging to realise automated tests.
  • Model performance tends to suffer from increasing complexity. Models become incredibly sluggish, in particular, in the context of scenarios, simulations, or portfolio aggregation.

Reducing financial model complexity thanks to an object-oriented approach

Project data needs to be entered to calculate the financial model. For this, we decided to go with an object-oriented model, which records all data or contracts as individual objects. This approach ensures that the model can be extended to include any number of entries without amending the model’s calculation structure. Another advantage of object-based programming is the option to define relationships between objects. For example, the user assigns each object a start and end date, which is either fixed or relative to the date of another item. This way, proceed objects can relate to the start date of the specified production facilities. The advantage is that the user only needs to amend the facility’s start date, and all other objects will adjust automatically. A timeline is calculated based on all the information provided. Based on this timeline, each value can be assigned.

We break down the project’s financial model into independent components. The object-oriented approach permits to resolve the calculations into the lowest denominators, which reduces complexity significantly. For instance, an operating cost item constitutes an object, which enables the calculation of profit-and-loss or cash-flow statements, as well as the carrying value for each month. For this, only the required project information is added to perform each calculation. This kind of compartmentalisation allows each area to focus on the task at hand.

More complex objects are made up of simpler ones. This way, maintenance agreements, costs for administration, lease, et cetera will be totalled with the operating expenses. Now, additional calculations can be done based on previously calculated objects. Here too, the principle applies that only the needed parts of the calculations already conducted or project data is used. This way, unnecessary dependencies will be avoided, and additional information can be added, or calculations performed without adding much complexity. Once all calculations are done, the financial-model object is created from all individual sub-objects. Based on this financial model object, encroaching key figures like returns, payback, or net asset value can be calculated. At any time, the financial-model object also contains the profit and loss statement, cash flow, and balance on the timeline for each sub-object.

Integration of actual figures into a financial model

Once a project moves from the evaluation stage to asset management, actual figures are added. Each project area has a complex overall object as well as several simple ones. Consequently, each section can decide if actual figures calculations should be integrated.

A financial project of an individual project is not the end of it. Individual financial models must be merged at a project-portfolio level to gain a complete overview of projects and the overall portfolio. The object-oriented approach allows aggregation and further supplementation with additional calculations. The deciding factor here is that the financial model has the same structure for each project, which allows accurate aggregation. Please keep in mind! Projects created with older versions must be kept up to date.

Reliable calculations at all times

The greenmatch financial model is secured with thousands of automated tests to ensure that project data is always calculated with the same results. From the individual calculation to the entire financial model, everything is covered. At the same time, for each change within the financial model, existing project databases will be recalculated and verified to see if key figures have changed. Thus, it is ensured that financial model extensions do not affect the returns of existing projects. Furthermore, the calculations are periodically checked by an independent auditor. The combination of independent auditing and automated tests ensures the validity of calculations at all times.

In summary, the greenmatch financial model offers the following advantages compared to spreadsheet solutions:

  • The intuitive interface offers a high level of convenience when adding project data and can be used without much prior knowledge.
  • The same underlying financial model permits continuous project comparability throughout their entire runtime.
  • Automated tests and periodic code reviews ensure that any changes to the greenmatch financial model work one hundred per cent correctly.
  • Our developer teams ensure the continuous refinement of our financial model in the future.
  • Since all existing projects from the database are recalculated, completed projects will also be calculated with the latest changes to ensure comparability at all times.
  • Relative date references allow the automated change of related objects on the timeline.
  • The object-oriented approach permits to illustrate various project stages and technologies within a single model.
  • Periodic source code reviews and exchange ensure our development team’s continuously developing expertise. Furthermore, compartmentalisation and automated tests allow developers to make changes to individual sections without having to have access to the entire financial model.
  • High performance during complex calculations like scenarios, sensitivities, and portfolio aggregations.

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About greenmatch

greenmatch is the leading web-based investment application for renewable energies. The highly flexible application models the complete financial project lifecycle of your wind, photovoltaic, hydro and biomass projects and optimizes your workflow. Its collaborative and integrative approach allows projects to be analyzed and executed more efficiently, comprehensibly and reliably. Our solutions empower project developers, investors and banks in making reliable decisions and in increasing the success of their transactions. greenmatch is an innovative model to limited traditional spreadsheet applications.

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