The construction phase is defined as the period between transaction date and production start of a project. In this article we will explain how we recommend to model it financially.
There are different, cost intensive, capital expenditures that arise during this period. For wind energy projects, the turbine supply agreement (TSA) is one example of such investment costs. We highly recommend modelling these payments accurately by splitting payments in several milestones and to define an adequate depreciation method.
Impact of split payments on the project return
In general you can say that later payments are better for an investor since they have a significant positive impact on the IRR of the project.
With greenmatch you can do so by adding multiple due dates in the capex section. Additionally you have the option to model a construction loan for the financing of the construction phase. There you can define different milestone payments with defined issuance dates. Try to avoid interest payments during the construction phase by agreeing on the capitalization of interest with the bank. This capitalisation of interest will have a positive impact on the financial stability of the project.
Please note that banks usually apply higher interest rates for construction loans since the construction risk has to be taken into account.
Positive impact on the return of the project If you have modeled the capital expenditures as well as its financing as mentioned above, you can check in the cashflow waterfall, that no expenditures arise during the construction period. This will have a positive impact on the return of your project because it is ensured that costs are only incurred when the project can bear them.
If you want to learn more on the calculation of the internal rate of return of a project, you can read our article “How to calculate NPV & IRR”
Will be explained in the video as well