A hedge would be paid to lock in a quoted interest rate for a specified time period. This hedge against future rates going up typically adds 0.4% to the interest rate. The hedge is highly dependent upon interest rate volatility. lf you want to be able to terminale the contract early by paying it off, the financing organization (financer) will add a prepayment adder to cover the possibility of interest going down and also to cover the administrative transaction costs. The option to prepay entails that you pay these costs whether you prepay or not. An adjustable interest rate changes periodically according to a selected index. The initial interest rate is lower than that of fixed interest rates, but monthly payments can go up or down as the rate is adjusted. Typical adjustment intervals are six months and one year. Monthly payments depend on the dollar amount financed, the term, and the interest rate. A lenger term will reduce payments, but at the expense of paying interest charges over a lenger time period. Strategies to consider include: □ Maintaining positive cash flow -this strategy is required for Federal energy savings performance contracts or for Revenue Bonds. Financing is structured such that payments to the financer do not exceed revenues or savings from the project. □ Minimizing life-cycle cost - if your minimum attractive rate of return is less than the interest rate (eften the case), maximizing the payments and minimizing the term of the financing will minimize project life-cycle cost. FACTORSAFFECTING INTEREST RATES lnterest rates depend on the perceived risk of a project and recourse or non-recourse financing. in recourse financing, the borrower is required to make payments to the lender, whether or not the project is performing as expected. in non-recourse financing, the supplier of the solar energy system gets paid and walks away, and the lender expects repayment from the end-user from the project performance. in non-recourse financing the interest rate will be higher to cover the lender's increased risk, and the lender's decision to finance a project is based on the creditworthiness of the end-user, rather than that of the supplier. RECOMMENDATIONS TO REDUCE THE INTEREST RATE □ Consult with the financer throughout development of the solar energy contract to ensure that contract requirements do not cause financing problems. □ Mitigate the risk of project non-performance. lnclude a 'protection of lien holder interest' (financer has right to cure problems) or take performance risk off the financer (in non-recourse financing). While it is tempting to saddle the financer with performance risk, the result is a higher cost of capital. □ lnclude a fixed termination schedule in the contract so the costs corresponding to termination at any time are clear. □ Fix settlement and acceptance dates. Uncertainty or slippage in these dates results in high-cost financing. MAKALE / ARTICLE Example /. Limited parıners/ıip - ılıe Jefferson Coıınıy Jai/ has a 700 111' solar ıroııglı systeııı. Tlıe sysıem-insıalled cosı ıvas US$/60,000, inc/ııdiııg 15 years of operaıioıı aııd ıııainteııance (O&M). Iııdııstrial Solar Techııology lııc. raised c<ıpital tlıroııglı a limited parıııcrslıip. Heat is sold ıo 1/ıe prison aı 90% o f prevailing natura/ gas cosı. lnvestors are paid back /rom revemıe. but receive not lcss ılıan $8000/yeaı: □ Ensure fixed rather than fluctuating payments. This may require an energy service company to collect variable revenues and make fixed payments. □ Make payments on time. □ Bundle small projects together to result in a larger package. □ Be ready to act when negotiating. The best rates are obtained without a hedge, and if the negotiator is ready to elese the deal on financing. Locking in rates for a long period of time results in an expensive hedge cost. □ Escrow or hedge? Evaluate whether it is cheaper to structure the financing in stages with a hedge (to secure the future interest rates), or to finance the entire project, keeping the money in an interest-bearing account until used. □ Make your deal more like standard, commercial securities. Anything unusual to the financer will delay or impede financing and resul! in a higher cost. Ask financers for an example structure before structuring the contract between the solar energy supplier and customer. TAXEFFECTS Tax effects include inceme tax, property tax, and the depreciation in the value of the equipment. Tax effects depend on the status and tax liability of the parties, on the financing mechanism utilized, and even on the technology employed. Solar energy currently enjoys a 10% Federal business investment tax credit. APPROPRIATIONS Appropriations are your organization's own funds used to purchase a system outright. A key question is: do you have the cash? Funding requests for a solar energy plant may compete with mission-critical needs for money. The cost-effectiveness of a solar energy project would be evaluated using your organization's 'minimum attractive rate of return' (MARR). For large organizations, such as the Federal government, appropriations eften represent the lowest cost of money. For example, the Federal government MARR is that of a Treasury bili rate of comparable term, currently 3.3% real (net of general ENERJi & KOJENERASYON DÜNYASI 59
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