Renewable

Energy
Finance

Practice Interview
Questions
By Category, Including Sample Responses
 Table of Contents

Table of Contents

Valuation....................................................................................................................................2
Project Finance .........................................................................................................................3
Tax Equity..................................................................................................................................5
Modeling ....................................................................................................................................6
Project Knowledge ....................................................................................................................7
Industry Questions ...................................................................................................................9

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 Valuation

Valuation

1. What are some investment metrics you would consider evaluating for a project?
a. Internal Rate of Return (“IRR”) – the time value return of free cash flows. If the
resulting IRR is higher than our discount rate, then the project is attractive.
b. Net Present Value (“NPV”) – the present value of cash flows, based on a
defined discount rate, less the initial investment. If positive, the project is
attractive.
c. Multiple on Invested Capital (“MOIC”) – the cash multiple we realize on our
investment.
d. Payback Period – the time to recoup an investment.

2. Describe the shortcomings of IRR.

a. IRR can give multiple values or no solution when project cash flows are irregular,
such as alternating between positive and negative values over time. Additionally,
IRR may favor projects with high early returns, even if they are less profitable in
the long term, such as projects with significant upfront incentives that provide a
lot of cash early on but little overtime.

3. Which valuation methodologies are typically applied to renewable energy

projects?
a. A Discounted Cash Flow (“DCF”) valuation is the primary methodology used
because cash flows can be forecasted for the project's entire useful life. In this
approach, it's common to develop case scenarios and to sensitize value drivers
to assess project risks. While market comparables may offer an initial indication
of value, they are rare, and the final valuation relies on DCF analysis.

4. Describe the Weighted Average Cost of Capital (“WACC”).

a. WACC is the average rate a company pays to finance its operations through debt
and equity, weighted by their proportions in the capital structure. It reflects the
minimum return needed to satisfy both debt and equity investors

5. Describe the relationship between IRR and NPV.

a. IRR is the discount rate that makes a project's NPV equal to zero, indicating the
rate of return the project is expected to generate.

6. What discount rate and cash flows are used to calculate enterprise value?
a. WACC is used as the discount rate to calculate enterprise value by discounting
unlevered free cash flow (cash flow to the project).

7. What discount rate and cash flows are used to calculate equity value?
a. The cost of equity is used as the discount rate used to calculate equity value by
discounting levered free cash flow (cash flow to equity).

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 Project Finance

8. What is a developer’s profit margin, and how is it calculated?

a. A developer’s profit margin, also known as the development fee or simply the
developer margin, is the amount a developer earns when selling a development-
stage asset.
b. The developer’s profit margin is calculated as the difference between the
project’s enterprise value and its construction cost. If the project's value exceeds
its cost, the developer can earn a profit. In practice, project acquirers often use
the developer’s profit margin as a model plug to achieve a target IRR threshold.

9. What is different about a DCF when valuing a solar asset compared to a typical
company?
a. When valuing solar assets, it is common to forecast cash flows over the entire
useful life (30+ years), whereas typical companies are usually valued based on a
5-year forecast plus a terminal value.
b. Solar projects require more detailed assumptions in the forecast because they
are typically highly contracted, with known variables such as construction costs,
offtake agreements, operating service agreements, and financing agreements.
c. Solar assets are financed using a unique capital structure that includes tax equity
and project finance debt, which differs from the financing structures of typical
companies.

10. What are some typical value drivers that you might choose to evaluate in a
sensitivity analysis?
a. Sensitivity analysis typically focuses on downside scenarios, as renewable
energy projects are lower risk with limited upside potential. Additionally, industry
trends suggest assets are more likely to underperform than exceed expectations,
making risk assessment crucial. Key sensitivity drivers include:
i. Development and Construction Costs – Variability in project costs.
ii. Development and Construction Timelines – Potential delays or
acceleration.
iii. Production – Variations in energy generation compared to the P50
scenario.
iv. Operating Costs – Fluctuations in ongoing expenses.
v. Merchant Revenue Prices – Changes in energy, capacity, and REC
price forecasts.
vi. Financing – Impacts of ITC rates, tax equity terms, SOFR fluctuations,
and debt terms.

Project Finance

1. What is a Debt Service Coverage Ratio (“DSCR”)?

a. In project finance, the DSCR measures a project's ability to cover its debt
obligations, calculated as Cash Available for Debt Service (“CFADS”) divided by
Total Debt Service (Principal + Interest).

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 Project Finance

2. What is the typical base rate used for a project finance loan?
a. The typical base rate used for a project finance loan is the Secured Overnight
Financing Rate (“SOFR”).

3. What is a common approach to hedge against the risk of an increase in interest

rates?
a. An interest rate swap is a derivative contract used in project finance to hedge
interest rate risk. In a typical swap, a borrower exchanges a floating interest rate
for a fixed rate to manage cash flow stability.

4. How do you size debt using a DSCR?

a. First calculate CFADS for each repayment period (typically quarterly) by
calculating operating cash flow less any tax equity distributions. Then, divide
CFADS by the appropriate DSCR to calculate the Maximum Debt Service in each
period. Finally, we discount the Maximum Debt Service by the interest rate to
arrive at our debt sizing.

5. What are two common constraints on debt sizing?

a. Debt sizing in project finance is constrained by lender equity requirements and
P90/P99 production debt service coverage.
i. Minimum Equity Requirement: Lenders typically require 10-15% equity,
with higher amounts for riskier projects to ensure sponsor commitment.
ii. P90/P99 DSCR Sizing: Debt is sized to maintain a DSCR of typically
1.20x-2.00x under P50 production forecasts and at least 1.00x under
P90/P99 scenarios, ensuring debt can be repaid even in low-production
cases.

6. Define debt sculpting.

a. Debt sculpting is a approach to debt repayment in project finance, where debt
service (principal and interest payments) is tailored to match the project's
expected cash flows. Instead of using a fixed repayment schedule, lenders adjust
payments to ensure a stable DSCR over the loan term.

7. Describe what it means for debt to be back-levered.

a. Back-levered debt is subordinated to tax equity, meaning tax equity distributions
take priority. Lenders account for this by reducing CFADS by the atx equity
distributions when sizing the debt.

8. How much interest would be owed over the life of a 5-year, $50 million loan, with
an interest rate of 5% per year?
a. Per year – $50 million * 5% = $2.5 million
b. Total term – $2.5 million * 5 years = $12.5 million

9. Why is project finance important for renewable energy projects?

a. Renewable energy projects are capital-intensive, often requiring substantial
upfront investment. Project sponsors may not have the equity capital to fund

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 Tax Equity

projects solely with equity. Raising project finance debt is also cheaper than
equity. This structure allows sponsors to deploy capital into multiple projects and
boost their returns through low cost debt.

Tax Equity

1. What is an Investment Tax Credit (“ITC”)?

a. The ITC is a federal tax incentive in the United States designed to promote the
development and deployment of renewable energy projects. It allows investors in
qualifying projects to claim a percentage of eligible project costs as a dollar-for-
dollar reduction in their federal tax liability. By directly lowering the amount of
taxes owed, the ITC enhances project economics and attracts investment in
renewable energy infrastructure.

2. What is a Production Tax Credit (“PTC”)?

a. The PTC is a federal tax incentive in the United States that supports the
development of solar and wind projects by providing a per-kilowatt-hour (kWh)
tax credit for electricity generated. Unlike the ITC, which is based on upfront
capital costs, the PTC rewards actual energy production over a specified period,
typically 10 years after a project begins commercial operation.
3. What is the Inflation Reduction Act (“IRA”)?
a. The IRA, signed into law in 2022, is a landmark U.S. policy designed to
accelerate clean energy deployment and reduce carbon emissions. It expands
and extends tax credits for renewable energy projects, incentivizes paying
industry laborers prevailing wages, and shifts tax credit eligibility to technology-
neutral projects starting in 2025.

4. What do projects need to comply with to get the full ITC rate?
a. To qualify for the full 30% base ITC or PTC, projects must meet the Prevailing
Wage and Apprenticeship (“PWA”) requirements. This means paying workers
prevailing wages as determined by the Department of Labor and ensuring that a
minimum percentage of total labor hours are completed by registered
apprentices.

5. What are the available ITC bonus credits?

a. Most renewable energy projects qualify for a 30% base ITC, but the total can
reach up to 70%. Projects can receive 10% bonus credits for being in an Energy
Community or using Domestic Content, and 10-20% bonus credit if awarded
the Low-Income Community Bonus Credit. Bonus credits are stackable, not
mutually exclusive, which is how we get to 70% maximum ITC.

6. How would you approach determining the tradeoff between the ITC and PTC?
a. First, assess eligibility – PTC applies only to solar and wind projects. Then,
compare the project's upfront costs and expected energy output. The ITC is more

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 Modeling

beneficial for capital-intensive projects with lower capacity factors, while the PTC
favors lower-cost projects with higher energy production. A financial model can
help compare the present value of each incentive cash flow for a more detailed
analysis.

7. What are some common tax equity structures?

a. Before the Inflation Reduction Act, partnership flips, sale-leasebacks, and
inverted leases were the main structures. While traditional partnership flips
remain common, new structures—tax equity hybrid and cash equity hybrid—now
incorporate transferability. Simple direct transfers might be common but are not
structured to capture FMV step-ups and monetize depreciation benefits.

8. What is a Fair Market Value (“FMV”) step-up?

a. An FMV step-up is the increase of a project’s cost basis, the value used for
calculating investment tax credits, to its Fair Market Value (“FMV”). The FMV is
determined by a third-party appraisal report prepared by a valuation firm. Typical
FMV step-ups usually increase the project’s basis by 20-30%.

9. Why would a developer use tax equity?

a. Developers use tax equity to reduce their capital investment and enhance
returns. Additionally, since most developers lack the tax liability to fully utilize tax
credits, tax equity investors provide a way to monetize these benefits efficiently.

Modeling

1. Describe some modeling best practices.

a. Clear formatting – Provide a legend describing color coding and stick to it (e.g.,
green text for links to other sheets, black text for formulas, blue text for
hardcoded values, blue text plus light-yellow background for assumptions, and
red text for an inconsistent formula).
b. Simple formulas – Avoid multiple lines of code for one formula. If the calculation
is complex, break it out into multiple steps to make it easier to follow and audit.
c. Consistent formulas – A formula in one row should be consistent across the
entire row.
d. Checks – Implement model checks to ensure structural integrity. Monitor checks
and make them easily accessible to always evaluate model integrity.
e. Documentation – Track changes to the model in a change log, document the
source of information for assumptions, and define the units of values.

2. Walk me through a financial model for a solar project.

a. We start by forecasting production (usually measured in MWh or kWh), which
represents the amount of energy a project will deliver over a given period. Next,
we model revenue, typically driven by production, by multiplying the production
forecast by the rate (usually $/MWh or kWh). We then subtract operating costs

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 Project Knowledge

from revenue to calculate operating cash flow (cash flow to the project). After
that, we consider any tax equity cash inflows and outflows, followed by capital
expenditures to determine unlevered free cash flow. Finally, we incorporate debt
funding and repayment cash flows to calculate levered free cash flow.

3. How do you manage large models?

a. For a single project, I may begin by breaking the model into distinct sections,
creating standalone tabs for inputs, construction, operations, and financing, with
separate tabs for any unique considerations. This allows me to perform detailed
calculations in one area and pull the outputs into the main model. I may
summarize key information and outputs on a dashboard tab and create a
scenario manager tab to handle different scenarios. I ensure formulas are simple,
consistent, and easy to track across rows, which makes the model easier to
audit. Additionally, I add checks to ensure the model’s structural integrity.
b. For a portfolio of projects, I may duplicate a tab for each project to forecast
construction, financing, operations, etc. If the model becomes too large, I may
switch to the previous approach, running one project at a time. I would then use a
macro to copy and paste the completed cash flows and then roll them up with a
SUMIFS function for a more manageable structure.

4. What is a common source of circularity in a renewable energy project model?

a. Interest During Construction (“IDC”) is circular because interest is Paid In
Kind (“PIK”), meaning interest is paid by an additional drawdown on our loan.
Drawing down more on the loan to pay for interest, increases the outstanding
balance, which increases the interest due and so on.
5. Describe some approaches to managing circularities in a financial model.
a. To overcome circularities, such as IDC, we can do the following.
i. Hardcode the estimated IDC rather than calculate it live in the model.
ii. Implement a macro to copy and paste values and reference the new
hardcoded schedule of value rather than the live calculations.
iii. Turn on iterative calculations in the model to self-manage the
circularity.

Project Knowledge
1. What are P50, P90, and P99?
a. These refer to different confidence levels in production forecasts. P50 represents
the median estimate, where there is a 50% chance production will exceed this
value. P90 means there is a 90% chance production will exceed this estimate,
while P99 indicates a 99% chance of exceeding the forecast.

2. What are some project attributes you’d diligence as an investor or financier?

a. Offtake – rate structure, term, credit quality, guarantees (e.g., production,
savings, etc.), liquidated damages, and termination rights.

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 Project Knowledge

b. Technology – performance history, manufacturer credit quality, warranties,

guarantees, liquidated damages, replacement options.
c. Service Providers – ensure all necessary parties are contracted (e.g., EPC,
O&M, etc.), operating history, credit quality, guarantees, liquidated damages,
termination rights, and replacement options.

3. What are some typical development risks of a project?

a. Development risks arise during the project's development stage, which includes
securing site control, offtake agreements, interconnection, and permits.
i. Interconnection – If upgrade costs are too high, then the project may
become uneconomical.
ii. Permitting – Even after submitting a permit package, authorities may
reject the project, such as when a local AHJ imposes a moratorium on
solar or battery storage.
iii. Real estate – Projects require title, environmental, and geotechnical
reports to ensure the site is viable. For instance, unclear title records can
complicate financing, while geotechnical issues, like difficult soil
conditions, can drive up construction costs.

4. What are some mitigation strategies to development risks?

a. Developers should work on multiple projects simultaneously to diversify risk, as
natural pipeline attrition is common. Developers can also run desktop analyses
on interconnection and real estate risk and focus on developing projects in
communities that have historically been supportive of renewable energy projects.
b. IPPs mitigate development risk by acquiring projects at later stages and
structuring payments around project milestone dates. They can also use
“adjusters” to modify the developer fee based on final project values.
c. Project finance lenders and tax equity investors typically do not take on
development risk, as they provide funding only after construction has
commenced.

5. What are some typical operating risks of a project?

a. Lower production – Solar and wind projects often underperform relative to P50
forecasts.
b. Higher construction costs – Project costs can increase due to macro events,
such as tariffs, regulation (e.g., requiring prevailing wages), and supply chain
constraints, or project-specific events such as new AHJ requirements, design
changes, and soil conditions.
c. Operating cost overruns – Unexpected increases in maintenance or
operational expenses can affect profitability.
6. What are some mitigation strategies to operating risks?
a. Lower production – Underwrite a lower than P50 production scenario and
account for more downtime.
b. Higher construction costs – Procure equipment in advance, manage inventory
in storage, and carry a construction contingency budget.

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 Industry Questions

c. Operating cost overruns – Receive quotes you can close on as you underwrite
a project, include a contingency budget such as a corrective maintenance
budget.

7. How might we evaluate the creditworthiness of an offtaker?

a. Review their credit rating from an agency (e.g., S&P, Moody's), ensuring it is
investment grade (BBB- or higher).
b. Analyze the cash flow statement to confirm the company is profitable and
generating sufficient cash to meet its obligations.
c. Review the balance sheet to ensure the company has significant cash reserves
or strong equity backing to cover its obligations.

8. Have you reviewed Independent Engineer (“IE”), insurance consultant, or market

consultant reports before? Can you explain what they’re used for?
a. Independent Engineer Report – An assessment of a project’s technology,
location, contracts, and costs. Used by financiers to evaluate a project’s
bankability and risks.
b. Insurance Consultant Report – Third-party review of insurance coverage policy
to ensure it meets market standards. Required by financiers to confirm the
project has adequate coverage.
c. Market Consultant Report – An analysis of the project's merchant power
market, including pricing trends and demand forecasts. Used by financiers to
develop merchant power curves and assess downside risks.

Industry Questions
1. What are some major trends in the renewable energy industry right now?
a. Transmission Challenges – Windy and sunny areas are often located far from
major load centers, and building transmission lines is hindered by permitting,
land control issues, and high costs.
b. Interconnection Delays – Projects can face lengthy delays in clearing
interconnection queues, with approval processes taking years and timelines for
interconnection upgrades being extended by long lead times of equipment and a
growing backlog of projects from the utility.
c. Power Demand Growth – Increased demand driven by AI and data centers, the
reshoring of manufacturing, electric vehicles, and the electrification of homes and
industries.
d. Policy Changes – Potential revisions to the IRA are creating uncertainty around
tax credits. As a result, many investors are proceeding with caution or
accelerating projects to mitigate risk.

2. What are the top tailwinds and headwinds in the renewable energy industry?
a. Tailwinds – Strong load growth, faster renewable build timelines compared to
gas, declining costs, and cost parity with traditional energy sources.

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 Industry Questions

b. Headwinds – Potential reductions in government support, supply chain

disruptions, tariffs, and challenges integrating intermittent resources into the grid.

3. How would you compare a solar asset, wind asset, and battery storage asset in
terms of risk?
a. Solar Assets – Generally the lowest risk due to predictable energy production,
lower operational complexity, and proven technology. However, risks include
weather variability, system uptime, and potential curtailment.
b. Wind Assets – Higher risk than solar due to greater production variability, and
more complex maintenance. However, onshore wind projects have the longest
operating history of all three technologies.
c. Battery Storage Assets – Typically the highest risk due to its immaturity in the
market and typical revenue dependence on merchant markets or ancillary
services. Profitability tends to be sensitive to market volatility, dispatch strategies,
and policy changes.

4. Explain the difference between the "develop and flip" business model and the IPP
business model.
a. Develop and Flip – Focuses on early-stage development activities (e.g.,
interconnection, land acquisition, and securing PPAs and permits) and selling
projects to other developers or IPPs, typically at the point in time the project
becomes construction-ready. This model requires less capital and allows
developers to realize their investments sooner.
b. IPP – Involves developing, constructing, and owning projects long-term, and
often acquiring projects from developers. While it requires significantly more
capital, the IPP captures the full value of a completed project, including tax
credits, cash flows, and the ability to leverage financing.

5. Describe the differences between contracted and merchant revenue.

a. Contracted Revenue – Predictable revenue from long-term agreements where a
buyer agrees to pay a fixed price for energy or services. This provides financial
stability and reduces risk. Examples include power purchase agreements (PPAs)
or fixed-price contracts.
b. Merchant Revenue – Revenue that depends on market prices, meaning it can
fluctuate based on supply and demand. This can involve selling energy at market
rates or providing grid services. While it offers more upside potential, it also
comes with higher risk.

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