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Financial simulation

Background​

As part of the simulator, we need to calculate the financial results of the asset given its solar generation and the expected prices on the markets. There are several important aspects to calculate the overall financial performance:

  1. trading simulation
  2. calculation of PPA settlements for assets with PPAs
  3. calculation of expenses (capex and opex)
  4. calculation of revenues

Calculation logic​

Trading simulation​

For simplicity, in the long term simulation we only simulate bidding on the day-ahead markets, without considering intraday markets or other market-based services such as reserves and frequency control.

We generate a bid for each day based on "simulated" forecasts. We create these forecasts by taking the expected actuals and introducing an error based on a certain expected RMSE. For assets with batteries, this bid will also depend on the results of the battery simulation.

We then calculate the imbalance based on the difference between the "real" generation and the plan submitted.

note

We are currently not simulating the effect of real-time battery adjustment to minimize imbalance. This will tend to slightly underestimate the revenues from battery operations. We plan to add this aspect in the future.

PPA settlement calculation​

For assets part of a PPA, we also calculate the settlements between the IPP and the offtaker, which will affect the total revenues.

Strike price calculation​

The strike price depends on the PPA scheme:

  • fixed: equal to the fixed PPA price
  • fixed with inflation escalation: equal to the PPA price in the first year of the PPA contract, then increasing every year according to inflation assumptions in the scenario.
  • fixed with escalation: equal to the PPA price in the first year of the PPA contract, then increasing every year according to the escalation factor in the contract.
  • discount floor/collar: equal to the market price multiplied by a discount factor (<=1<=1) and limited by optional floor and/or ceiling prices.

Settlement amount calculation​

There are two main types of PPAs: physical and virtual. For physical PPAs, which include offsite, onsite, and self-wheeling PPAs, the energy produced by the plant during the validity of the PPA contract is not traded in the market, thus the trading simulation in these cases is not performed during the PPA period. All the energy produced is bought directly by the offtaker, and paid at the strike price, which represents the main revenues for the IPP.

For virtual PPAs, the energy is sold to the market, but later a settlement amount is calculated and there may be a transfer of funds between IPP and offtaker, depending on the market conditions. The settlement amount SS in this case is calculated as:

S=Pstrike(t)−P(t)S = P_{strike}(t) - P(t)

SS the price (per kWh) that the offtaker needs to pay the IPP, or viceversa if the value is negative.

example

If during a certain slot SS=4.5 JPY/kWh and the generation is 400 kWh, the offtaker will need to pay the IPP 1,800 JPY for that slot.

Expense calculation​

We calculate expenses for each assets including capital expenses (CAPEX) and operational expenses (OPEX). The CAPEX depend on the CAPEX payment in input.

OPEX costs include:

  • Operations and management (O&M). Assigned at the last day of the month.
  • Asset management. Assigned at the last day of the month.
  • Land lease. Assigned at the last day of the year.
  • Insurance. Assigned at the last day of the year.
  • Decommission reserve. This is paid only from year 11, and is assigned at the COD date of the asset.
  • Inverter replacement. This is assigned at the same COD date of the asset, and is charged at the end of the inverter warranty period. So if the COD is 1 April 2020 and warranty is 10 years, the first payment will be on 1 April 2030.
  • Property tax. This depends on a tax rate that can be set in input. The cost is assigned at the end of May of each year, assuming 17 years depreciation of the original taxable CAPEX expenses.
  • Other OPEX, for generic/miscellaneous expenses. Assigned at the last day of the year.

Revenue calculation​

The revenues are calculated by summing all the different components: revenues from the markets (day-ahead trades), imbalance cashflows, subsidy cashflows, and PPA settlements.

The total cashflow can then be calculated by subracting all the costs from the revenues.

IRR calculation​

We calculate the yearly internal rate of return (IRR) on a monthly basis. We first calculate the monthly IRR, then we translate it into yearly IRR with this formula:

IRR=(1+IRRmonthly)12−1\text{IRR} = (1 + \text{IRR}_{\text{monthly}})^{12} - 1

info

There may be cases where IRR cannot be calculated. This may be due to missing or incomplete data (eg. missing CAPEX information) or because the calculated IRR would produce extreme values, which generally indicates that there are issues with the input data.