Appraisal methodology for solar and wind energy projects
Update to Solar and Wind Appraisal Model.
We recently became aware of a computational error in the Solar and Wind Appraisal Model. The error resulted in an underestimation of energy output for solar plants that are 5,000 kW or less. The model has been updated to correct the error. There have been no changes to any of the assumptions or any of the other calculations in the model.
The 2021-2022 Enacted State Budget established a process for the New York State Department of Taxation and Finance to develop a standard appraisal methodology for solar and wind energy systems with a nameplate capacity equal to or greater than one megawatt.
The Tax Department—in consultation with the New York State Energy Research and Development Authority (NYSERDA) and the New York State Assessors Association (NYSAA)—will annually develop:
- an appraisal model using the discounted cash flow approach for solar and wind energy systems, and
- discount rates to be applied to the models.
Beginning with 2022 assessment rolls, local assessors are required to use the model and discount rates to value and place assessments on affected solar and wind energy systems.
Note: Municipalities will continue to have the flexibility to negotiate payment in lieu of taxes (PILOT) agreements.
The discount rates below are based on the economic principle of weighted average cost of capital (WACC). The cost of capital is a forward-looking measure comprised of the time value of money and investor risk. It takes into account the expected rate of return that market participants require to attract funds to a particular investment. The cost of capital is synonymous with the discount rate that is typically used in renewable energy discounted cash flow analysis.
The discount rates are separated into three distinct categories based on investment risk associated with system type and size.
|Large-scale solar (pre-tax, 5 megawatts and larger)|
|Weighted cost of debt||0.519||4.00%||2.08%|
|Weighted cost of equity||0.481||10.58%||5.09%|
|Base discount rate per WACC||7.16%|
|VDER1 Solar (pre-tax, 1-5 megawatts)|
|Weighted cost of debt||0.300||4.50%||1.35%|
|Weighted cost of equity||0.700||9.50%||6.65%|
|Base discount rate per WACC||8.00%|
|Wind (pre-tax, 1 megawatt and larger)|
|Weighted cost of debt||0.316||4.00%||1.26%|
|Weighted cost of equity||0.684||12.28%||8.40%|
|Base discount rate per WACC||9.66%|
1 VDER = Value of Distributed Energy Resources
Note: The rates specified above are before-tax discount rates. These rates will be combined with the local full-value property tax rates before use in the Solar and Wind Appraisal Model.
The model below was developed in consultation with NYSERDA and NYSAA, with input from the Alliance for Clean Energy, the New York State Economic Development Council, and renewable energy developers.
Following a 60-day comment period, the Tax Department reviewed all of the comments received and adjusted the model appropriately.
Note: The model utilizes earnings before interest, taxes, depreciation, and amortization (EBITDA).
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Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. The analysis projects how much money an investment will generate in the future, and then discounts that cash flow to arrive at an estimated current value of the investment.