[Document title]
A Case Study: Risk Analysis of Project Implementation
Philip A. Venanzi
SMBA 533 | Sustainability Tools & Processes
April 14th, 2015
Table of Reference
Executive Summary ...................................................................................................................... 1
Wells Fargo & Company and Solar Energy ............................................................................... 2
Situation Analysis.......................................................................................................................... 2
Evaluation of Strategic Alternatives ........................................................................................... 2
Recommendations ......................................................................................................................... 3
Next Steps for Implementation .................................................................................................... 3
Appendices ..................................................................................................................................... 4
Appendix A: Variability Assumptions for @Risk Input – Worst Case ........................................ 4
Appendix B: Variability Assumptions for @Risk Input – Most Likely Case............................... 4
Appendix C: Variability Assumptions for @Risk Input – Best Case .......................................... 4
Appendix D: Worst Case NPV Calculations and Risk Analysis ................................................. 5
Appendix E: Most Likely Case NPV Calculations and Risk Analysis ........................................ 6
Appendix F: Best Case NPV Calculations and Risk Analysis .................................................... 7
Appendix G: Worst Case NPV and Risk Analysis Without SIP Rebate ...................................... 8
Appendix H: Most Likely Case NPV and Risk Analysis Without SIP Rebate ............................. 9
Appendix I: Best Case NPV and Risk Analysis Without SIP Rebate ........................................ 10
Appendix J: Approval or Rejection of Projects With or Without SIP Rebate ........................... 11
Appendix K: Power Purchase Agreement Analysis (Most Likely Case)................................... 11
Appendix L: Financial Analysis of Scenario Impacts ............................................................... 12
Works Cited ................................................................................................................................. 13
Executive Summary
Wells Fargo is considering whether or not to add solar panels to three Los Angeles branches
based on the success of a venture in Denver and the variability of inputs related to the net present
value (NPV) of the project. It is recommended by the author of the paper that the managers and
executives pursue the current project but urges caution as to how future projects should be
evaluated based on the availability of the California SIP rebate. The author then dives deeper
into a more thorough analysis as to why the organization should pursue the option chosen and
where the short-term and long-term value propositions lie within the analysis and the system’s
solar generation as a whole. First, the paper evaluates Wells Fargo’s various internal and
external environments. Second, it evaluates three alternatives that the organization could
consider but ultimately justifies the pursuit of one strategic option. Additionally, the paper goes
into great depth regarding an analysis of each scenario’s NPV values and the probability that a
project will have an internal rate of return (IRR) greater that the after-tax hurdle rate. Lastly,
once the recommendation is given, the analysis examines whether or not Wells Fargo should
engage in a power purchasing agreement or incur the costs of installation upfront. Overall, it is
concluded that pursuing the project now is confirmed by the financial and risk analysis
conducted, but only if the SIP rebate is available. Otherwise, the project should be rejected.
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Wells Fargo & Company and Solar Energy
In August of 2011, Sheri Lucas had an important decision to make regarding whether or not to
implement the installation of separate 15-kilowatt (kW) photovoltaic solar generation systems on
three of their Los Angeles branches. Now she had been given the known values for upfront and
estimated ongoing costs for system implementation. However, even with these values, the
variable of uncertainty needed to be accounted for (detailed assumptions pertaining to the
variability analysis can be found in Appendices A through C). Additionally, the various
alternatives to project implementation needed to be considered before a rational decision could
be made. The main problem facing Wells Fargo was determining if the projected financial
byproducts of system installation would meet internal requirements and whether statistical risk
analysis of cash flow variability would affirm or refute pursuing their proposal.
Situation Analysis
Wells Fargo had developed a strong reputation for their social and environmental screens that
would accompany any investment decision by their organization. Ironically, instead of
considering whether or not they should lend money for an environmental or social endeavor,
they were considering a capital investment project to improve operational efficiency in three Los
Angeles branches. Success with a similar venture in Denver gave them great optimism about
new system implementation in California. However, there was uncertainty in regards to the SIP
California government rebate being available in the future. So, although they would be able to
receive the rebate now, the rebate might not be available for other projects moving forward.
Overall, Sheri needed to figure if the analysis would change her views on whether or not to
implement or reject the project based on the availability of the government rebate.
Now, the organization had certain evaluation requirements for the various strategic alternatives.
First, the internal rate of return needed to exceed the after-tax hurdle rate of 3.53%. Based on the
analysis conducted, the NPV-positive projects would have an internal rate of return (IRR) above
the hurdle rate while all NPV-negative projects would have IRR percentages below the hurdle
rate. Second, the project approval process was primarily dictated by a 12-year NPV calculation.
However, for some parts of the analysis, a 30-year calculation does a better job of characterizing
long-term benefits in addition to short-term performance. Lastly, the organization needed to
know when the project would break even. It was preferred that payback would occur at some
point during the first 12 years.
Evaluation of Strategic Alternatives
Four strategic alternatives could be pursued: (1) not pursuing current or future projects, (2) not
pursuing current projects, but pursuing future projects, (3) implementing just one branch system,
or (4) implementing the project for all three branches. Now, option three and option four have
the same benefits and costs (aside from the increased scale for three systems, and hedged
downside risk for one system). Thus, for simplicity, they will be considered as one collective
option. Now, what is the cost of forgoing current projects? That would be the net present value
of the projects that you decide to forgo. Regardless of the availability of the SIP rebate, the
majority of the projects have a positive 12-year NPV, positive 30-year NPV, or both. For more
detailed analysis of worst, most likely, and best case scenario project valuations with and without
the SIP rebate, review Appendices D through I. The same cost is incurred by option two. The
only way this option recoups more value compared to option one is that it pursues future projects
instead of forgoing them altogether.
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For the three options, variability plays the most important role in terms of figuring out the
probability of a particular project NPV value being positive or negative. Appendices D through
I also describes the probability of each scenario yielding a positive NPV result. For this analysis,
the variability in the growth of electricity prices, maintenance costs, and insurance premiums are
the most important sources of variability. This is the case because these growth rates have a
large impact on the value of future cash flows that went into the analyses found in each
appendix. Overall, the change in electricity prices should be the most closely monitored because
it has the greatest impact of the three. The greater the prices of the traditional electricity grid
mix, the greater Wells Fargo’s savings will be. In contrast, lower prices will reduce the savings
from solar generation (see Appendix L for a more detailed analysis on how project
implementation will affect financial performance).
Recommendations
There are some key findings that will drive the recommendations for two specific project
categories: current and future projects. For the current project (and potentially other current
projects), Wells Fargo should accept the project and install the solar panels on the three
branches. Appendix J shows that within three scenarios considered, only the worst case
scenario’s 12-year NPV is rejected. The other scenarios and time horizons yield beneficial NPVpositive output. Additionally, since current projects will receive the SIP rebate, the analysis
adequately characterizes the financial benefits of the systems.
However, future projects require different considerations. These projects must be rejected or
accepted based upon SIP rebate availability. If it is available, they should accept the projects that
are proposed (assuming the solar projects are similar to the one described in this analysis). On
the other hand, if the rebate is not available, then it would make more sense to reject (assuming
similarities between the projects and the current analysis) unless Wells Fargo’s is willing to
receive full payback of installation between years 12 and 30. Thus, the availability of the SIP
rebate is the key driver of deciding whether or not to pursue future projects.
Next Steps for Implementation
One question remains. Should Wells Fargo engage in a power purchase agreement (have
contractor build systems at own expense and then sell energy at lower rate back to Wells Fargo)
or go with the original implementation strategy (incur all of the costs of system implementation)?
According to Appendix K, they should forgo power purchase agreement (PPA) because the
long-term benefits of incurring the upfront costs far outweigh buying electricity back from an
independent contractor, even if it is below the market rate for electricity. Although the PPA
yields a greater 12-year NPV, the 30-year NPV for the original arrangement is much greater.
The government subsidization upon installation allows the payback period to be comparable to
the 12-year NPV comparison. The 30-year NPV comparison shows that the original
arrangement allows for greater grid electricity purchase savings than the PPA agreement.
Additionally, the flexibility that is provided through the acquisition and ownership of renewable
energy credits (RECs) in California can create significant benefits for Wells Fargo such as
enhancing the “greenness” of their brand and the ability to sell these credits based on need.1
Wells Fargo will save millions of dollars in energy and taxes by implementing this project now
(see Appendix L). Additionally, the long-term financial, social, and environmental benefits of
such a project will far outweigh any shortcomings seen in 12-year NPV values. Thus, based on a
comprehensive risk and financial analysis, Wells Fargo should go solar in Los Angeles.
1
Elder, Bruce, "Renewable Energy Credits (RECs) in California: Status after Passage of Senate Bill 107 of 2006."
3
Appendices
Appendix A: Variability Assumptions for @Risk Input – Worst Case
Input
Electricity Price Growth Rate2
Maintenance Cost Growth Rate3
Additional Maintenance, Year 15
Inverter Replacement, Year 17
Insurance Cost (as % of system cost)
Insurance Cost Growth Rate
Minimum
3% (given)
2% (given)
$400/kW (given)
$250/kW (given)
0.30% (given)
2% (given)
Most Likely
7%
3.5%
$550/kW
$400/kW
0.65%
5%
Maximum
9%
5%
$700/kW
$550/kW
1.00%
8%
[1] According to a study, the price of traditional grid mix electricity is supposed to rise rapidly. The study cited that
prices were expected to grow by more than 7% in a relatively short period of time in the late 2000s.
[2] As the demand for solar project implementation increases in California, the demand for related maintenance
services will increase and likely result in modest growth in maintenance costs.
*Last four assumptions are meant to simulate the worst case scenario for higher ongoing operational costs.
**Bolded values went into the NPV calculations in appendices below.
Appendix B: Variability Assumptions for @Risk Input – Most Likely Case
Input
Electricity Price Growth Rate
Maintenance Cost Growth Rate
Additional Maintenance, Year 15
Inverter Replacement, Year 17
Insurance Cost (as % of system cost)
Insurance Cost Growth Rate
Minimum
3% (given)
2% (given)
$250/kw
$200/kW
0.20%
1%
Most Likely
7%
3.5%
$400/kW (given)
$250/kW (given)
0.30% (given)
2% (given)
Maximum
9%
5%
$550/kW
$400/kW
0.50%
5%
[3] According to a study, the price of traditional grid mix electricity is supposed to rise rapidly. The study cited that
prices were expected to grow by more than 7% in a relatively short period of time in the late 2000s.
[4] As the demand for solar project implementation increases in California, the demand for related maintenance
services will increase and likely result in modest growth in maintenance costs.
*Last four assumptions are meant to simulate the most likely scenario for higher ongoing operational costs.
** Bolded values went into the NPV calculations in appendices below.
Appendix C: Variability Assumptions for @Risk Input – Best Case
Input
Electricity Price Growth Rate
Maintenance Cost Growth Rate
Additional Maintenance, Year 15
Inverter Replacement, Year 17
Insurance Cost (as % of system cost)
Insurance Cost Growth Rate
Minimum
3% (given)
2% (given)
$200/kW
$150/kW
0.10%
0.5%
Most Likely
7%
3.5%
$300/kW
$200/kW
0.20%
1.25%
Maximum
9%
5%
$400/kW (given)
$250/kW (given)
0.30% (given)
2% (given)
[5] According to a study, the price of traditional grid mix electricity is supposed to rise rapidly. The study cited that
prices were expected to grow by more than 7% in a relatively short period of time in the late 2000s.
[6] As the demand for solar project implementation increases in California, the demand for related maintenance
services will increase and likely result in modest growth in maintenance costs.
*Last four assumptions are meant to simulate the best case scenario for higher ongoing operational costs.
** Bolded values went into the NPV calculations in appendices below.
2
3
"Understanding California's Electricity Prices." CPUC. California Public Utility Commission.
"Major Solar Projects List." SEIA. Solar Energy Industries Association.
4
Appendix D: Worst Case NPV Calculations and Risk Analysis
12 years
The worst case scenario would yield a 55.3% chance of payback within 12 years. This output
had 5000 iterations. Additionally, the 12-year internal rate of return is below Wells Fargo’s
after-tax hurdle rate of 3.53% which would suggest the project needs to be rejected if these
conditions were to prevail over the life of the project.
30 years
The worst case scenario would yield a 100% chance of payback within 30 years. This output had
5000 iterations. Additionally, the 30-year internal rate of return is above Wells Fargo’s after-tax
hurdle rate of 3.53% which would suggest the project should to be accepted if these conditions
were to prevail over the life of the project.
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Appendix E: Most Likely Case NPV Calculations and Risk Analysis
12 years
The most likely scenario would yield a 98.8% chance of payback within 12 years. This output
had 5000 iterations. Additionally, the 12-year internal rate of return is above Wells Fargo’s
after-tax hurdle rate of 3.53% which would suggest the project should be accepted if these
conditions were to prevail over the life of the project.
30 years
The most likely scenario would yield a 100% chance of payback within 30 years. This output
had 5000 iterations. Additionally, the 30-year internal rate of return is well above Wells Fargo’s
after-tax hurdle rate of 3.53% which would suggest the project should be accepted if these
conditions were to prevail over the life of the project.
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Appendix F: Best Case NPV Calculations and Risk Analysis
12 years
The best case scenario would yield a 100% chance of payback within 12 years. This output had
5000 iterations. Additionally, the 12-year internal rate of return is above Wells Fargo’s after-tax
hurdle rate of 3.53% which would suggest the project should be accepted if these conditions
were to prevail over the life of the project.
30 years
The most likely scenario would yield a 100% chance of payback within 30 years. This output
had 5000 iterations. Additionally, the 30-year internal rate of return is well above Wells Fargo’s
after-tax hurdle rate of 3.53% which would suggest the project should be accepted if these
conditions were to prevail over the life of the project.
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Appendix G: Worst Case NPV and Risk Analysis Without SIP Rebate
12 years
The worst case scenario without the SIP rebate would yield a 0% chance of payback within 12
years. This output had 5000 iterations. Additionally, the 12-year internal rate of return is well
below Wells Fargo’s after-tax hurdle rate of 3.53% which would suggest the project needs to be
rejected if these conditions were to prevail over the life of the project.
30 years
The worst case scenario without the SIP rebate would yield an 82.4% chance of payback within
30 years. This output had 5000 iterations. Additionally, the 30-year internal rate of return is just
below Wells Fargo’s after-tax hurdle rate of 3.53% which would suggest the project should be
rejected.
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Appendix H: Most Likely Case NPV and Risk Analysis Without SIP Rebate
12 years
The most likely scenario without the SIP rebate would yield a 0% chance of payback within 12
years. This output had 5000 iterations. Additionally, the 12-year internal rate of return is well
below Wells Fargo’s after-tax hurdle rate of 3.53% which would suggest the project needs to be
rejected if these conditions were to prevail over the life of the project.
30 years
The most likely scenario without the SIP rebate would yield a 100% chance of payback within
30 years. This output had 5000 iterations. Additionally, the 30-year internal rate of return is
above Wells Fargo’s after-tax hurdle rate of 3.53% which would suggest the project should be
accepted if these conditions were to prevail over the life of the project.
9
Appendix I: Best Case NPV and Risk Analysis Without SIP Rebate
12 years
The best case scenario without the SIP rebate would yield a 0% chance of payback within 12
years. This output had 5000 iterations. Additionally, the 12-year internal rate of return is well
below Wells Fargo’s after-tax hurdle rate of 3.53% which would suggest the project needs to be
rejected if these conditions were to prevail over the life of the project.
30 years
The best case scenario without the SIP rebate would yield a 100% chance of payback within 30
years. This output had 5000 iterations. Additionally, the 30-year internal rate of return is well
above Wells Fargo’s after-tax hurdle rate of 3.53% which would suggest the project should be
accepted if these conditions were to prevail over the life of the project.
10
Appendix J: Approval or Rejection of Projects With or Without SIP Rebate
SIP Rebate Included Project Decision (based on Appendices D through F)
Categories
12-year NPV
30-year NPV
Worst Case
Reject
Accept
Most Likely Case
Accept
Accept
Best Case
Accept
Accept
Overall, if Wells Fargo is presented with opportunities to implement additional solar projects on
their California with the SIP rebate still available, they should pursue those projects. There is
only one scenario where you would reject the project. However, even this project scenario still
yielded a larger than 50% probability that the project would be NPV positive in the worst
possible case.
SIP Rebate Excluded Project Decision (based on Appendices G through I)
Categories
12-year NPV
30-year NPV
Worst Case
Reject
Reject
Most Likely Case
Reject
Accept
Best Case
Reject
Accept
Overall, if Wells Fargo is presented with opportunities to implement additional solar projects on
their California without the SIP rebate available, they should not pursue those projects. All of
the scenarios do not attain at less than 12-year payback period. Even though two of the scenarios
yield NPV-positive projects for a 30-year time horizon, these projects are hard to sell the
business case for due to their lack of a payback period within a 12-year time horizon.
Appendix K: Power Purchase Agreement Analysis (Most Likely Case)
Power Purchase Agreement (PPA) NPV Calculation (based off of Appendix E analysis)
NPV (12)
$23,903.51
NPV (30) $ 95,814.05
Original Most Likely Case NPV Calculation (also see Appendix E)
NPV (12)
NPV (30)
$20,060.55
$ 229,068.20
Analysis
Although the PPA does edge out the most likely in-house installation option, the long-term
benefits of the PPA are dwarfed by the original scenario’s 30-year NPV. It would appear more
practical to forgo the PPA because the only benefit that outweighs the original option is in the
near term. The original arrangement will yield the greater long-term benefit.
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Appendix L: Financial Analysis of Scenario Impacts
Worst Case & Most Likely Scenarios (with or without SIP rebate)
Aggregate Tax Savings, 12 years
Aggregate Tax Savings, 30 years
Total Savings, 12 years
Value of Grid Purchases Avoided, 12 years
Value of Grid Purchases Avoided, 30 years
Total Savings, 30 years
*Initial investment net of rebates is $187,377.89.
$79,459.95
$393,463.22
$209,105.13
$129,645.18
$641,966.31
$1,035,429.53
Number of times initial investment returned
5.53 times
Best Case Scenario (with or without SIP rebate)
Aggregate Tax Savings, 12 years
Aggregate Tax Savings, 30 years
Total Savings, 12 years
Value of Grid Purchases Avoided, 12 years
Value of Grid Purchases Avoided, 30 years
Total Savings, 30 years
*Initial investment net of rebates is $187,377.89.
Number of times initial investment returned
$89,369.41
$145,813.25
$235,182.66
$564,650.67
$921,272.15
$1,485,922.82
7.93 times
12
Works Cited
Elder, Bruce. "Renewable Energy Credits (RECs) in California: Status after Passage of Senate
Bill 107 of 2006." Web. 14 Apr. 2015.
"Major Solar Projects List." SEIA. Solar Energy Industries Association. Web. 14 Apr. 2015.
"Understanding California's Electricity Prices." CPUC. California Public Utility Commission.
Web. 14 Apr. 2015.
"Wells Fargo: Solar Energy for Los Angeles Branches (A)." Darden Business Publishing.
Web. 14 Apr. 2015.*
*This citation was used throughout the written report and the analysis found in the appendices.
Additionally, Microsoft Excel and the @Risk software plug-in for Excel were used extensively in
the analysis found in the appendices and the conclusions in the written report related to this case
study citation.
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