Impact of financing and payout policy on the economic profitability of solar photovoltaic plants

This paper introduces an innovative comprehensive evaluation model for appraising an investment in a solar photovoltaic plant which encompasses both operational and financial management. We illustrate the intricate network of logical relations among technical (estimated) variables and financial (decision) variables and show that establishing transparent links between the former and the latter enhances the accuracy and soundness of the model. The results indicate that understanding the conceptual and formal relations of operating variables and financial decisions is necessary for correctly measuring shareholder value creation and making rational decisions, even for those projects (such as solar energy projects) where the operating, technical component is of paramount importance. We show how a firm's decision of replacing conventional energy with solar energy may be affected by managerial decisions regarding the firm's payout/retention policy and its financing policy to support the project. The model discloses insights on how to fine-tune the financing and distribution decisions in order to maximize the value creation for shareholders. We apply the model to a real-life photovoltaic project to be located in the province of Modena, in Northeast Italy, and quantify the effect of financial decisions on the project's net present value, showing that the financing and distribution policies may amplify or shrink the impact of changes in other inputs and may even revert an otherwise unprofitable project into a value-creating one. Finally, we allow operational variables as well as financial variables to change in order to measure their importance via the application of the Clean Finite Change Sensitivity Indices (Magni et al., 2020).