Be careful not to mix up different model uses if they are incompatible.
An error which often arises is the following:
- A model is created to determine the price or tariff of the project’s output. In order to do so, the tariff must change depending upon the input parameters to the model (e.g. capex, opex, cost of finance, etc)
- The model is modified to turn it into the lenders’ base case model. However, the tariff still changes when certain input parameters change.
- When lenders run sensitivity tests to determine the effect of an adverse scenario, the tariff increases, and the project appears to be insensitive to that particular downside scenario…
In short, tariffs and prices must be locked down prior to the model being turned into a lenders base case model.