India has an installed base of 4,011 MW of Solar Projects and if government targets are to be be taken on face value, we should reach 100 GW by 2022. These high targets, which are way ahead of the UN global targets for renewable energy, would require a steady and large availability of debt.
Availability of debt, however, is amongst the largest challenges leading to delay and occasionally, cancellation of Solar Projects. That is not to say that Lending Institutions or the government is at fault. In fact,with inclusion of small utility scale and rooftop solar projects in Priority Sector Lending, banks are mandated to fund solar.
Project Bankability or the measure of risks as assessed by the bankers defines whether the project would be able to raise debt in time or not. Although, it is easy to summarise it in terms of financial metrics (DSCR, IRR, Debt Equity Ratio et al), but in practice, it is more complicated than that.
Lets walk through the phases of a typical solar project to help you make your project bankable:
India has seen fierce competition for setting up solar projects where one typically gets a project allotted by outbidding the competition for a lower tariff or for a lower subsidy (Viability Gap Funding). This competition is further intensified when the counter party signing the Power Purchase Agreement is strong, like in National Solar Mission which has a history of being oversubscribed by 10 times because NTPC Vidyut Vyapar Nigam (NVVN) signs the PPA.
Bankers assess the risk of payment delay or defaults by state utilities before deciding on giving loan for a project, and so should you!
This becomes important particularly considering the large cumulative and annual losses some state discoms are sitting on. For example, Tamil Nadu Discom alone accounts for 50,000+ Cr of accumulated losses!
2. Site Assessment
They say that there are 3 things important in the real estate sector: Location! Location! Location! Solar is not so different.
Location of your site not only determines how much can you generate, but is also important to ascertain cost, connectivity, uptime of the plant and more.
Generation expected can be calculated by using coordinates and accurate weather data (radiation, temperature etc). Bankers typically engage independent agencies to assess this and take a conservative estimate (P75 or P90).
Site characteristics determine the ease and cost of construction of solar plant and hence, have an impact on Bankability of the project.
- Soil Type: determines the depth of structures in ground and in turn the cost of civil work
- Shape: determines the exact area required and also the cost of equipment like cables. You can order your free Solar Plant Layout here by creating an account on ezysolare
- Encumbrances & Legal History: Bank needs to mortgage the land to process the loan and hence, wants it free of legal history and 100% in your possession with registered documentation.
- Connectivity: Road, Rail and Air connectivity to the site determine the ease of execution of the plant and in turn affects the cost of transportation as well.
The solar power generated is typically fed to the closest grid substation. But, if the substation suffers from long and unpredictable downtimes, the power can’t be evacuated and the returns from the plant would diminish. Bankers look at the uptime along with a host of other technical data like distance of the plant from substation which determines the transmission costs and losses, Bay Availability at the Substation, transmission capacity available at the substation and more.
3. Design & Procurement
Selection of equipment & contractor and optimization of design impact cost and credibility of the plant. Tier 1 equipment and contractors with strong financial footings, established quality standards and performance guarantees go a long way in giving confidence to the bankers. Further, equipment guarantees and warranties should be negotiated upfront to avoid any rude surprises during operations.
4.Installation & Commissioning
Solar Power plants typically covers many acres of land and one tends to run into site specific challenges from moving of local deity temples to removal of encroachment. It is also important to empower and if possible employ local manpower to take them into confidence and ensure long term safety and smooth running of plant.
Further, a typical solar plant requires more than 30 approvals from evacuation to land to meter & billing and more before it finally gets a commissioning certificate. The bankers are particularly cautious of legal and regulatory compliance.
5.Operation & Maintenance
Prudence demands that you not only assess the cost of construction of the plant but also cost of maintaining it including operational cost of manpower and security, spares to ensure redundancy and repair or replacement of equipment.
Over and above everything already mentioned, a good track record of Solar Plants installed earlier and promoter’s profile are the 2 most important factors to get fast financial closure.
It is not enough to get the debt but the terms of loan are equally important, but we will cover that another day. Subscribe to remain posted.
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