Is it really risky to put solar project under REC Scheme?
While India has reached to an installed capacity of solar Power over 1000 MW there is an insignificant addition has happed under the REC scheme. The major reason for this had been the lack of financing available for the solar proposed under REC. Considering the fact that the normal bidding route has taken the tariff as low as 7 rupees/ unit, it becomes important to the investor to reevaluate the REC route and assess the profitability of the project under REC route. If we consider a project with PLF of 18 % and interest rate 13% capital cost 8Cr/ MW and another factor in line with the CERC proposed benchmark in the recent publication the levelized tariff is about 8.42/ unit. However, under the REC route the project developer can sell electricity at the APCC price (For e.g. 2.5 Rs/ unit) in the case of Rajasthan. If we assume that REC are tradable until at base price 9.3 Rs/ unit, it is important to assume a flat price beyond 2017 and we have considered the scenarios wherein the total electricity sale price beyond 2017 is 5 Rs/ unit and 7 Rs/ unit. An escalation of 5% per year in tariff is also considered. The levelized tariff under the scenario when we sell electricity at 5RS/unit beyond 2017 is 8.97 Rs/ unit, which is much higher than the recent bidding prices quoted where average tariff for 20 years had been below 8 Rs/ unit. There is a upside for an investor further as the per MW installation cost of the solar projects is reaching as low as 6.5 Cr/ MW. This recent slide down in the capital cost of solar projects generates tremendous interest in the market to install solar project under REC route, however, the lender should come forward to finance these projects. There are various risk mitigation options for the lenders which are summarized below.
- The project activity has a DSCR>1 in all the four scenarios
- The project cash flow is positive till 2017. However, it becomes negative after 2017 for a few years depending on the scenarios. This requires an additional capital infusion to the extent of Rs.5.9 million.
- There is surplus revenue generated till year 2017. This surplus revenue is in the range of Rs.19.50 million to Rs.29.84 million. This surplus revenue generated by the year 2017 will cover the negative cash flow expected beyond 2017.
- By the year 2017, the lender recovers about 40% of its principal amount. For a typical 1 MW project illustrated above, the loan amount is Rs.56 million and lender recovers about Rs.22.4 million by 2017 and there is a surplus revenue available in the project cash flow which is at least Rs.19.50 million. This shows a healthy cash flow and a capital reserve in the project.
- The levelised tariff in the above scenarios is ranging between Rs.8.97-11.54/kWh and the LCOE is around Rs.8.20/kWh. It shows that the project will remain profitable provided there is a risk-free generation and desired PLFs are maintained.
- Solar projects typically generate PLF in the range of 18-24% based on the recent data released by MNRE. The PLF assumed is on a conservative basis, however the lender can consider collateral securities to cover its generation risk.
- There is a lack of clarity for REC availability beyond 2017, however it is expected that solar projects will be able to sell electricity in free market @Rs.5/unit beyond 2017 with an escalation 5% per year. In case the project developer is not able to meet the electricity sale price of Rs.5/unit, the lender may face non-payment risk. However, considering the APPC escalation of 5% per year, it is expected that the APPC price will be on the order Rs.3/unit by the year 2017. This is the worst case scenario which is unlikely to happen. However, the lender can consider the following options to cover its risk for financing the projects under REC route
- Financing a max. of 60% of the capex as the project generates a min. revenue to cover the above debt
- The collateral securities of the order of 30% for covering its risk associated with REC policy
- Forward ballooning (accelerated forward payments) in the first four years to cover its max. debt by 2017. The lender can cover about 60% of its debt amount by 2017
- Preference to be made in financing the projects under REC route which are having a third party PPA. The lender should ensure a PPA which guarantees electricity sale to a third party at a min. rate of Rs.5/unit beyond 2017
In case of third party PPA, the lender should do due diligence for the electricity buyers with whom the PPA is signed. The buyer should be creditworthy to honor the PPA