Financing of solar projects: Issues and concerns
A typical solar project is financed in the form of debt and equity wherein the equity is brought by an investor and debt is provided any financier or lender to the company executing his project.Generally a project company is a SPV (special purpose vehicle company)and is liable to all contractual/obligations rising out of the solar project activity.In case of project finance the debt providers extend credit the project in the form non-recourse financing and the debt is secured by assets related to the solar projects.In case of default the parent company don not have any liability.All the liabilities are with the SPV. Typically the debt-equity ratio is in the ratio of 70:30,and equity is provided by the project proponent.The expected returns on a typical solar projects are highly dependent o the type of PPA,In the Indian context the PPA’s are at the electric utility at long term agreed price for 20 years.The 3rd part PPA is also in practice which is done by an off taker willing to take electricity at a mutually agreed price.It is very imp that PPA is done with a credit worthy off taker to secure project financing.Many time equity investors accept a lower tariff in case the off taker is credit worthy,this helps in securing finance for the projects.
There has been an investment of about 1300 MW in solar projects in last 3 years and most f this investment was through long term PPA’s .However PPA’s signed under JNSNM and Gujarat policy wherein the off taker risk Is minimal,in recent years there have been some more PPA’s where off takers were utilities having negative balance sheets such has Tamil Nadu and Andhra Pradesh. The project financier found difficulties to sign PPA’s as the banks and financial notations were not comfortable with the credit worthiness of off taker utilities.Below is the list of banks which offer term loans for a typical solar pv. we have also depicted few banks which are the front runner in providing and taking initiatives for solar pv loans.
Some of the project installed under REC route also found difficulty in getting project finance, as there was a lack of clarity in terms in terms of project cash flows beyond 2017,and lenders found it difficult to finance these projects under project finance route. Few of these achieved finance closure , however this project was financed as a part of their promoter fundings also known as recourse financing. In this kind of financing have to, also pay collaterals and securities to achieve financial closure.
Investment in solar project the more attractive proposition to the project developers who used invest earlier in wind project due to AD. After withdrawal of AD in wind projects, the project developers find solar project much more attractive for investment. AD provides investors a modified cost recovery system which allows 80% of project cost recovered in 1st year itself and subsequent project cost to be recovered in coming years. Through AD the investors can reduce their tax liability and tax savings achieved through these invest. Makes these projects financially viable. Recent investment and bidding show that the Co. Which were aggressive I bidding in JNSNM or state policies because of reducing their tax liability by investing In solar projects.
We anticipate that the newly launched scheme under JNSNM phase 2,VGF will find new investors in solar projects and will be helpful in securing project finance for these projects.
Article by: Dr. Sanjay Vashistha & Sonu Nair