How to structure a bankable solar PV project?
The increased interest in solar projects in recent years have raised the concerns of the investors towards the structuring a bankable solar project. On one side while there is a lack of clarity of cash flows in the REC route, the banks and financial institutions are reluctant in financing these projects and consider these projects as non-bankable. Some of the investors have gone highly aggressive in the reverse bidding and find it difficult to get the financed from the Banks. There is a need for the investors to understand that how the project structuring can be done in order to make it bankable project.
Structuring a project as a bankable project requires detailed consideration on the technical, legal and economic aspects of the project. Every bank and financial has its own set of criteria through which it assess the bankability of a project. However the basic requirement is that the project should have a stable and visible cash flow throughout the entire financing period of the project. The assessment by any banks or financial institution is done in typical four phases, which include the
a) Initial qualitative assessment, b) Assessment of cash flow models c) Quantitative risk assessment d) Assessment of financial structure.
The major aspect which any bank or financial institution assess for the bankability of a solar project is the local site conditions. The local site conditions are typically evaluated on the basis of solar radiation available at the site and expected yield (Annual Energy Generation) which dictates the cash flow of the project. It is not only important to assess the energy yield for a single year, there is a requirement to have the energy yield assessment on long-term basis for which you are required to have the historical solar radiation data at least for 10 years for the site location. So that the trend can be forecasted to give the expected future energy generation for the banker. The data is not generally viable through the free data source. However some of the paid data sources such as 3tier or solar GIS provides this data on cost basis, which makes your detailed project report (DPR) as a bankable DPR. Following example show the historical data for some of the typical paid site done by us.
In order to make the DPR bankable the financial institute also asks to conduct the energy yield assessment and electricity generation assessment at P50, P90 basis. Which gives reasonable comfort to the bank towards the expected generation from the solar plant. The typical P50 and P90 for the site can be depicted as follows.
Apart from generation the financial institutes also sees for technical assessment so that they can assure there is no nearby shading from nearby hills which may affect the generation. In fact your DPR should conduct detailed shadow analysis of the site including the inter row shadow which gives a high ranking in terms of technical assessment to the bank or financial institution.
While you are submitting your application in the bank, there is a need to provide the details about nearby infrastructure such as access roads, power evacuation, water availability etc.
Apart from technical aspects the bank-ability of solar project is heavily dependent on power purchase agreement. The PPA should be on long-term basis on a clarity of cash flow at least for the long tenure. The lender assess PPA and the party’s financial strength/pay ability, risk of the buyer. In this regard the PPAs with NVVN are considered bankable. The PPAs with state power utilities are also bankable, however some of the financial institutions have discomfort with regards to balance sheet (negative) of the state power utilities which increases the off taker payment risk in the project.
Sometimes the PPA are signed with private parties as part of capital/ third part sale and the balance sheet of captive power buyer with third party becomes a critical factor in the bankability of the solar project. The technology selection and EPC also play an important role with the bankability of a solar project. For example if the modules and inverters are supplied from the reputed supplier. It is considered as a less risky proportion by the banker. If the EPC is not experienced or the structuring of EPC is not done through a single EPC contractor. It reduces the bankability of the project, hence de bundling of EPC contract is not advisable because banks find difficult to put a single point responsibility in terms of performance ratio guarantee in case of multiple/de bundled contractor.
Finally you should take care of permits, agreements, licences, land papers and other statutory clearances available so that there is no compliance risk seen by the lender. If you structure your project with all above aspects the project can be bankable, will achieve financial closure. Many times people approach bank first and then start accumulating this information, however if all this information is compiled in advance with bank/financial institution then it will not take much time in releasing your loan.