Solar Project Financing: Taming uncertainities in solar power generation

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While the Banks and financial institutions are aware that the solar resource is variable and there is always risk associated with the uncertainty of the solar resource data. The more the data u certainty, it is more likely that the actual generation may differ from the estimated generation. The uncertainty in generation can be due to the variation in the solar radiation which is the input fuel to your solar project, as well as it can also be due to the equipment performance.

While analysing the IRR of a project the uncertainty in the data needs to eb analysed. The data uncertainty is analysed in terms of P50, P75, P90, and P99 values. This represent the probability of exceedence where there is a 99% chance of yields exceeding the P99. The most likely scenario is the P50 yield which is expected to be achieved 50% of the time. The P99 values typically represent the lowest energy yield from your solar plant and typically interpreted as the worst case scenario and is a lower value than the P75 or P50 in terms of energy yield.

The banks and financial institutions are comfortable generally at the P75 data however assess the sensitivity of their DSCR at the P90 values also. Probability

 

In the above example the variability of energy yield has been analysed with reference to various levels of uncertainty and it may be noted that about 15% variation in annual energy generation can take place with reference to P50 level to P90 level of energy generation data.

The banks and financial institutions take in to consideration in the DSCR (Debt Service Coverage Ratio) and cover the debt amount which can address the uncertainty in energy yield at P90 levels.

Banks usually target a DSCR of 1.2, however in case the project DSCR is lower in the scenarios of  P75, P90, or P99 level, the banks ask for the collaterals or some other risk mitigation tools to address this uncertainty in generation.

For higher uncertainty, there is more severe risk for the probably of underproduction. Even if the majority of projects are performing to the projected CUFs of the order of 19-20%, there are still projects which are underperforming at a lower level of CUFs of the order of 10-12%. Hence it becomes important to the project developers to address the uncertainties and their mitigation strategies right at the planning for structuring a bankable project.

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