0 HOW TO MAKE YOUR PV PROJECT BANKABLE? HOW TO SELECT EPC CONTRATCOR? ROLE OF TECHNLOGY SELECTION BANKABILITY OF SOLAR PROJECTS www.firstgreen.co IMPACT OF O&M ON BANKABILITY SOLAR RESOURCE ASSESSMENT FIRSTGREEN CONSULTING U28A/3 FF DLF Phase III, GURGAON 122002 INDIA www.firstgreen.co
Table of Contents I. Introduction... 2 II. Site and Solar Resource Assessment... 3 III. Design Optimisation... 4 IV. EPC Selection... 5 V. Installation and Commissioning... 6 VI. Operation and Maintenance... 7 VII. Other Issues... 7 VIII. Conclusion... 8 Firstgreen Consulting... 8 FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 1
Introduction While conventional power projects are facing the fuel availability challenges and fuel price uncertainty, investors are looking renewable as preferred options to remain in power sector. Especially solar PV projects are much more appealing to the investors due to their scalability and flexibility in nature. While Indian Government has withdrawn the accelerated depreciation from wind projects, solar provides a yet another tax aversion tool to the investors. The cash flow of solar present a much more stable and risk free cash flow as compared to the conventional power projects where you cannot predict the fuel prices. The higher cost of capital can significantly make projects unviable. Hence it is important for the project developers to take care of the factors which affects the bankability of solar projects. There are five major parameters which affects the bankability of solar projects which include The Banks and Financial institutions are concerned on the risk associated with the solar projects due to high capital cost requirements in these projects. The financing institutions in India do not have enough experience in these technologies and always concerned about the following issues: Is the yield assessment reliable? Are there any power evacuation risks? How about degradation? How about performance in the Indian dusty and high temperature conditions? What about skilled labour for maintenance? How about the reliability of the PPAs signed with the state utilities which are already under financial crunch? Are there any generation guarantee available? How about future policy framework? Is the technology proven? Has the EPC demonstrated the ability to deliver the projection-time and on-budget? What is the anticipated ROI? How quickly can the project start generating a return? Most of the solar projects face delays due to the reason of the financial closure and hence bankability of a solar project is a major issue. The degree of bankability is dependent on the reliability technology supplier, reliability of EPC contractor, Reliability of the yield assessment, and the financial health of the promoter company. FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 2
Site and Solar Resource Assessment Selecting a proper site is important aspect which may affect the bankability of solar project. While solar radiation do not change at a location within few kilometers, it is less risk in a selecting a project site as compared to wind power projects where the variability of wind is highly location specific. Developers should consider a project site with good solar insolation and near to the grid substation so that the transmission losses are lower. Selection of site should also consider the legal aspects of the land, clear title of land and position is required to make your project bankable. What level of confidence should be applied to historical solar data? What is known and what might not know of the site? What are the weather, Water, Geo-Technical and other infrastructure conditions? Does the project developer own the project Many times developer consider the solar radiation data for a single year, however long term solar radiance data should be collected for the proposed site in order to give comfort to the banker. This day s satellite based as well as ground based measurement data is available through which inter and annual variability in generation can be assessed. If developers have one year of major data, banks have to assume the minimum radiation levels observed at the site which will reduce the generation almost by 10% and project may become non bankable. Many times project developer take one year of solar radiation data, however it may note that there is a significant inter-annual variability in solar radiation data. Following example highlights that for a typical location in Rajasthan the solar radiation (GHI) has a variation from 1900 kwh/m 2 /year to 2100 kwh/m 2 /year. Typically banks expect P50, P75 and P90 level of confidence in solar radiation data. The P90 level of solar radiation of data is accepted globally by banks. 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. The project developer should also consider the other factors such as historical flood data, seismic data, etc. which may save the developer the insurance cost and provide the lender significant comfort in terms of site location. FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 3
Design Optimisation Selecting an appropriate technology for your solar project plays a very important role in the bankability of a solar project. The major aspects in the technology selection are selection of PV module supplier which should be from the reputed manufacturer who provide the warranties for 5-10 year workmanship and performance guarantee for a period of 25 years. The guarantees and warranties of BOS also play an important role as PV module contributes only 50% of the project cost. Typically all the PV module manufacturers offer long term performance warrantee, however the question remains on the effectiveness of the warrantees. If a PV module manufacturer goes bankrupt, then there is no entity left to the developer for honoring the warrantees of the bankrupt of the manufacturer. Many developers take warrantee insurance to mitigate the risk associated with the bankruptcy of PV module supplier which help them in maintaining bankability of their solar projects. Apart from guarantees and warrantees most of the PV module suppliers conduct IEC and UL certification tests to justify their module degradation, performance and reliability. Selecting a PV module supplier with IEC and UL certification not only justifies the bankability of the selected modules, but also reduces risk of technology failure. It is important to optimize your system sizing while selecting PV technology and BOS. The major consideration should be given to levelized cost of energy to evaluate various design configurations. Are there any equipment warrantees? Are the manufacturers still able to service them? What are the components failure/reliability Risk? Is there adequate availability of spare parts? In state like Rajasthan the ambient temperature reaches as high as 50 C and modules surface temperature reach of the order of 75 C and accordingly the string voltage is of the order 560 V. It is equally important that we consider the minimum temperature of the site conditions while doing the array layout.during winters the temperature go as low as 0 C and the module surface temp is also reaching to C and hence the voltage of the string reach 770 V. It may be noted that the temperature has the greater impact on voltage,while the irradiance has greater impact on current.hence while selecting array size maximum irradiance and minimum irradiance will dictate cable size for interconnecting the modules in the string. FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 4
EPC Selection Selecting the right EPC is key to ensure the project commissioning as scheduled and as per the quality standards specified. Reputed EPCs offers significant advantage through their linkages for equipment procurement and standard installation practices. Many times the banks and financial institutes have their comfort for some of the empanelled EPC contractors who maintain certain quality standards and developers are required shortlist EPCs from the empanelled EPCs only. Some of the developers would like to reduce their upfront cost through fragmenting the single EPC into multiple EPC contractors, however this exposes the developer in terms of performance guarantee of the overall plant. If the EPC contractor is not reputed this increases the project risk ratings and in-turn increases the cost of capital available to the project. While selecting EPC the developer should consider not only experience and reliability but also the balance sheet of EPC should also take in to consideration so that the EPC can honor the guarantees and warrantees for the future. How strong is your EPC provider? Is the EPC Firm experienced?. Does it have strong balance sheet? Are the Risks allocated to various parties through contracts? Technology Selection We have personally seen that in 2009-2011 years, many investors in India adopted only one criteria for the selection of EPC contractor. Yes, you are right, it was Money. At present many of those are not happy with their plant and for some of them, conditions are so bad that when they want to sell their solar plant to get rid of it, they didn t find any buyer. PV module supplier 5-10 year workmanship BOS DC/AC Ratio Banks/ financial institution are the major stakeholder in the solar plant investment. Selection of a reputed EPC contractor for your solar money plant can help you to get cheaper finance. Typically saying a 0.5% decrease in cost of debt can reduce the LCOE (Levelized cost of electricity) even by 30 paisa/ kwh. Performance Guarantee Corporate Sustainability Chances of meeting the promised time line for the commission of solar money plant are very high with a reputed EPC contractor. Take a case that this reputed EPC contractor commission plant one month before than the other one, and a typical 1 MW solar money plant generated around 1.3 Lac unit of electricity. This means you can enjoy this 1.3 lac of units which you cannot even think with another EPC contractor. FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 5
Installation and Commissioning The installation and commissioning can cut further if EPC is selected having experience in working in a specified region of the project. Selecting a local EPC also help in developer in resolving the local issues. An EPC with experience in the region is more likely to understand the regulatory and licensee requirement which may unnecessarily delay in project development. Many times project is to be commissioned with the specific timelines and delay in scheduled timelines may reduce the PPA price. Hence If the EPC contractor do not meet the specified timeline, the project developer may suffer significant losses because of reduced tariff beyond the agreed timeline. The installation and commissioning of project typically takes 6-8 months and if the EPC is not experienced it can prolong for a year.. Some Common Installation problems Many times the solar field terrain is uneven and requires variable leg length to achieve the level installation and avoid the shading of one table over another table. It becomes critical if the liner shading is not taken into consideration while designing the differential heights of the table. Selection of foundation is also one of the important factors for the structure design and layout. Where ever excavation/ drilling is possible, concrete structure are recommended, however, some of the project developer use ramming rather than concrete structure to save time and money. Rammed structures are more prone to corrosion and life expectancy for 20 years becomes critical. The structures vertical member should be designed in such a way that they can accommodate variability in height from one table to another table. Apart from the structure member clamping of module is also one of the critical consideration to mount the module on the structure, structure frame, there are various top down clams are available which can hold the with frame and frameless module efficiently. In case these considerations are not made during array installation the structure faces sagging and the tilt angle get disturbed. Are there any equipment warrantees? Are the manufacturers still able to service them? What are the components failure/reliability Risk? Is there adequate availability of spare parts? FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 6
Operation and Maintenance O&M of solar project becomes significant in maintaining the bankability of solar project, the banks and financial institutes typically wants to ensure the projected generation. Some of the insurance companies have also come up to cover the generation risk and started offering generation insurance. However the developer should consider the generation insurance is available at what cost. In recent installations the local site conditions were not taken in to consideration while deciding the inverter parameters which led tripping of inverter of solar plants this reduces generation. In order to cover the generation risk many financing institutions look for strong balance sheet of the developer in order to cover the generation short falls. Some of the financing institutions also create to a DSRA (Debt service reserve account) to mitigate the generation risk of the solar project. It is equally important to consider the adequate availability of spares so that equipment failures do not cause generation reduction in solar projects. The recent experiences in solar plants also highlight the reduced generation because of grid tripping. Solar project developers should take in to consideration the grid tripping data of their respective sub-station to estimate the project electricity generation estimates. The bankability of solar project is also affected by O&M cost and its expected escalation. Project developer should do sensitivity analysis of their LCOE with reference to their O&M cost escalation. Mwh 2000 1500 1000 500 Other Issues 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. Finally you should take care of permits, agreements, licenses, 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. 0 1 2 3 4 5 6 7 8 9 Mwh Is the project developer balance sheet strong enough to cover this generation shortfall? Does the generation shortfall threaten the project debt service? FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 7
Conclusion Making solar projects bankable needs careful attention to the not only five key factors which are highlighted in this paper but also there are many other factors such as PPA, Local issues, curtailment which may affect the project economic viability. The project developer should strive in reducing the risk associated with solar radiation and collect local and satellite based data to attract more investors and lower the cost of capital in the project. In other words bankability of the solar projects is key for future capacity installations and developers have experienced this issues in recent installations. 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 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 longterm 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. Firstgreen Consulting Firstgreen provides consulting services in the area of Renewable Energy, Building Energy Efficiency, and Climate Change. We are one of the leading consulting firm in the field of Solar PV projects in India and have been involved in MW class grid connected as well as Rooftop Solar projects. We have provided Project Management consulting, Design and Engineering services for over 200 MW of solar projects since 2010 of which about 100 MW is already being commissioned and balance is under various stages of development. We provide various services to the client right from the inspection of project, Design and Engineering support, Policy and Regulatory support, financing support and strategic business advisory to our clients. Firstgreen has been conducting training and capacity building programs for solar, wind and building energy efficiency projects in India and abroad. Our training programs has been widely attended by senior management of various organizations which provide hands on experience and step by step approach to implement solar, wind, and building energy efficiency projects. We believe in sharing our knowledge through technical articles on our blog (www.firstgreen.co/blog). So far we have published around 680 articles which reflect our experience i policy, technology, financing, and project management. Our blog is visited by 64 countries in the world and having footfall over 1,40,000 people across the globe. We provide 360 degree turnkey solutions for solar projects and also provide EPC services. Some of the clients who believe in getting a quality installations (Grid connected/rooftop) through us. FIRSTGREEN WHITE PAPER BANKABILITY OF SOLAR PV PROJECTS - DECEMBER 2013 8