The financing community has long known to be reserved and watchful about funding solar power projects mainly because of the lack of familiarity with the industry and due to their natural instincts about investing in safe projects with short term returns. It was only recently that the banks have slowly understood the solar energy sector. Banks and other investors have moved out of their i0ory towers, expressing willingness to lend for solar power projects. The financing community has started to realize that they are one of the key stake holders and an integral part of the solar PV ecosystem, whose contribution is vital for the growth of the industry. In such a scenario, the steep fall in the solar FiT due to big discounts offered by developers in the recently concluded round of JNNSM bidding has created a serious debate as to whether investors would be optimistic about funding these low FiT projects. It is worthwhile mentioning here that some of the investors / bankers have already started expressing dissatisfaction over the recently concluded reverse bidding process where the developers cut down their bid price to levels where it doesn’t really make any sense to fund the project.
The past one – two years has been a learning phase for the investor community and slowly they have understood that solar energy based power would scale up to become the mainstream power source in the next 5 to 10 years. Multilateral agencies have helped the banks to understand the industry by sharing their knowledge, experience and through credit enhancement programs. The learning’s during the first phase and state policy projects has given the bankers a sense of commitment beyond just being mere debt providers. So, rather than simply arguing that bankers are wary of funding solar power projects, it would make sense to have an understanding on what would make a project more bankable and returns-centric.
Some of the key considerations / factors that will improve the comfort levels of investors / bankers to fund the solar projects are summarized below:
The ability of a distribution company / licensee to disburse payment in a timely manner throughout the PPA contract period (Fortunately, JNNSM projects have a major advantage here due to MNRE’s payment security mechanism)
Background and experience of the promoter (Ideally, banks expect that the promoter / developer should have a prior experience in the solar energy sector or its adjacent seas. The project developer is expected to have properly audited balance sheets which would help convince the banker that due’s could be recovered in case of defaults. A developer is held responsible by the bankers not only for his defaults, but also for defaults at the side of EPC, vendor, electricity buyer etc. The bank’s feel that it is a developers responsibility to share the risk with other stake holders)
No issues with regards to land acquisition (This factor isn’t a problem in a few states in India where the government provides land on lease to developers for a fixed contract period, thereby eliminating issues relating to land purchase)
Authentic data on irradiation / insolation (Lack of reliable solar radiation data has been a big challenge and bankers are wary of the legitimacy of these data and its impact on the CUF of solar power plants. This issue is however getting sorted out slowly with MNRE along with CWET have initiated efforts to set up solar radiation measurement stations at various regions in the country in an effort to provide accurate and reliable data on solar radiation)
Realistic and properly vetted proposal (A project based on realistic predictions and analysis is vital to please the financing community. Misleading radiation data, unrealistic generation capacity and CUF, disproportionate capital costs etc., will have the developer getting his project earnestly rejected. Bankers expect that the project has to be built on all realistic data / numbers and it has to be thoroughly vetted)
Competency and track record of EPC company (The design engineering of a solar power plant is critical to its performance over a lifetime. Efficient design and installation has shown improved performance of power plants in many regions in the world. Hence the role of EPC in a solar power project is of paramount importance. Banks and other lenders of realized this and hence there is a high demand for competent EPC with proven track record. The second round JNNSM bidding has seen an increase in project size from 5 MW to 20 MW. Indian EPC companies do not have proven experience of commissioning such large utility scale projects. Hence, developers are forced to look up for European EPC’s and system integrators especially for the design and detailing part. This is vital to improve the comfort level of banker to fund the projects)
Competency of vendors and performance of their products (Banks are willing to fund projects that utilized modules and inverters from established players who can offer performance guarantee over the lifetime of the project. New suppliers who tend to offer products at lower cost will have to be kept away by developers in an effort to satisfy investors / lenders)
The banks here in India are certainly willing to invest in solar power projects and it is indeed their responsibility to play a key role in shaping up the solar ecosystem in India. Banks and other investors have obviously shown interest in projects that are more reliable and they promise quick turnaround time for reliable projects. It is the sole responsibility of the developer to make his project more reliable and bankable. While low bid price is seen as a factor that is likely to impact the viability of project, there are a lot of other factors that could well be controlled by a developer so as to make his project more viable and reliable.
The general perception about the Indian investor community will make most developers look up at multilateral financing for their projects. However, there are a lot of preconditions required to be fulfilled to secure foreign funding. Also, with Indian rupee’s value crashing consistently in the past few months with no end at sight, the benefit from low interest foreign finance is no more an attractive proposition.
Developers with deep pockets might choose to go with high equity contribution, but still the Indian investor community has a role to play in execution of the solar power projects and it is the developers responsibility to make the bankers have an optimistic outlook on their projects.
The bid results and crashing FiT’s have given a false indication that grid parity is at close reach. However, only time has to tell whether these projects are genuinely viable at such low cost and let us wait for the financial closure to happen. With 30 extra days available for achieving financial closure, one will have to wait and watch the scene as it unfolds before us.