PF Project - Solar Roof Top Final

5/25/2015

Project Report - Solar Roof Top A Project Finance course submission

Under guidance of Prof Abhilash S Nair EPGPKC01-063 BINU BHASKARAN EPGPKC01-078 JIDDUKRISHNAN S EPGPKC01-113 VINOOP MULACKAL VIJAYAN

PROJECT REPORT - SOLAR ROOF TOP

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Contents Executive Summary ........................................................................................................................................... 2

Present Model .................................................................................................................................................... 2

The PPA Structure .............................................................................................................................................. 3

Basic components and working model ...................................................................................................... 3

Possible sources of funds ............................................................................................................................. 4

Features & Benefits ....................................................................................................................................... 6

What’s in it for the investors/developers ? .................................................................................................... 6

Financial Model .............................................................................................................................................. 6

Regulatory support (JNSM) ......................................................................................................................... 7

Financials ............................................................................................................................................................. 7

Key assumptions for the Model................................................................................................................... 7

Amortization Schedule.................................................................................................................................. 8

Returns to the Investors ............................................................................................................................... 8

Risk Analysis ................................................................................................................................................... 9

References ......................................................................................................................................................... 11


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Executive Summary Government of India launched the Jawaharlal Nehru National Solar Mission in 2009 to increase the contribution of renewable energy primarily Solar energy to India’s energy security needs. The three main application segments to this mission were Solar collectors, Off grid Solar Applications and Utility grid power including solar roof top. However, the roof top Solar PV has gained little traction with most capacity additions being in the grid connected utility projects.

Taking the queue from Solar City in US, we have developed a basic financial model for Roof top systems in India. Though it is different from Solar City model, the underlying philosophy remains the same ie the users pay for the electricity they consume and the costs of the asset (ie the Solar PV) is borne by the developers.

Solar energy is slowly gaining critical mass and in this endeavor we believe that the energy requirement of the future cannot be met by fossil fuels alone and clean and renewable is the way to go. The energy business is always a sunshine business as demand never falters. The sun is a mighty source of fuel that is indefinitely running at least if the past is a reflection of future. The main benefit of solar energy is its ease of usage whether it is for a business or for a home user.

Solar power falling under renewable energy category had recently received a shot in the arm by the policy makers providing a whole gamut of incentives like Net metering, Accelerated Depreciation benefits, Feed in tariffs, Clean Development mechanism, Renewable Purchase Obligations (RPOs), Bank Guarantees and Renewable Energy Credits (RECs). We have only included the accelerated depreciation benefit in this model and inclusion of other benefits we are sure will further increase the value proposition of the already compelling investment. The financial model is focused on the off grid generation and hence the grid involvement is not considered.

Present Model The present model has two primary stakeholders, the developer or the sponsor who invests in and pays for the solar system and the owner/user in whose premises the PV plant is set up and who uses the power and pays the utility. The developer owns the plant and is the one who buys it , designs it , constructs and services it. The plant is located on the roof top of the Industrial units or anywhere else needed to capture the sun’s rays.

The economics of present Solar structure does not give a compelling proposition for the home owners and hence we are presently targeting the industrial units in Kochi. The domestic consumers in Kerala have power subsidy benefits from the government which the industrial units does not have. Most industrial establishments are aware of the solar rooftop as potential component in their power composition. If the experience of consultants in the energy space is anything to go by, it is shown that anywhere between 20-70% of power requirements in industrial units can be met through Solar power and their only reservation towards accepting this form of energy is the high capital cost. We believe that this model can address this vital issue as the consumers do not have to bear the brunt of initial cost.


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The PPA Structure PPA stands for Power Purchase Agreement and essentially turns a capital investment model into a recurring expenditure model which most industrial units might be happy with. Some of the salient features of a PPA model are

We can have a solar PPA company install a solar power system on the roof top without the consumer paying any upfront cost

The Solar PPA company will operate and maintain the solar power system The consumers purchase the solar power at a predetermined rate from the PPA company. The

rates can be for a specific duration, however is left to the PPA company to draft the terms of the agreement, for Eg : Rise in utility price because of inflation.

The model transfers the risk of operations, maintenance and decreased power production of the roof top owner to the Solar PPA company.

Fig - Proposed model (Ref - Ref http://www.nrel.gov)

Basic components and working model - Solar panels - The core and most integral part of the system. Its role being to convert sun's

radiation to electrical energy, later sourcing the electrical energy and storing into batteries or directly power the facility. The Solar panels dominate the quality and cost of the deployment

- Solar Controller – Its role is to manage the supply and power generation system, battery charging, discharge control. In regions with varied temperatures across the year, the controller would have temperature compensation facilities as well. There could be other features such as well like - control switches, timers etc which could be are optional entities

- Battery – The most common and popular are the Lead-acid batteries. In smaller system, nickel metal hydride batteries, or nickel cadmium batteries or say lithium batteries could also used. The role being to store electric energy during the day, and supply when required.


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- Inverter – This component required to convert the DC to AC which is as 220VAC, 110VAC AC power. Normally the solar energy output ranges under 12VDC, or 24VDC, or 48VDC, and thereby provide 220VAC. In some cases a range of out may be made available.

Fig - Technical Setup (Ref - http://www.iosrjournals.org)

Possible sources of funds Instrument Sub Category Function Source

Equity Ordinary Shares

Raise capital from developer or sponsor

Sponsor

Preference Shares

Senior to ordinary shares, typically from tax investor; sometimes proviiding a cumulative dividend.

Institutional Investors Investment Funds Tax Investors

Debt Subordinated Loan / Mezzanine

Usually fixed rate, long-term and unsecured. May be considered as equity. Can be used to cover construction overruns or other guaranteed payments

Lenders specialising in mezzanine debt

Syndicated Loans

Loan provided by two or more lenders, governed by a single loan agreement. May have different agreements for construction and operating phase of project. Provide long-term finance

Banks

Senior Debt - unsecured / secured

Large unsecured loans are only available to creditworthy corporations. Banks tend to limit their

Commercial banks


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risk to 5 - 10 years. Development Loan

Financing provided during development of project to a sponsor with insufficient resources.

Lender with project experience

World Bank (only if project can not secure borrowing at reasonable rates from any other sources)

Vendor

Intermediary Loan

Export-Import bank lends to a financial intermediary (commercial bank), which in turns lends to the project.

Export Credit Agency

Private Placement

Direct sale of long-term debt / equity Sophisticated investors including insurance companies, pension funds, trading companies

Guarantee Exchange Rate Risk

A commercial lender provides a loan to the project entity (the importing entity), at below market interest rates. The Export-Import bank provides compensation for the difference between commerical rate and below-market rate

Export Credit Agency

Political Risk Limited protection against risks of sovereign non-performance and against certain Force Majeure risks.

Word Bank

Tax Relief Tax Credits Tax Holidays Duty exemption

Individual governments may offer tax incentives

Host governments

*Source - http://www.greenrhinoenergy.com


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Features & Benefits

What’s in it for the investors/developers ? We have found that developers get an IRR of 18% on their Equity while the Project’s IRR itself is 14% with the cost of capital assumed to be 12.34%. Please refer the calculations in excel sheet.

Financial Model Central to the work of this project is to evolve a financing strategy. We have identified that an average medium industrial unit requires 30 KW of power for its consumption. We have worked on the economics of the project( in Excel) and identified that the total cost for a single 30KW roof top solar panel is Rs 26.5 lakhs. We are targeting 9 MW in the city of Cochin which means the total investment is Rs 79.6 crores.

A research on Solar projects on similar size revealed a debt to equity of 70:30. That is the debt requirement of the current project is Rs 55.7 Crores. A maximum borrowing capacity analysis modeled on the cash flow coverage revealed that the project has a capacity to take on debt to the tune of Rs 60 Crores. Hence the debt requirement is well within the limits. We are pitching for a Bank Loan having a 10 year term as banks will be reluctant to lend for a higher period. We are assuming a 10% interest rate on the loan. The rest will be funded by equity contribution from the developers. Cash flow analysis of the

Advantages •Access to uninterrupted power supply•No dependency on bio fuels•Quality superior to grid supply•Long term strategic investment against

increasing grid rates.

Areas of application•Educational institutions•Hospitals•Government establishments•Malls•Gas stations•Housing Communities

Benefits•Minimal maintenance cost, all

maintenance taken care by developors.

•Consistent supply increasing efficiency of electric and electronic commodities

•Improved Batteries supporting longer life

•Lesser power loss with improvement in technology


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project revealed a positive NPV and a risk analysis with the parameters Price, Discount Rate and Capacity Utilization was also carried out.

Regulatory support (JNSM) The regulation encouraging rooftop solar PV connected to LT/11 KV grid, and thereby replacing

traditional power and diesel-powered generators Incentive options that allow quick & large-scale capital venturing Supporting technological innovation & reducing deployment costs Mission to seek raising region specific regulatory structure Incorporate responsibilities of mission inside of Electricity Act 2003 The National Tariff Policy 2006 mandating State to purchase minimum energy from renewable

initiatives Solar power purchase for states - Phase I = 0.25%, Phase 2= 3% NVVN (wholly owned subsidiary - NTPC) has selected agency for Power Purchase Agreement (PPA)

with units producing solar power Financial support :Budgetary support to be provided by govt

Financials Key assumptions for the Model TARGET CITY COCHIN TARGET POWER GENERATION 9 MW

Approximate Number of Industrial Units Targeted 300 Price/Unit @ KSEB rate(in Rs) 9 Capacity Utilization 75% Total Number of Years 20 Inflation Rate 7% Tax Rate 35%

Accelerated Depreciation 80% 20% Cash Flow Coverage Ratio 1.8 Leverage(Debt to Equity of 70:30) 3.3 Interest Rate on debt 10% Principal Repayment (Years 1-3) 5% (Years 4-7) 10% (Years 8-10) 15% Debt Repayment Term 10 Years

Equity Cost of Capital 18.0858

(Aswath Damodaran Beta Avg for Semiconductors-1.17 Risk Premium- 8.74 % Risk Free Rate - 7.86% )

WACC 12.40%


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Amortization Schedule

YEAR EBITDA Interest Principal Principal After Repayment

Tax Adjusted Principal

Interest Coverage ratio

Debt Service Coverage Ratio(DSCR)

1 110,825,912.36 55,774,607.28 27,887,303.64 529,858,769.16 42,903,544.06 1.99 1.12 2 118,583,726.23 52,985,876.92 27,887,303.64 501,971,465.52 42,903,544.06 2.24 1.24 3 126,884,587.06 44,701,580.90 27,887,303.64 474,084,161.88 42,903,544.06 2.84 1.45 4 135,766,508.16 40,231,422.81 55,774,607.28 418,309,554.60 85,807,088.12 3.37 1.08 5 145,270,163.73 36,208,280.53 55,774,607.28 362,534,947.32 85,807,088.12 4.01 1.19 6 155,439,075.19 32,587,452.48 55,774,607.28 306,760,340.04 85,807,088.12 4.77 1.31 7 166,319,810.45 29,328,707.23 55,774,607.28 250,985,732.76 85,807,088.12 5.67 1.44 8 177,962,197.18 26,395,836.51 83,661,910.92 167,323,821.84 128,710,632.18 6.74 1.15 9 190,419,550.98 23,756,252.86 83,661,910.92 83,661,910.92 128,710,632.18 8.02 1.25 10 203,748,919.55 21,380,627.57 83,661,910.92 0.00 128,710,632.18 9.53 1.36

Returns to the Investors

PROJECT IRR 14%SPONSOR's IRR 18%NPV(PROJECT) INR 94,550,756.95PAYBACKPERIOD 8 YEARS


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Risk Analysis

Simulation Summary Information

Workbook Name Project Rooftop Solar.xlsx

Number of Simulations 1

Number of Iterations 100

Number of Inputs 3

Number of Outputs 3

Sampling Type Latin Hypercube

Simulation Start Time 5/22/2015 11:14

Simulation Duration 00:00:06

Random # Generator Mersenne Twister

Random Seed

409736699

Summary Statistics for Sponsor's IRR / 0

Statistics Percentile

Minimum 15% 5% 15%

Maximum 22% 10% 16%

Mean 18% 15% 16%

Std Dev 1% 20% 17%

Variance 0.000199068 25% 17%

Skewness -0.13130925 30% 17%

Kurtosis 2.598700147 35% 17%

Median 18% 40% 17%

Mode 19% 45% 18%

Left X 15% 50% 18%

15%

16%

17%

18%

19%

20%

21%

22%


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Left P 5% 55% 18%

Right X 20% 60% 18%

Right P 95% 65% 18%

Diff X 4% 70% 18%

Diff P 90% 75% 19%

#Errors 0 80% 19%

Filter Min Off 85% 19%

Filter Max Off 90% 19%

#Filtered 0 95% 20%

Change in Output Statistic for Sponsor's IRR / 0

Rank Name Lower Upper

1 Price/Unit @ KSEB rate(in Rs) / 9 MW

16% 20%

2 Capacity Utilization / 9 MW 16% 19%

12.5

%

13.0

%

13.5

%

14.0

%

14.5

%

15.0

%

15.5

%

16.0

%

16.5

%


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The project provides an IRR of 14% which is above the Cost of Capital of 12.34 %. The sponsor’s IRR is 18% much above the rate of return expected by the stakeholders. It moreover has a positive NPV.

A risk analysis for Sponsor’s IRR with Price, Discount Rate and Capacity Utilization will reveal that 90% of the values will lie between 15.27% and 21 %. The project IRR values (90%) will lie between 12.61 and 16.2 %.

NPV risk analysis show a Mean of Rs 89,170,88 with a small probability of going negative. The payback period is 8 years.

Hence, overall the Project seems to be of only medium risk and the returns add value to the stakeholder. We recommend a go decision for the project provided all other conditions of technical feasibility, regulatory requirement, other requirements specific to industry are met with the assumptions highly probable.

References 1) http://www.nrel.gov, 2) http://www.iosrjournals.org 3) http://www.greenrhinoenergy.com

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PF Project - Solar Roof Top Final

Documents

solar energy

solar collectors

solar pv

solar city

project report solar

grid solar applications

present model

basic financial model