VGF model for solar projects viable, But needs financial engineering techniques

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solar projectsMonday, May 12, 2014: In a good news for India’s solar power endeavors, India Ratings in its latest ‘Financially Engineering the Solar Projects to Shine’ report has suggested that the viability gap funding (VGF) model for the batch I, phase II of the Jawaharlal Nehru National Solar Mission is very much viable. However, there’s a ‘but’ attached to it. According to Ind-Ra, the VGF model will be dependent on the support provided by financial engineering techniques to ensure a timely debt service on these projects. The credit quality of these projects will in turn depend upon the equipment costs, debt structure and the VGF size.

Ind-Ra has revealed that the afore-mentioned projects would need a minimum VGF grant of 16 per cent of the project costs under a certain set of assumptions, that is. The projects will further require an annual declared capacity utilisation factor of 19 per cent in order to achieve timely debt service. It must be noted that the optimum debt/equity mix stands at 69:31 to obtain a break-even debt service coverage ratio of 1.0x.

Ind-Ra further reveals that the projects would require an amortisation period of approximately 13 years depending upon the seasonal variations involved in solar projects. It’s only obvious that seasonal variations in capacity utilisation must form an integral part of the capital structure analysis to make full use of the sun’s true potential. Furthermore, the success of these projects would ultimately depend upon the Solar Energy Corporation of India’s (SECI) payment track record.

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