Solar power developers must be aware of the following three types of risks before they take final decision to set up a solar power plant.
A. Risk due to poor health of Distribution Company
The power off-taker risk is the most crucial from the perspective of long term payment security. A payment delay or default can make a project unviable and possibly eliminate a project owner’s ability to structure the debt.
For most Feed-in-Tariff based projects, a government entity is the off-taker. As an example, NTPC Vidyut Vyapar Nigam (NVVN), a government-owned power trading company, has been the off-taker for projects allocated under the National Solar Mission (NSM). Similarly, Tamil Nadu Generation and Distribution Corporation (TANDEGCO) is the off-taker for projects allocated under Tamil Nadu’s state solar policy. While the NVVN can be considered a credible off-taker, as it is an Indian AAA rated company with a healthy balance sheet, TANGEDCO cannot be considered a low-risk off-taker as it is in poor financial health and has a track-record of delayed and defaulted payments to wind power generators in the state. The selection of a PPA signing authority and payment security measures such as payment guarantee funds together determine the risk associated with payment security.
The sound financial health of the Gujarat PPA signing entity, Gujarat Urja Vikas Nigam Limited (GUVNL), which is responsible for the generation, transmission, and distribution of electricity in the state, has gone a long way in creating interest amongst investors and lenders in solar projects in the state. Andhra Pradesh also received a decent response owing to the relatively better health of DISCOMs. On the other hand, Tamil Nadu received an interest for just 499 MW out of the 1,000 MW offered in January 2013 under its solar policy, primarily due to the poor financial health of its PPA signing entity (TANGEDCO).
Apart from the bankability of the PPA signing authority, the exact terms under the PPA itself are equally crucial. For example, the PPA in Gujarat does not explicitly guarantee that all the power produced will be bought by the off-taker.
Going forward, the government-entity-backed PPAs are slowly giving way to private third-party PPAs. These PPAs are partially driven by the increasing commercial viability of solar power in India and may avail additional benefits under mechanisms such as the REC mechanism or Viability Gap Funding (VGF). In addition, Solar RPOs and SPOs in Tamil Nadu) on various private obligated entities also drive private PPAs.
For state policy-backed PPAs that are usually signed with the state distribution companies (DISCOMS), it is important to assess the financial health of the counterparty. Typically, DISCOMS in India are heavy loss makers. Majorities of the State Electricity Boards are financially very fragile and their situation is only becoming worse. This puts their PPAs at risk. In the past, they have been bailed out by the governments in an irregular manner. Now, the central government has offered to bail them out systematically through a debt restructuring. In return, states have been asked to raise tariffs on a regular basis which is a difficult political decision.
Features of a good power purchase agreement
A sound power purchase agreement must consider the following for it to be bankable:
- The tariff mentioned in the PPA, should be approved by the state electricity regulatory commission (SERC).
- The term of the PPA should be longer than the debt repayment period (debt repayment period for rupee term loans is usually 8-10 years). The recent solar policy of the UP government offers PPA for 10 years.
- The off-taker should commit to buying all the solar power produced as governed by some range of the Capacity Utilization Factor (CUF) or the Performance Ratio (PR).
- Payment security should be ensured through a revolving monthly letter of credit (LOC). This ensures short term payment security; the long term security should come from a dedicated fund since most PPA signing discoms are loss making entities.
- A course of action for a probable default by either the power producer or the off-taker should be clearly outlined.
- During any litigation, payment should typically not be held up. The power producer or the procurer can be asked to submit bank guarantees in lieu of payments being made during the litigation period. The procedure for this should be specified in the PPA itself.
B. Risk from Uncertainty in solar irradiation data
Irradiation data from various sources in India is mostly based only on satellite data. According to experts, the margin of error for specific locations could be as high as 10% for some commonly used global satellite based data sources such as NASA-SSE and WRDC.
Meteonorm is a combination of satellite and ground based data. In places where irradiation measurement is not available for an area of 200km around the selected location, it uses satellite information. If the nearest site is more than 30km away, a mixture of ground and satellite information is used. However, the satellite covers a period of just three years (2003-2005) and there are less than 15 locations in India for which Meteonorm uses ground data and this data too cannot be considered as high quality.
Most satellite data available only covers 10 years as compared to the 20+ years in mature markets. Satellite based irradiation sources generally use monthly averages of Linke Turbidity function and have no credible methodology to correct this based on ground measurements. Further, traditional Satellite based data is generally of low resolution – this can be as high as 30-40 kms for some sources. Many people claim that it was high level of uncertainty in direct normal irradiation (DNI) data considered at the time of planning was responsible for cancellation of concentrated solar power (CSP) projects under phase one of the NSM.
Ground based measuring stations have only recently been installed under the Center for Wind Energy Technology (C-WET), an initiative by the Ministry of New and Renewable Energy (MNRE). Therefore, there is very little ground measured irradiation data available in the country till date. A network of 51 Solar Radiation Resource Assessment (SRRA) stations have been installed just recently in the first phase. So the real-time data is now available from these stations for short duration.
Since solar power plants were set up only within 1-2 years, so the actual generation data of operational plants is only available for just over a year. Hence, it is really difficult to check the accuracy of irradiation data with the performance of the generating plants. This uncertainty of actual performance predictions is a risk for the lenders which they generally cover by charging a higher rate of interest and assuming a discount on the projected generation, while determining the viability of a project.
Ideally, irradiation data for more than 10 years should be considered for accurate prediction models. For India, such data is available from SolarGIS and 3TIER. Since their data is available in real-time, it can be combined with ground-measured data. Such a process results in a 10+ years with accuracy of a ground sensor. Many people prefer these sources.
C. Risks due to Quality of Plant Installation
A preliminary review of the power production data in Gujarat from January to April 2012 shows that despite similar irradiation and temperature conditions, there is significant variation in their output. While most of the plants have a CUF – based on actual power injected into the grid – of around 20%, some plants have achieved a CUF as high as 25% while a few are as low as 14%.
What it means is that many projects are performing lower than expected. Generation data for projects under the NSM in Rajasthan also shows similar variations in project performances. This variation is primarily due to component selection, engineering and construction.
In the extremely competitive PV landscape of India, cost reduction is a major point of concern for developers to be able to offer winning tariff bids. However, this needs to be managed in a comprehensive manner. It is not wise to use just the right modules and inverters and ignore the balance of system (BOS) components and sound construction in order to cut costs. Regular breakdowns due to inferior components can not only increase the recurring costs on maintenance of structures, electrical equipment and wiring, but can also result in significant losses in power due to frequent shut-downs in generation over the plant lifetime. Plants with a below average CUF will struggle to be profitable.
Most projects in India have not insisted on performance guarantees from the EPC provider as it comes at an additional cost. Internationally, such guarantees are structured in such a way that the EPC pays a penalty to the plant owner, if the plant performance ratio of the plant is lower than a certain pre-decided limit. In India, this trend has yet to catch up.
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