How a Lender evaluates a project

As discussed in the previous article,  investors typically need to evaluate the legalities, consent and technical aspects of a  project before agreeing to invest.

The due diligence conducted at the equity stage is mostly based on previously available technical information. Whereas, as for the case of project finance, due diligence is conducted at a later stage extensively, with detailed technical information and designs.

The developer is required to carry out the following tasks:

• Identifies the sites with the best resources.

• Negotiates the use of the land.

• Conducts an initial solar resource analysis.

• Completes an EIA.

• Conducts initial layout and design including initial equipment selection.

• Applies for and receives planning permits and consents.

• Applies for and receives grid connection offer or letters of intent.

• Applies for the feed-in tariff (FiT) and/or PPA.

  The equity investor needs to study every aspect of the above-listed technicalities. 

  Following this, it is required to validate and confirm all the permits, consents and power purchase agreements.

  It is common for the project finance partner to influence the choice of the equipment technology, based on what they perceive to be within financial limits.

  The due diligence phase of evaluating a project can be categorised into three parts:

  • Legal due diligence – assessing the permits and contracts (EPC and o&M).

  • Insurance due diligence – assessing the insurance policies and gaps in cover.

  • Technical due diligence – assessing the technology, integration and technical aspects of
    permits and contracts.

    Key areas of interest for due diligence for best industry practices includes:

    Technology review of major technical components.

    • Suitable for environment.

    • Integration of components.

    • Track record of suppliers and models.

    • Quality and compliance certificates.

    • Compliance to safety standards.

    • Warranties.

    • design life.

    • degradation assumptions.

      Energy yield assessments:

    • Appropriateness of any assumptions made.

    • Source of solar irradiation data.

    • Assessment of shade.

    • degradation assumptions.

    • Uncertainty analysis.

    • Model used and modelling techniques.

    • Check the theoretical Performance ratio.

      Contract assessments (EPC, o&M, grid connection, power purchase and FiT regulations):

    • Looking for interface points and areas where there could be risks.

    • Examining construction timelines and ensuring that the critical path is clearly identified and mitigated in the contracts.

    • Assessing the warranty and guarantee positions within the contracts – protection for the lenders.

      Financial model assumptions:

    • Assessing that the assumptions used are complete and appropriate.

     It is absolutely necessary that developers have realistic financial models with contingencies clearly shown. Alongside, it is also imperative to have a sensible construction programme, which takes contingencies into account. This will ensure that target deadlines are realistic and achievable.

     

    Sizing of the Pv plant:

    • Layout in the land area available.

    • The appropriate buffer zone around the plant to account for shading/other activities.

    • Overall size appropriate for the grid connection.

    •  The layout of the Pv modules, mounting and/or

      trackers, and inverters:

    • Assessment of level of inter-row shading.

    • Access to plant components for maintenance and installation activities.

      • Electrical design layout and sizing:

    • Assessment of cable losses in the

      DC/AC cabling.

    • Assessment of appropriateness of the cable placement and connectors.

    • Appropriateness of the earthing and protection systems.

    • Compliance to safety standards.

  The above considerations and parameters are absolutely necessary in order to ensure that the design or use of components used in the project make it financially viable for the lenders.