Estimation of Investment Costs in Solar Power

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Benchmarks Project Capital Cost as per CERC

In order to determine the level of the feed-in tariff, the Central Electricity Regulatory Commission (CERC) has produced a benchmark capital cost of INR 50.12 million/MWp for solar PV power projects commissioned during fiscal years 2016-17. This capital cost is considered to be a reference cost in India as no large utility scale projects have yet been commissioned.

Following graph gives the percentage breakdown of cost for a typical 1MWp size project. These costs are discussed in more detail in given table of this section. It should be noted that the various elements of the capital cost will vary depending on the technology selected and other project specific parameters; as an example, while the CERC benchmark costs show modules accounting for approximately 62% of the overall capital cost, it is not unusual to see module costs ranging from 50% to 60% of the overall cost.

Benchmark Costs, Capital Cost norm proposed for FY 2016- 17 for Solar PV projects

S. No Particulars (INR. Million/ MW), Details
1 Land 2.5 It is assumed that 5 acres/MW is required, at a cost of INR 0.5 million/ acre, although this estimate will vary according to the technology chosen
2 PV Modules 31.01 Although in practice there is a cost difference between crystalline and thin film PV modules, the cost assumed for both of these technologies is INR 31.01/Wp.
3 Module Mounting Structure 3.5 The cost assumed for the mounting structure is INR 3.5 million/MWp
irrespective of the type of technology.
4 Power Conditioning Unit/ Inverter 3 The cost assumed for the power conditioning unit/inverters, including the required controls and instrumentation, is INR 3 million/MWp
5 Evacuation to Grid Connection 4 This cost includes supply, erection and commissioning of all cabling, transformers and evacuation infrastructure up to the grid connection point.
6 Preliminary and operating expenses 2.61 This cost includes services related to design, project management, insurance and interest during construction, among others. Though it is expected to vary with project size, the cost assumed for generic tariff determination is INR 2.61/ MWp.
7 Civil and general Work 3.5 This includes general infrastructure development, application for permits and approvals, and preparation of project reports
  Total Capital Cost 50.12  

Tariffs Structure

For projects commissioned in financial years 2016-17, the tariff has been structured (assuming a useful life of 25 years) at a discovered rate of INR 4.63/kWh for large scale parks (350 MWp to 500 MWp). So we can estimate the tariffs for medium and small scale projects as INR 5.0 TO 6  per kWh. This tariff takes into account a reasonable return of equity, interest on loan capital, depreciation factor, interest on working capital and O&M costs.

Operation & maintenance

O&M expenses comprising extended warranties, repairs, routine maintenance, employee and administrative costs have been assumed to be INR 1 million/MWp yearly basis. There shall be an annual escalation of 1% over the tariff period.

Key Factors for Solar Project Financial Model

It is clear from the discussion in the previous section that many of the economic benefits and costs of solar PV project development do not accrue directly to the developer.

Instead, these act as “externalities”, which stem from investment choices made largely on the basis of financial benefits and drawbacks.

The financial benefits and drawbacks to the developer are explored in detail through the construction of a full financial model. This facilitates the identification of key variables affecting the project value and enables financing decisions.

The following sections describe the key items and assumptions that would be included in the financial modelling of a typical Indian solar project, and discuss the conclusions that can be drawn from the results of the modelling process.

Capital Cost

According to a CERC report, capital cost per MWp for solar PV plant in India is expected to vary between INR 45 million to INR 50 million. This total capital cost includes the cost of land, PV modules, mounting structure, inverters, balance of plant and support infrastructure, and start-up costs. The cost variation largely depends on the project location, the project design (such as the voltage level of power cables), the technology utilised and the grid connection cost.

In addition to overall project cost, there can be significant variation in component costs depending on the type of PV technology used.

A project with crystalline PV technology requires less surface area per kWp installed compared to thin film modules. As a result, the mounting structure and DC cabling costs are lower. However, there is not significant variation in the other cost components.

Operation & Maintenance (O&M) Cost

O&M costs for solar PV are significantly lower than other renewable energy technologies. O&M costs depend on many factors, including the project location and the surrounding environment. For example, a site located in a dusty environment is likely to require frequent cleaning of modules.

It is difficult to predict the O&M cost over the latter part of the 25 year design life as there are very few large scale solar projects that have been generating for sufficient time to have reached the end of their design life. The modules, which typically comprise over 60% of the total project cost, are generally supplied with performance guarantees for 25 years. However, other project components require routine maintenance and component replacement. Aside from O&M, operational expenditure will include comprehensive insurance, administration costs, salaries and labour wages.

Annual Energy Yield

There are a number of factors which affect the annual energy yield of a solar PV project. The confidence level of the yield forecast is important, as the annual energy yield directly affects the annual revenue.

Energy Price

Besides the power generated, the solar PV project revenue is dependent upon the power price. This may be fixed or variable according to the time of day or year, and must be clearly stipulated in the power purchase agreement. Economic return has historically been the key limiting factor for development of large scale grid-connected solar PV projects. PV has a high initial capital cost. High energy prices are required for projects to be economic. Currently, grid-connected solar projects are highly dependent on policy support initiatives such as grants, feed-in tariffs, concessional project funding and mandatory purchase obligations. In India, the power tariffs for solar PV projects are determined by the Ministry of New and Renewable Energy (MNRE). Incentive policies include the generation-based incentives (GBI) and the recently created Jawaharlal Nehru National Solar Mission (JNNSM).

Certified Emission Reductions (CERs)

As India is a non-Annex 1 party under the UN Clean Development Mechanism (CDM), qualifying Indian solar projects could generate Certified Emission Reductions (CERs). These CERs can then be sold to Annex 1 parties and help them comply with their emission reduction targets. This effectively causes transference of wealth from Annex 1 parties such as the UK and Germany to Indian developers. Each CER is equivalent to the prevention of one tonne of carbon dioxide emissions. The income from CERs can be substantial. However, this revenue source cannot be predicted as it is uncertain whether the project will be accredited. Moreover, CER values fluctuate considerably. Therefore, sensitivity analysis around the CER price (and the period of time for which the project is accredited) is important. The National CDM Authority under the Ministry of Environment and Forests (MoEF) is the designated authority in India for approving CDM projects.

Financing Assumptions

The project financing structure generally comprises of debt and equity. The general financial assumptions for a project in India are as follows:

Financing structure – equity 30% and debt 70%.

Debt repayment period – 10 years.

Project Economics and Financial Modelling Results

A project financial model will calculate a range of project value indicators in order to allow developers, lenders, investors and relevant government bodies to assess the project economics from several perspectives.

From an investor’s point of view, a project is generally considered to be a reasonable investment only if the internal rate of return (IRR) is higher than the weighted average cost of capital (WACC). Investors will have access to capital at a range of costs; the return arising from investment of that capital must be sufficient to meet the costs of that capital. Moreover, the investment should generate a premium associated with the perceived risk levels of the project.

Solar projects are usually financed with equity and debt components. As a result, the IRR for the equity component can be calculated separately from the IRR for the project as a whole. The developer’s decision to implement the project or not, will be based on the equity IRR.

As returns generated in the future are worth less than returns generated today, a discount can be applied to future cash flows to present them at their present value. The sum of discounted future cash flows is termed the net present value (NPV). Investors will seek a positive NPV, assessed using a discount rate that reflects the WACC and perceived risk levels of the project.

Lenders will be primarily concerned with the ability of the project to meet debt service requirements. This can be measured by means of the debt service coverage ratio (DSCR), which is the cash flow available to service debt divided by the debt service requirements. The Average DSCR represents the average debt serviceability of the project over the debt term. A higher DSCR results in a higher capacity of the project to service the debt. Minimum DSCR represents the minimum repayment ability of the project over the debt term.

A Minimum DSCR value of less than one indicates the project is unable to service the debt in at least one year. Lenders will conduct sensitivity analysis around the key variables in order to determine whether the project will be able to service the debt in a bad year, for example if energy yield is lower than expected, or operational expenditure is higher than expected.

Sensitivity Analysis

Sensitivity analysis involves changing the inputs in the financial model (such as power tariff, capital cost, and energy yield) to analyse how the value of the project changes (measured using Net Present Value, Internal Rate of Return, or the Debt Service Cover Ratio).

Sensitivity analysis gives lenders and investors a greater understanding of the effects of changes in inputs such as power tariffs on the project’s profitability and bankability. It helps them understand the key risks associated with the project.

Typical results that are monitored during sensitivity analysis include:

  • Post tax Project IRR.
  • Post tax Equity IRR.
  • Average DSCR.
  • Minimum DSCR.

Typical variables investigated during sensitivity analysis are:

  • Capital costs.
  • Operational costs.
  • Annual energy production.
  • Interest rate.

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