Risk Exposure to REC

The typical payback period of solar projects considering a tariff of Rs. 8/kWh is of the order of 7 years. This is considering the typical parameters such as 8 Cr/MW cost, 19% PLF, and 13% interest rates, etc. The lenders are exposed to a maximum risk of 7 years in a solar project. In case the PLF goes down to 15% the payback period is about 10 years. Under the REC route if we consider that RECs will be traded by 2017, and the average REC price is considered to floor price i.e. Rs. 9.30/kWh, and the APPC of the order of Rs. 2.5 per unit. There will be an increase in APPC by 5-10% per pear. Considering this all, an average sales revenue under the REC route can be considered as 12.5/kWh. If this revenue is considered in first four years the project pay back about 80-90% of the total project cost. It is advised that a 20% collateral security can be taken from the project proponents to finance the REC route projects, in order to cover the risk exposure on account of lack of clarity for applicability of REC mechanism beyond 2017.

Performance parameters of the projects based on REC are majorly affected by market price of REC and change in APPC. To assess the risk of REC Projects we can consider two different cases, one with the REC+APPC and One with Third Part Sale (TPS) + REC, the latter case can be analysed considering different scenarios of PPA signed between the developer and buyer. Here it is assumed that there is escalation of 5% every year.

Case 1: APPC Only: If there is no REC after 2017 and the project is having the only source of revenue as APPC, in this case the lender should take at least 35% of project cost as collateral security which will cover up the risk involved in this case. The payback period in this case will be 9 years, with IRR of 10% and average DSCR of 1.17. The lowest curve in the graph is considering APPC only. In the graph shown below we can see that there is dive in the net cash flows and goes even negative. This shows that there is highest risk involved to the lender and this requires having better risk mitigation plans. Even the period of negative cash flows is highest in this scenario. Then after some years of operation it again rises up as the revenue improves.

The graph below shows the annual net cash flow of projects considering different scenarios of revenues available in absence of RECs.

Case 2:  If the projects with the business model of Third Party Sale (TPS) + REC then after 2017 the only source of income is the revenue from PPA signed between third Party and the developer (Assuming no REC after 2017). Here is risk is dependent on the fact that how much is amount on which the PPA is signed. We have considered three different scenarios TPS 4, TPS 5 and TPS 6 with PPA signed at INR of 4, 5 and 6 respectively.

In case the PPA is signed at INR 4 then the payback period is of 6 years, the collateral security required to cover up the risk is of at least 12% of project cost and the average DSCR is of 1.61. Even the curve of TPS 4 in the above graph shows a better condition of project and less risk to the lender as compare to the project with APPC only. So the project with the TPS + REC is posed lesser risk as compare to the project with APPC + REC. Even we can see in the graph the curve moves upper side as the amount of PPA goes up and at INR 6 is only with INR 5 Million as the negative cash flow for one year. Hence the INR of 6.5 can be considered as the break even for the PPA to be signed with TPS.

The following graph clearly indicates the rise in IRR with the increase in the amount at which PPA is signed.












This graph below shows the trend of percentage of collateral security required, years of negative cash flows (when developer can’t their debts) and lender’s unrecovered amount from the developer during the loan repayment period, all these are having a decreasing trend  with the increase in amount at which PPA is signed with the third party. In case of APPC only the amount of unrecovered loan is very high which is about INR 250 million and requires about 7 years to come out of the negative cash flows.


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