Project Financing in Solar:

Project Financing is one important tool used in funding, it primarily relies on the cash flows for the repayment of the loan or debt borrowed. The private sector like banks attracts more as they look into their balance sheet for major funding,but for funding solar projects one needs to look into other measures too and other ways of project financing.

Implementation of solar projects is a capital intensive game & financing become key area for successful implementation of the project. On one side project developers look for project financing options, on the other side the financing institutions stress more on balance sheet financing and collateral securities to mitigate their risk related to the project.

In case of project finance the main guarantee for debt repayment are the project cash flows and the financial needs to ascertain risk associated with the factors which allows limiting the possibilities of failure of envisages of cash flows. It is important for a financier to evaluate technical/financial/economic risk associated with the project which may affect greatly in a cash flow of a given project

Project financing has the following steps:

  • Proposal Submission
  • Business plan development
  • Feasibility studies
  • Review of EPC contracts.
  • Approval & disbursements of funds
  • Monitoring Project Progress
  • Loan repayment & Loan re- settlement.

Typically under project finance the promoter floats the project company (SPV) and infuses the equity in the SPV. The SPV ties up with the Financial institutions for project financing of construction & operation of the project, typically the SPV signs election procurement & construction contract with an epic contractor to execute the project. Once the project developer infuses the equity the debt component starts disbursements.



Generally the same EPC also signs a contract (short and long term) for an operational part. In order to mitigate the risk during the construction; an agreement is also signed with the insurance company  to hedge the generation.

There are various risks associated during the 3 phases. These risks can again be classified in risk during planning phase,construction phase,operation phase.Although the risk may be minimized in 1st stage,but in construction phase (fire,land,technology) risks may arise.. Once the project is completed the risk is related to higher technology, finance, regulatory.Once the project is operational for at least one year, the risk reduces and the financial promoters can expect good Cash Flows.

Tariff risk:

The tariff is a significant risk in solar projects. While under PPA, there were counter guarantees and letter of credit provided to owners for power purchase agreements, in case of state level PPA’s the similar provisions were provided by the state utilities as a guarantee to reduce their long term pain.


In case of REC route the financiers were doubtful about the cash flows beyond 2017 and hence  very few projects are financed under the project financing route.

Solar projects should be implemented after conducting a detailed site assessment for the availability of solar radiation.there are various tools available to assess the site based on the satellite radiation data as well as ground based solar radiation data.MNRE has stored around 108 weather monitoring.and the date can be used to assess the generation &mitigate the risk associated with the solar resource availability.It is equally imp to assess the behavior of technology(crystalline/thin flim) and its behavior at the proposed location.The generation based on the selected technology can be forecasted from various tools and the technology can be assessed from the standarized methods like Performance ratio and specific yield(kwh/). There are various insurance companies who provide the generation insurance to mitigate the generation risk associated with solar projects.

While financing  a project, a financier evaluates various parameters related to a project. These parameters include O&M cost, tariff, working capital, insurance cost, revenue generated through PPA.revenue generated through Carbon Credits.

The Operational cash flows of a project are evaluated based on certain financial ratio like debt coverage ratio(DSCR)


Conclusion : If the project developers take into consideration some of these  factors during construction,operational , the risk can be minimized and it can help in financing of the project.It also helps in doing detailed site assessment work,regulatory measures and to find out various ways to successful financing of projects.

Article by : Dr. Sanjay Vashishtha and Sonu  Nair


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