By Jerri-Lynn Scofield

No one size fits all financing model currently will cover the financing needs of the seven successful bidders for concentrating thermal solar power (CSP) projects awarded under Phase 1 of the Jawaharlal Nehru National Solar Mission (JNNSM). 

Three companies – Rajasthan Sun Technique Energy Private Limited (a Reliance subsidiary), Lanco Infratech Limited, and KVK Energy Ventures Private Limited -- will each construct a plant with a 100 MW capacity, while three others – Megha Engineering and Infrastructures Ltd., Godawari Power and Ispat Limited, and Corporate Ispat Alloys Limited -- will each develop projects with a 50 MW capacity. Aurum Renewable Energy Private Limited will build a 20 MW facility.

The companies were chosen from more than sixty bids submitted.  Most of the new capacity will be built in the Indian state of Rajasthan, with one project to be constructed in Andhra Pradesh, and one in Gujarat.

Each company on January 8 entered into a purchase power agreement (PPA) with NTPC Vidyut Vyapar Nigam Limited (NVVN), the agency designated by the JNNSM for procuring solar power.  The PPAs specify tight financing and construction schedules, and require financial arrangements to be closed no later than six months from signing the PPA, and plants to be commissioned within twenty-eight months from signing the PPA.   

These transactions face four financing obstacles. First, successful bidders quoted extremely competitive tariffs for power provision – with each developer offering a discount to the tariffs originally specified by India’s Central Electricity Regulatory Commission, and developers have little leeway for structuring financially viable arrangements. 

Second, since this CSP technology has yet to be successfully deployed at large scale in India. “Banks will have some legitimate concerns about the viability of these projects,” said Venkittu Sundaram. Managing Director, of Sun Protecs, a consultancy that concentrates on the renewable energy sector in India. 

Third, the loan sizes are large, noted Ramana Reddy, project manager, energy, for KfW, Delhi. “Projects become economically viable at levels of €1.5-2 million per megawatt to supply at the low tariffs that have been quoted.” 

And finally, the aggressive schedule for commissioning plants is more ambitious than that so far achieved in CSP projects completed elsewhere (such as Spain). 

Both company and financial sources are nonetheless optimistic that necessary financing arrangements will emerge, according to the mandated timetable. “If the project owners do their homework and present their projects with bankable power purchase agreements, and with good financial numbers,” Reddy noted, “then financing should be available.”

Although the nominal cost of the CSP power being provided is high, the CSP is being purchased as part of bundled arrangements. As such, the distribution companies should have no problem fulfilling their purchase agreements, explained Ehsan Sharief, deputy general manager for regulatory and business development for KVK Energy. “These arrangements help them to fulfill their solar power purchase obligations, and also get additional power from NTPC thermal power plants,” he added. 

“It’s not difficult to get finance for these projects provided the promoter is strong”, said Thirupati Rao Nadipineni, director of finance for Megha Engineering.

No single solution

There is no one size fits all model for what financing arrangements will emerge, and much will depend on the credit profiles, as well as overall strength and experience of the individual developer.

“Lanco and Reliance are known entities with strong balance sheets,” said Sundaram. “They should have absolutely no problem securing necessary funds.” But regardless of track record, if developers are to secure to secure financing “every aspect of the projects must be bankable,” he added.

The challenge will be in putting together funding arrangements that make financial sense.  Some developers will look to maximize the use of financing from multilateral development lenders such as the Asian Development Bank (ADB) and the World Bank Group (which includes the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC), and export credit agencies such as France’s COFACE, Germany’s KfW-IPEX Bank, the United States Export-Import Bank (US Ex-Im Bank), and Israel’s Foreign Trade Risks Insurance Corporation. 

These lenders could provide finance at LIBOR based rates, which would track private market rates; currently averaging 4-5%. If project developers choose to hedge their currency exposure, the actual cost of funds on these foreign originated loans would be higher than the nominal lending rate; the net result would be that the effective rate of these loans would be 2-3% higher than the nominal foreign lending rate. 

These rates are significantly lower than prevailing Indian rupee lending rates of 11-13%.  Alternatively, the developer could choose to run the currency risk, and not hedge these exposures against exchange rate fluctuations.

In next week’s issue of CSP Today, Part II of Financing India’s CSP Mission explores the international and domestic financing options open to India’s CSP developers.

To respond to this article, please write to: Jerri-Lynn Scofield

Or write to the editor:

Rikki Stancich: rstancich@csptoday.com

*****Advertisement*****

Don't miss CSP Today's 2nd Concentrated Solar Thermal Power Summit India, April 12-13, 2011 – New Delhi, India