The key components of a successful solar project – Part 4:

What are the right financing approach

and supportive regulatory framework?

Muraho* Everyone!

After reviewing the first 2 components (Good & Robust Design and Effective Implementation) of a successful solar PV project, let’s have a look at the third and final one: Making sure the right commercial approach is developed and the project is benefitting from a supportive regulatory framework.

Right financing approach

As the solar plant is being developed, the developer and the off-taker should agree early in the process what the payment plan should be. Ultimately, it comes down to two fundamental choices; the off-taker or client will either pay outright for the power station and owns it, or enter into a finance agreement plan with equity and debt lenders. There no right or wrong answer here, it is all dependent of the particular circumstances of the project and the different parties involved, especially the off-taker. Ultimately it is about what you want as a customer.

Although solar installation prices have spectacularly felt over the course of the last decade in Africa, the level of upfront investment required is still fairly considerable.

From the 2015 IFC guide on utility scale PV plants, you would need to spend about $1.39 million per megawatt installed.

For small domestic systems (in kW, rather than MW), the challenge is the same.

In fact, according to the IRENA Renewable Cost Database in 2014, depending on the location, the cost varies between $1570 and $4340 per kilowatt.

As expected, we will tend to experience prices towards the higher end of the bracket on the continent. Why? A cheeky side of me might be tempted to respond why not but I am not sure that will be a satisfactory response and I suspect few eyebrows would probably be raised. The real answer is that most of the material needed would need to be imported so equipment and transportation costs do need to be factored in. Added to it the fact that the industry is not mature enough in the continent and more learning is required to bring costs down.  I once had to organise delivery of solar equipment I purchased from China and believe or not, he cost me in total twice the retail price to ship them to Botswana.

In the domestic market for example, if you are part of 23% middle class households in Nigeria with a monthly income of $500 (₦160,000 currently), installing a solar system on your rooftop could equate to an investment worth your annual income. Although convinced of the multiple benefits of the system, you would most likely be looking to spread the costs over a period of time rather than paying for it outright. This is the reason why finance plan would tend to be more popular.

Project Finance

Almost all large scale PV plants and a good majority of smaller solar projects are funded through finance. The experience and creditworthiness of the sponsor (developer) is critical to attract investors and achieve financial closure. So again, choose the right one!!

Financing a solar PV project is in principle very similar to financing other types of power projects. However, there are certain risks that are unique to solar PV and they must be catered for in the financing plan. Risks associated specifically with solar PV projects are related to:

• the energy resource (irradiation)
• project siting and permitting
• solar technology used
• degradation of PV modules
• reliability of long-term plant performance
• potential uncertainty of the tariff and revenue collection.

The last one is particularly important as issues of extreme currency volatility and devaluation as recently experienced in Nigeria could have an enormous impact in financial projections.

The appropriate arrangement depends on the characteristics of each project and the investment risk profile and appetite. The most frequent setup in the industry is project finance. It is the long-term financing of infrastructure projects based upon the projected cash flows rather than the balance sheets of its sponsors. Usually, at least 30% equity would be required, with remainder as coming as debt. To help deliver this arrangement, a thorough due-diligence of the project and especially the off-taker (you..YES YOU THE CLIENT!) will be undertaken before any finalized deal. My financial partner would strongly advise you make sure that your finances are in order. Would you apply for a mortgage with a shining credit score flashing red? The same rationale works here.

Supportive regulatory framework

The regulatory environment plays an important role into the deployment of solar projects. Developers are advised to perform a comprehensive assessment of the power sector to have a proper understanding of any support mechanisms that exist for solar PV projects if any. As mentioned in the previous post, this is a bureaucratic task that could involve different administrative tasks.

In a number of countries now in Africa like Egypt, Kenya, Ghana, Nigeria or even Sierra Leone, priced-based incentives such as Feed-in Tariffs (FiTs)  and also tax breaks are employed to boost the commercial scale for solar. Although mainly targeting large projects on average, these subsidies will also sometimes address small residential market. I am tempted to say you should endeavour not to miss out on this help but I am reminded that our opportunistic nature would certainly not allow us to ignore such a great gift. Especially coming from the government!   I don’t know for you but I have yet to come across companies or individuals that will voluntarily turn down tax breaks.

Project viability on long term

For the long term sustainability, developers are nevertheless strongly invited to consider the viability of their projects without subsidies or special treatment. Especially if such consideration makes the effective price of solar power well above the levelised cost of power in the existing power market. It is very much important not to lose sight of the fact that solar, like any renewable energy project is part of the bigger power industry and as such, is bound to compete with traditional sources of energy.

So are there any regulation laws governing renewable energy in your country or area? Do you understand them? Are there some incentives for solar PV? Would your project quality for them? Here are some sample questions that would need to be addressed to take the project to the next stage.

You now have a full overview of the three key components that are essential to deliver a successful solar PV project. There are obviously some specifics depending on the size, the type and also the location but I believe most of the advice given here is applicable to all.

I will be dedicating articles to some individual components of the system to give you more details and boost that technical awareness of yours!!!

Until then, take of yourself and look after our planet…Switch this device off when you’re done!!

Don’t forget to sign-up for our newsletter and download the report on Large-scale solar projects in Africa. It’s FREE!!!!

Tony Tiyou

* Muraho: “Good Morning” in Kinyarwanda, language spoken in Rwanda.

Summary

To ensure the right commercial approach:

• Decide on finance strategy: outright payment or finance
• Check for project finance:
  • Experience of the sponsor
  • Creditworthiness of the sponsor
  • Due-diligence of off taker

To ensure a supportive regulatory framework

• Perform regulatory environment assessment
• Check if qualification to any renewable energy incentives (e.g. FiTs, tax breaks)
• Check long term viability of project without special treatment

Sources

1. Energy Science, Principles, Technologies, and Impacts, 2^nd Edition – John Andrews, Nick Jelley
2. Photovoltaic Solar Power Course – Prof John I B Wilson, Heriott Watt University
3. Sustainable Energy – Without the hot air – David JC MacKay
4. Utility-Scale Solar Photovoltaic Power Plants – A Project Developer Guide – IFC 2015
5.  Renewable Power Generation Costs in 2014 – IRENA