How to do Business Analysis of Solar Power Plants

The current article aims to highlight the key aspects of solar power projects. After reading this article, an investor would understand the factors that impact the business of solar power plants and the characteristics that differentiate a fundamentally strong solar power plant from a weak one.

Key factors influencing the business of solar power plants

1) Large land requirements:

Solar power plants need a comparatively larger land parcel than thermal power plants. As per some estimates, a solar power plant needs about 10 times more land than a thermal power plant of similar capacities (Source).

Solar power plants require significantly larger land areas compared to conventional power plants. A 100 MW thermal power plant for instance would require less than 10% of the total area that a 100 MW solar PV power plant would.

The above estimate only compares the two power plants of equal size (MW). However, if an investor compares the amount of power produced i.e. plant load factor (PLF) of each power plant, then she realizes that the land requirement of solar power plants is even higher than the above-mentioned 10x.

A solar power plant normally has a PLF of about 20% (Source). This is because there is no sunlight at night and its intensity is low in the morning and evening. Whereas a thermal power plant can easily run at PLF of >80% if sufficient coal supply is there. Therefore, to replace 1 MW of thermal power plant, one may need at least 4-5 MW of solar power plants.

Therefore, on a like-to-like power production basis, the land requirement of solar power plants is much more (about 40x) than thermal power plants.

One of the impacts of such large land requirements is that while setting up a solar power plant, land acquisition becomes the most significant activity, which is inherently tricky in nature.

As a result, most solar power plants face a significant risk in acquiring land and then converting the same from agricultural/forest land to industrial/commercial land.

In order to promote solar power production, govt. has come up with solar parks where land is already acquired by the govt. with all the requisite approvals and the developer has to only install solar panels and other machinery. This reduces the risk of land acquisition significantly.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 2:

Land acquisition & related approvals is considered to be very critical for timely implementation of solar power project as this activity usually takes maximum time in the entire implementation schedule of the solar power project. Government Solar parks offer a plug and play model with availability of land, shared infrastructure and all the related approvals.

Therefore, an investor may note that solar power plants proposed in the solar parks have much lower land acquisition risk than the plants outside.

Advised reading: How to do Business Analysis of Thermal Power Plants

2) Capital-intensive nature of business:

Creating a solar power plant requires a lot of capital. As per ICRA, the cost of setting up a solar power plant in India is about ₹5.3 cr/MW, which is after a significant decline in recent times due to the reduced cost of solar panels and other equipment.

Rating Methodology for Solar Power Producers by ICRA, June 2017, page 2:

Normative benchmark capital cost estimate for solar PV project by the CERC declined by 34% from Rs. 8 Cr./MW in FY2014 to Rs. 5.3 Cr./MW in FY2017

Solar panels and other parts like inverters form about 60% of the total cost of the solar power plant.

Global Methodology for Rating Solar Power Projects by DBRS Morningstar, Sept 2022, page 9:

Approximately 60% of total project costs are attributable to the cost of panels and inverters.

As a result of the declining costs of panels and inverters, the cost of producing solar power has decreased significantly in recent years and has even declined lower than thermal power.

Rating Methodology for Solar Power Producers by ICRA, July 2021 page 1:

The decline in solar power bid tariffs is led by a decline in module prices, improvement in module efficiencies

Nevertheless, despite declining equipment costs, installing a solar power plant is still an expensive undertaking, which forms an entry barrier for large-sized power plants, which add a meaningful power generation capacity. Otherwise, solar power production is highly fragmented with simple households generating rooftop solar power.

European Utilities: Renewable Energy Corporates Rating Methodology by Scope Ratings GmbH, January 2022, page 5:

entry barriers to the industry, which are imposed by the high capital intensity of power generation assets and by regulations

Due to large capital requirements, solar power plants need a lot of debt. Usually, developers opt for a debt-to-equity ratio of 3:1 for funding solar power projects.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 6:

As a normal trend, solar projects are financed at a debt equity ratio of 75:25.

The presence of a large amount of debt brings in additional risk if the terms of the debt are not aligned with the cash flow pattern of the solar power plant. This risk is especially high for solar plants where the tenor of the debt is low e.g. less than 10 years, as the plant may not generate sufficient cash for debt servicing and the solar plant will face refinancing risk.

If the solar plant has a long tenor of debt e.g. 15-20 years, which normally corresponds to the life of the plant, then the solar plant would be able to repay its debt without significant challenges.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 7:

Loan from banks / FIs for financing of a solar project are available for a tenor of maximum up to 17-18 years…However, when a solar project is funded by some loans and/or capital market instruments for a tenor of say 3 / 5 / 7 / 10 years, it is exposed to the refinancing risk for varying degree.

Therefore, the terms of the debt are an important aspect of the financial performance of the solar power plant.

Advised reading: How to do Financial Analysis of a Company

3) Seasonality in production and increased working capital needs:

Solar power production fluctuates with seasons. The production is maximum in the summer months and in India, it is lowest during monsoons.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 5:

Electricity generation through solar power is also subject to seasonal variations, i.e., solar generation usually peaks in summers and bottoms during the monsoon season

Moreover, in places where there is a lot of snowfall, solar power production declines significantly during the winter months. As per the data available from Canada, which witnesses a significant snowfall, power production from solar plants declines to about one-fourth during winter months when compared to summer months.

Global Methodology for Rating Solar Power Projects by DBRS Morningstar, Sept 2022, page 13:

seasonal effect of snowfall in northern climates can cause a reduction in solar energy of between 40% and 70%…generation during the winter months is typically between 20% and 30% of that in summer months

Due to seasonal variations in power production, the money available with the solar power plant to meet its operating expenses and debt servicing fluctuate significantly during the year. However, the expenses, primarily debt servicing, are constant throughout the year. As a result, the solar power plant faces a cash flow mismatch between the inflow and outflow during different seasons.

To mitigate this cash flow mismatch, a solar power plant needs to maintain sufficient excess liquidity so that it can meet operating and debt-related outflows without any problems. It increases the working capital requirements for the solar power project.

Normally, a solar power plant needs to maintain an extra reserve of two months of debt repayment due to the seasonal variation of power production.

Rating criteria for solar power projects by CRISIL, June 2021 page 24:

Also, seasonal deficit in a typical project is about two months of debt obligation.

Even though a solar power plant faces seasonality; however, on a long-term basis, the performance is much more in line with expectations. This is because solar irradiation at any place is usually within a narrow range around the long-term average. As a result, the fluctuations of a solar power plant’s performance are lower than a wind power plant.

Advised reading: How to do Business Analysis of Wind Power Plants

Global Methodology for Rating Solar Power Projects by DBRS Morningstar, Sept 2022, page 14:

Annual variance in solar energy over the life of a project is generally about 5% to 10% from the long-term average.

Rating criteria for solar power projects by CRISIL, June 2021 page 21:

Inter-annual variation: Solar radiation may vary from year to year, though not as significantly as wind speed (variations are less than half of that in wind speed).

Further advised reading: How to do Business Analysis of a Company

4) Power offtake and payment risk:

In the normal course of events, in India, we hear a lot about the auctions for solar power production conducted by organisations like Solar Energy Corporation of India (SECI) and NTPC Limited (NTPC) where these agencies act as power purchasers on behalf of distribution companies. These are the auctions, which have seen very aggressive biddings by solar power plant developers and the per-unit cost of solar power has declined below thermal power.

SECI and NTPC assure purchasing the entire power produced by the auctioned solar power production capacity at the bid price. Such an arrangement creates an impression that the entire solar power production industry is a low-risk venture with assured demand at a fixed price where the plant owner can easily predict its cash flows and earn returns on investment with low volatility.

However, for many solar power plants, the selling of power and receiving of money is not as straightforward.

The first problem faced by solar power plants outside solar parks is the delay in the completion of the transmission line to the nearest grid substation, which is required to transfer the solar power from the plant to the grid/distribution company. This problem is common because, in India, the power transmission infrastructure is growing at a slower pace than solar power generation.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 3:

Transmission line availability and access risk is high for renewable energy especially with wind and solar projects compared to traditional power projects because of site-specific and intermittent generation pattern of these resources….Pace of expansion in transmission infrastructure is lagging compared to faster pace of solar capacity addition in India.

Therefore, some solar power plants face situations where the plant is ready for power generation; however, it is not able to generate power as the transmission line to take its power to the grid is not built or is not available.

On the other hand, solar power plants also face situations where the plant is ready, the transmission line is ready; however, the customer/off-taker is not drawing/buying power from the solar power plant i.e. called grid curtailment risk.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 8:

Delay in availability of evacuation infrastructure for under implementation projects, inadequate capacity of sub-stations leading to power curtailment issues once the project is operational.

Indian govt. supports renewable power production including solar power by imposing renewable purchase obligation (RPO) on distribution companies, which obligates them to buy whatever renewable power is produced. Theoretically, it creates a situation where each unit of power produced by solar power plants would always find a buyer.

However, solar power plants face problems in selling power to distribution companies (discoms) as the discoms do not buy solar power despite being obligated to do so.

Rating Methodology for Solar Power Producers by ICRA, July 2021 page 7:

A weak compliance of the RPO norms by obligated entities, coupled with inconsistencies in the RPO norms by the SERCs, affect the demand for renewable energy

Apart from these challenges in the offtake of the power produced by solar power plants, they also face issues in getting the contracted price of the power even if it is fixed in the long-term power purchase agreement (PPA) signed by the discom with the solar power plant. This is especially true in the case of slightly older solar power plants, which got commissioned when the price of solar power was comparatively higher.

As per reports, from 2010 to 2019, the per-unit cost of solar power in India declined 85% (Source).

The nationally-weighted average cost of electricity from large scale solar fell 85% in India during that period, according to Irena.

Such a drastic fall in the cost of solar power production in the last 10 years has created a difficult situation for those discoms, which 10 years back, entered into 25-year long power purchase agreements (PPAs) at then prevailing high fixed prices. These discoms are now paying almost 6 times the price to buy solar power from those old plants than the per-unit cost offered by the latest solar plants.

As a result, solar power plants, which are about 10-15 years old face immense pressure from discoms and there have been attempts by discoms to renegotiate prices in line with current prices or attempts to get out of the contracted PPAs.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 8:

Honoring of the executed PPAs by the off-takers; few instances of state Discoms asking for renegotiation of tariff in concluded PPAs have been observed. Any renegotiation of PPA tariff rate or tenure of PPA could materially change the project dynamics and its debt servicing capability

This resistance of customers (discoms) to pay the contracted price and attempts to renegotiate/exit the PPA is especially higher in those PPAs, which are signed at a price, which is much higher than the current ongoing solar power price.

Power Generation Projects Methodology by Moody’s, January 2022, page 11:

If the contract is materially above the market based on the contract terms…, the off-taker has less incentive to work with the project in a constructive manner to resolve any operational or technical problems that arise… Similarly, if there is limited regulatory support, for instance if the project sells to a utility whose regulator does not permit the pass-through of project costs to ratepayers, the off-taker has greater incentive to find ways to exit the contract.

Therefore, if an investor comes across a solar power plant enjoying a very high selling price of its solar power as per the original PPA signed in the past, then she should not think that these high prices would continue without any resistance from the customer. Soon, she might find that the customer has started creating issues in off-taking the power from the said power plant. This increases the repricing risk for the power plant.

Rating Methodology for Solar Power Producers by ICRA, July 2021 page 7:

While the PPAs are contractual documents, instances of attempts to re-negotiate the PPA terms unilaterally have been seen recently, resulting in prolonged legal & regulatory proceedings.

Apart from the above-mentioned challenges in power offtake, solar power plants also face delays in getting payments for the power sold to the discoms. This is due to the weak financial position of most of the state discoms.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 6:

barring a few state Discoms & central agencies, majority of the state Discoms in India have a weak financial profile and they demonstrate delayed payment track record for varying period of delays which typically constrain the rating for a project.

Advised reading: Receivable Days: A Complete Guide

Therefore, solar power plants need to maintain additional liquidity to meet their operational and debt servicing cash outflows when their payments from discoms are delayed.

As a result, those solar power plants, which have contracts with central bidding agencies like SECI and NTPC are considered better than those having PPAs with state discoms and commercial & industrial (C&I) customers.

Rating Methodology for Solar Power Producers by ICRA, July 2021 page 5:

PPAs with central nodal agencies are viewed more favourably compared to the PPAs with state distribution utilities and C&I customers, due to factors such as adequate payment security mechanism and tripartite agreement benefit for realising payments from discoms.

Also, the projects inside the solar parks face a lesser risk of evacuation as the power evacuation/transmission lines are already in place.

Further advised reading: How to analyse New Companies in Unknown Industries?

5) Very high, long-term counterparty risk: discoms and solar panel suppliers:

Solar power plants enter into contracts with very long-term obligations with their counterparties. Moreover, it is not easy for the solar power plant to replace any of its counterparties.

In the case of power purchase agreements (PPAs) with customers, solar power plants usually enter into contracts extending up to 25 years.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 5:

In case off-taker is state Discoms / central agency like SECI / NTPC / NVVN, PPA is executed for a period of 20-25 years, whereas in case of third-party off-taker, PPA is executed for a period of 3-15 years.

Once a PPA is signed, the solar power plant or the customer cannot exit the contract easily. Therefore, the solar power plant has to suffer if over the next 25 years the financial position of the customer/off-taker/discom deteriorates.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 5:

Counter party risk could significantly impact the credit quality of the project as there is long-term tie-up of the project with off-taker with minimal chances to move out of it… Predicting the quality and behavior of off-taker for a reasonably long period of time as long as up to next 20-25 years is very difficult.

Similarly, the solar power plant is stuck with another counterparty, the solar panel manufacturer for the entire life of the project. Once the solar power plant is commissioned with the panels from a manufacturer, then it is stuck with that equipment. If the panels and other equipment do not perform as expected, then the returns earned by the promoter as well as debt servicing, both, come under pressure.

Therefore, to assure solar power producers, the panel manufacturers give long-term warranties about the performance of their panels and other equipment. These warranties guarantee a minimum level of performance even up to 25 years of the life of solar panels.

Rating criteria for solar power projects by CRISIL, June 2021 pages 23-24:

Manufacturers of solar panels extend warranties of 20 years or more. This provides business certainty and assures project developers performance up to 90% for 10 years and 80% for another 15 years. If panels degrade more and affect project cash flow, the manufacturer will fulfil the warranty by supplying additional panels that will enable achievement of the performance originally warrantied.

However, an investor would note that such long-term warranties are useless if the solar panel manufacturer. Moreover, intense competition in the solar panel manufacturing segment has weakened the financial position of almost all panel manufacturers.

Rating criteria for solar power projects by CRISIL, June 2021 pages 19 and 23:

the technology is new, evolving rapidly, and often owned by companies with moderate-to-weak credit quality.

The landscape of solar panel suppliers is constantly changing with new companies setting up shop and several exiting due to weak credit risk profile.

Therefore, an investor would appreciate that a warranty of the performance for 25 years is meaningless if, at the time of a claim under warranty, the panel manufacturer is already out of business.

Therefore, to mitigate such risks, solar power plants insist on insurance from an outside party to back the warranty provided by the panel manufacturer.

Rating criteria for solar power projects by CRISIL, June 2021 page 24:

To overcome the credit risk in warranty, suppliers back their warranties with third-party insurance.

However, in the absence of insurance, the solar power plant bears the risk of more than expected deterioration in the performance of solar panels. If the panel supplier goes out of business, then it has to spend more money on installing additional panels to bring the performance to the minimum guaranteed level under the PPA. Otherwise, it faces penalties from the customer/discom.

Rating Methodology for Solar Power Producers by ICRA, July 2021 page 4:

impact of the scheduling and forecasting mechanism approved by the regulators for solar power projects, wherein higher-than-permitted deviation between the actual and the forecasted generation will attract penalties.

Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

6) High operating profitability with low operating & maintenance expenses:

A solar power plant primarily has fixed equipment like solar panels pointed at the sun, which keep generating electricity. An absence of moving parts protects solar plants from frequent breakdowns; therefore, reducing their operating and maintenance costs.

Rating Methodology: Solar Power Projects by CARE, August 2020, page 4:

Due to low number of moving parts and stationery PV modules, O&M costs for a solar plant are significantly lower as compared to other sources of energy.

Due to low operating costs, solar power plants have a high-profit margin (EBITDA: earnings before interest, tax, depreciation and amortization).

European Utilities: Renewable Energy Corporates Rating Methodology by Scope Ratings GmbH, January 2022, page 7:

EBITDA margin as the most important indicator of its profitability, efficiency and cash flow stability…. hydro, wind, solar and geothermal power generation, tend to have EBITDA margins of between 50-85% with very little volatility

Rating Methodology: Solar Power Projects by CARE, August 2020, page 6:

O&M costs are very marginal for a solar project leading to very high PBILDT margin.

Many times, to increase returns, solar plant developers appoint low-cost, weak contractors for operations & maintenance (O&M). However, it increases the risks of suboptimal performance of the power plant as well as may require a replacement of the O&M agency later on, which would involve additional costs.

Renewable Energy Project Rating Criteria by Fitch Ratings, August 2021, page 5:

We consider operator agreements that appear under-priced or are with a counterparty of weak credit quality to be credit negative, as the operator may have to be replaced with a higher-cost third-party operator in the future.

Advised reading: How Companies Inflate their Profits

Therefore, investors should be cautious of solar power plants showing very low O&M expenses due to the hiring of cheaper agencies.

Solar power plants may decide to increase returns on investment by keeping a lower than required liquidity for operating expenses, debt servicing as well as major maintenance reserve (MMR). However, an investor may note that these liquidity reserves are necessary. Moody’s penalises solar power plants, which do not provide enough money as a major maintenance reserve (MMR) with a lower credit rating.

Power Generation Projects Methodology by Moody’s, January 2022, page 22:

Depending on the severity of the project’s expected maintenance profile and major maintenance cost outlays, the lack of an adequate MMR may result in a one-half to whole notch downward adjustment.

Advised reading: Operating Performance Analysis: A Simple & Complete Guide

7) Diversification:

Solar power plants are exposed to risks of natural events like heavy rains, floods, storms etc., which impact power generation. A solar power generation company with plants in different geographical locations is relatively protected from such natural disasters.

Solar plants face a strong counterparty risk from their customers as PPAs are contractually binding agreements where in the case of non-performance, it takes a lot of time and resources to get out of the agreement. As a result, non-performance by the customer/discom/off-taker is a serious risk for a solar power plant, which gets reduced if a plant has tied up with many different customers/off-takers.

Rating criteria for solar power projects by CRISIL, June 2021 page 25:

Solar farms spread across locations and supplying to different counterparties tend to reduce the impact of risks related to resource variation and counterparty payment.

8) Market risk and cyclicity:

Most solar power plants get an assured price of the power produced by them (the bidding price) for their life along with an assured offtake of the entire power produced by them due to renewable purchase obligation (RPO). These power plants do not face any market risk or price risk because both the demand and the price for their power are fixed.

However, there are other solar plants, which do not have long-term and fixed-price PPAs. These plants face a significant market risk because the demand as well as the price for their power is not fixed and depends on market forces of demand and supply.

Solar power plants, which have short-term PPAs also face the market risk at the time of renewal of PPA because the new PPA would be priced according to the then prevalent market situation. Solar plants with PPAs stipulating variable prices based on some formula are also exposed to market risk.

Another set of solar power plants, which receive payment of their power in the form of renewable energy certificates (REC) is also exposed to market risk because the price of RECs fluctuates based on their demand and supply.

Rating Methodology for Solar Power Producers by ICRA, July 2021 page 7:

For projects based on the REC route, returns remain exposed to the market risks associated with the REC demand and pricing.

If the solar power plants do not have an assured offtake for their power via PPAs and renewable purchase obligation (RPO), then the purchase of their power is influenced by the situation of the general economy. These power plants face alternate phases of high and low demand based on the stage of the boom and bust phases of the economic cycles.

European Utilities: Renewable Energy Corporates Rating Methodology by Scope Ratings GmbH, January 2022, page 5:

For renewable energy corporates which sell at fully regulated long-term tariffs, Scope regards exposure to cyclicality to be low. In contrast, renewable energy corporates which sell at market prices may face high volatility from market prices. Project developers generally face high cyclical exposure

Advised reading: Margin of Safety in Stock Investing: A Complete Guide

9) Social, environment and regulatory risk:

As discussed earlier, solar power plants require large parcels of land. As a result, the land acquisition process has social consequences. There have been multiple instances when the land acquisition process has led to social unrest. Sources:

• Assam solar plant: Return land, withdraw forces, say activists
• How indigenous land was grabbed for a solar power plant in Assam
• A dharna here, a court victory there: How Rajasthan villages try to keep their land from solar firms
• Villagers’ stir against solar plants protects khejri trees

Therefore, an investor should be cautious of these social aspects of solar power plants before doing their due diligence.

Additionally, solar power plants have a limited life of about 25 years, which is the life of their solar panels. At the end of this period, the solar panels become e-waste.

It is essential for the solar power plant as well as the govt. to form proper policies and procedures for dealing with this humongous amount of e-waste expected to hit the nation when the massive solar power plants currently being promoted will reach the end of their life.

Even though, on the face, it looks like solar power reduces carbon emissions by reducing the use of fossil fuels; however, if the e-waste at the end of its life is not managed properly, then the said benefits may only stay on paper. An investor should be aware of this aspect while evaluating solar power plants.

Solar power plants are exposed to high regulatory risk. This is because regulations related to land acquisition, renewable purchase obligation (RPO) etc. have a huge impact on the performance of solar plants.

In addition, due to a stable and easily predictable business model of solar plants with low risk, the returns to the investors are also priced lower, which is visible in the form of continuously declining solar power tariffs. In such situations, solar power producers run on a very thin line as any unexpected regulations or an increase in taxes, which increases their costs is likely to make the solar power plant economically unviable.

Advised reading: When a company should sell all assets and invest money in FDs?

Summary

Solar power plants are characterised by a stable business model with low construction and operating risks. Solar irradiation in any region stays close to the long-term average leading to a stable generation of power. Operating and maintenance costs are low because the solar panels are fixed without any significant moving parts. As a result, these power plants have a high operating profit margin.

Currently, the business model is a low risk due to regulatory support. Govt. promotes renewable power offtake by stipulating renewable power obligation (RPO) and the discoms mostly enter into fixed-price power purchase agreements (PPAs) for almost 25 years, which is the life of a solar plant. As a result, solar power plants face low market risk.

A large amount of land requirement is critical for solar power plants, which are used to create delays and social unrest. However, govt. has reduced this risk by forming large solar parks with a ready infrastructure of land, connectivity, power evacuation etc. Many such parks are formed in areas away from towns and villages making use of unused land.

However, still, solar plants outside solar parks face challenges in land acquisition. In addition, solar plants, which do not have a fixed-price, long-term PPA, face market risk in the form of pricing as well as demand for their power. Moreover, at times, discoms do not adhere to renewable purchase obligations (RPO) leading to lower demand for power despite available generation capacity.

Solar power plants also face a risk of grid curtailment and lack of evacuation infrastructure, which may lead to suboptimal utilization of power generation capacity.

Creating meaningful capacities for solar power is a capital-intensive business. As a result, these plants are highly leveraged with a lot of debt, which puts a large burden on regular debt servicing cash outflows on the solar plant. Seasonal variations in solar power generation create cash flow mismatches for the plants, which have to maintain excess liquidity to meet operating, and maintenance expenses as well as debt repayments during periods of cash flow shortfall.

In recent years, the cost of solar panels has declined sharply leading to a reduction in the cost of solar power by about 85% in the last decade. This has benefited the industry as solar power is now cheaper than thermal power. However, it has simultaneously created problems for older solar power plants, which were completed previously at a higher investment. These plants have PPAs with discoms at a price, which is much higher than the current bid prices of solar power. As a result, they are facing issues of discoms attempting to renegotiate prices.

In addition, the solar plants, which did not have long-term, fixed-price PPAs are facing severe repricing risk as the new PPAs are at a much lower price than the originally contracted prices.

Apart from the risk of declining prices as well as offtake, solar power plants also face issues of delayed payments as most of the customers (state discoms) are in a financially weak position. Such payment delays require solar plants to keep excess liquidity to meet operating and debt repayment outflows, which reduces the return on their investment.

The return on investment in the solar power industry is continuously declining because of high competition and improving efficiencies. As a result, even minor changes in the regulations and costs have the potential of making a plant economically unviable. Even in the segment of solar power components like panels, many players have shut down businesses due to thin margins and long-term warranty commitments.

Long-term agreements of solar power plants with customers put them in a tricky situation because it is difficult to get out of a PPA even if the customer does not fulfil its obligations, which increases the counterparty risk. As a result, a diversification by solar power producers in terms of customers and geographies of production is beneficial.

The solar power plant faces a similar risk with the panel manufacturers as they have to guarantee a minimum performance for 25 years whereas the panel manufacturer may not be in the business when the warranty claim arises.

Therefore, solar power production is not a field without any risk. Land acquisition, offtake risk, repricing risk, and refinancing risk are some of the challenges faced by solar power plants. Additionally, solar plants face social, environmental and regulatory risks. At the time of decommissioning, solar plants generate a huge amount of electronic waste (e-waste), which needs to be disposed of carefully without adverse impact on the environment.

Regulatory risk is significant for solar power projects because any change in guidelines related to land acquisition, renewable purchase obligations, renegotiation of PPAs, and applicable taxes on solar power equipment has the potential to severely deteriorate the financial performance of solar power plants.

Therefore, an investor should always keep in mind these multiple aspects of solar power plants to understand the true picture of their business position.

• Large land requirements
• Capital-intensive nature of business
• Seasonality of power production and the associated increase in working capital
• Power offtake and payment risk
• Counterparty risk from long-term agreements with customers (discoms) and panel manufacturers
• High operating profits due to low O&M costs
• Diversification benefits
• Market risk and cyclicity in absence of long-term, fixed-price PPAs
• Social, environmental and regulatory risks.

We believe that if an investor analyses any solar power plant by considering the above parameters, then she would be able to assess its business properly.

Regards,

Dr Vijay Malik

P.S.

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