SunPower Ghana: Solar IPP Appraisal and Financing
SunPower Ghana Ltd is developing a 20 MW solar PV plant in the Upper West Region under a 20-year take-or-pay PPA with the Electricity Company of Ghana at USD 0.11/kWh. Capital cost is USD 18 million, depreciated straight-line over 20 years; annual operating costs are USD 450,000, escalating 3%; expected output is 34 GWh per year with 0.5% annual degradation. The project is funded 70% debt at 14% and 30% equity; the sponsor requires a 24% dollar return. Ghana's corporate tax is 25%, and the PPA is denominated in dollars, but 60% of operating costs are in cedis. The debt has a 10-year tenor with a 2-year grace period. A DFI has offered a 12-year loan at 11% but requires a 40% equity contribution and an environmental and social action plan costing USD 600,000 upfront.
1. Calculate an appropriate discount rate for the project and evaluate its viability, explaining the treatment of currency and inflation.
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Discount rate. The project cash flows are contracted in US dollars, so the primary discount rate should be a nominal dollar WACC. Using the commercial structure:
- After-tax cost of debt = 14% × (1 − 25%) = 10.5%
- Weighted debt = 70% × 10.5% = 7.35%
- Weighted equity = 30% × 24% = 7.20%
- WACC = 14.55%
The 24% equity return is a required return, not a project discount rate; using it for all cash flows would ignore the tax shield and the lower cost of debt. The 14.55% rate is appropriate if the debt is dollar-denominated and the project's risk profile is stable. If the debt were cedi-denominated, a cedi WACC would be needed, and the gap between cedi and dollar rates would reflect expected depreciation and inflation.
Viability. Annual revenue is 34,000,000 kWh × USD 0.11 = USD 3.74 million. Operating cost is USD 0.45 million, so EBITDA is about USD 3.29 million before escalation and degradation. Depreciation is USD 18m ÷ 20 = USD 0.9 million. Taxable profit is roughly USD 2.39 million, tax at 25% is USD 0.60 million, and net income is USD 1.79 million. Adding back depreciation gives operating cash flow of about USD 2.69 million a year before working capital and debt service. A 20-year annuity at 14.55% has a factor of about 6.5, giving a present value of roughly USD 17.5 million against USD 18 million capex - marginally negative before escalation and degradation. The project is therefore borderline, not comfortably viable. It becomes viable if capex falls, the tariff rises, output exceeds 34 GWh, or financing costs fall.
Currency and inflation. Revenue is dollar-linked, while 60% of operating costs are in cedis. A cedi depreciation lowers the dollar cost of the cedi portion, which is a partial natural hedge. But local inflation may offset that benefit. The model should escalate cedi costs with Ghanaian inflation and dollar costs with US inflation, then convert at forecast rates. The key sensitivity is not depreciation alone; it is the interaction of cedi inflation, tariff indexation and offtaker payment risk.
2. Compare the commercial debt structure with the DFI offer and recommend a financing structure, considering risk and value.
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The commercial structure is 70% debt at 14% over 10 years with a 2-year grace period. The DFI offers 12-year debt at 11% but requires 40% equity and USD 600,000 of upfront E&S costs.
Cost comparison. On the commercial structure, after-tax debt cost is 10.5%. On the DFI structure, after-tax debt cost is 11% × 75% = 8.25%. The DFI is cheaper on an after-tax basis and has a longer tenor, which better matches a 20-year PPA. A longer tenor reduces refinancing risk and improves debt-service coverage in early years. However, the DFI requires more equity: 40% of USD 18 million is USD 7.2 million, versus USD 5.4 million under the commercial structure. The extra USD 1.8 million of equity must earn the sponsor's 24% return, which is expensive. The USD 600,000 E&S cost is also a real upfront cost, though it may be financed.
Risk comparison. The commercial loan has a 10-year tenor against a 20-year PPA, leaving a refinancing cliff in year 10. That is a material risk if credit markets tighten or the offtaker's payment record deteriorates. The DFI's 12-year tenor is better but still shorter than the PPA. The DFI will impose environmental and social covenants, which add compliance cost but may improve bankability with other lenders. The commercial lender may be more flexible and faster to close. The DFI may require sovereign support or a guarantee, which has political implications.
Recommendation. The DFI offer is preferable if the sponsor can fund the extra equity without straining its balance sheet and if the E&S action plan is achievable. The lower after-tax cost and longer tenor improve resilience. But the project is borderline on NPV, so the sponsor should not accept a structure that consumes more equity without renegotiating the tariff or capex. A sensible approach is to use DFI debt as the anchor and seek a commercial tranche for the balance, or to ask the DFI to reduce the equity requirement to 35% and capitalise the E&S cost. Before committing, run sensitivities on offtaker payment delays, tariff indexation and cedi depreciation. The financing decision should follow the project's ability to service debt, not simply the lowest interest rate.