A 150 MW Solar Project That Fails Its Own DSCR Floor
A lender is appraising a 150 MW AC solar project in Rajasthan. Capital cost is ₹4.5 crore per MW, or ₹675 crore, funded 75:25 by debt and equity, giving debt of ₹506 crore at 9.0% with an 18-year tenor and a 12-month moratorium, so repayment runs over 17 years. The project has a 25-year PPA with a state distribution company at a flat ₹2.60 per kWh with no escalation. The independent engineer estimates CUF at 24.0% on a P-50 basis and 22.0% on P-90. Operating costs are ₹9 lakh per MW per year for O&M, ₹1.0 crore per year for land lease, and ₹1.5 crore per year for insurance and administration, escalating at 5% annually. Module degradation is 0.7% a year. The lender's policy requires a minimum DSCR of 1.20 in the base case and a DSCR of at least 1.00 on the P-90 case. The discom has a documented history of paying generators 90 to 120 days beyond the due date, though it has never defaulted.
1. Compute the base-case and P-90 DSCR and state clearly whether the lender's policy is met.
Read the worked answer
Generation. 150 MW × 8,760 hours × 24.0% = 315,360 MWh = 315.36 million kWh.
Base-case revenue. 315.36 × ₹2.60 = ₹820 million = ₹82.0 crore.
Operating cost. O&M 150 × ₹0.09 crore = ₹13.5 crore; land lease ₹1.0 crore; insurance and administration ₹1.5 crore. Total ₹16.0 crore.
EBITDA. ₹82.0 − ₹16.0 = ₹66.0 crore.
Debt service. Annuity factor at 9% for 17 years = 0.09 / (1 − 1.09⁻¹⁷) = 0.09 / (1 − 0.2311) = 0.11705. Debt service = ₹506 crore × 0.11705 = ₹59.2 crore.
Base DSCR = 66.0 / 59.2 = 1.11. Policy floor of 1.20 is not met.
P-90 case. Generation = 150 × 8,760 × 22.0% = 289.08 million kWh; revenue = ₹75.2 crore; EBITDA = ₹59.2 crore; DSCR = 59.2 / 59.2 = 1.00. This sits exactly on the policy floor with no margin.
The base case fails by roughly 0.09 of DSCR, and the answer should say so plainly rather than presenting 1.11 as "close to policy". Note also that this ignores 0.7% annual degradation and any revision in O&M escalation, both of which erode DSCR further in later years, when the loan is still 40–50% outstanding.
2. The sponsor offers three alternatives: extend the tenor, accept a ₹45 crore capital grant, or renegotiate the tariff. Evaluate each against the 1.20 floor and recommend one.
Read the worked answer
Alternative 1 - tenor extension from 18 to 22 years (21 repayment years): annuity factor = 0.09 / (1 − 1.09⁻²¹) = 0.09 / 0.8363 = 0.10762; debt service = ₹506 × 0.10762 = ₹54.5 crore; DSCR = 66.0 / 54.5 = 1.21. Policy met. At P-90, DSCR = 59.2 / 54.5 = 1.09 - above 1.00 but far below 1.20, so a DSRA and cash sweep are still needed.
Alternative 2 - ₹45 crore capital grant applied to debt: debt = ₹461 crore; debt service = ₹461 × 0.11705 = ₹54.0 crore; DSCR = 66.0 / 54.0 = 1.22. Also works, but the grant consumes sponsor cash, is typically unavailable after COD, and reduces the equity base that would otherwise absorb a P-90 shortfall.
Alternative 3 - tariff renegotiation to reach 1.20 at the original tenor: required EBITDA = 1.20 × 59.2 = ₹71.0 crore; required revenue = ₹87.0 crore; required tariff = 87.0 / 315.36 million kWh = ₹2.76 per kWh. A 6% uplift on a signed 25-year PPA is the least likely of the three to be achieved and the most likely to trigger regulatory scrutiny.
Recommendation. Extend the tenor to 22 years. It matches the 25-year PPA and 30-year asset life, leaves a three-year tail after the final repayment, costs the sponsor nothing, and requires no counterparty consent. Pair it with a two-quarter DSRA and a cash sweep, and treat the capital grant as the fallback if the P-90 DSCR needs to be lifted toward 1.15. The renegotiation route should not be relied on in the base case.
3. How should the appraisal treat the discom's 90-to-120-day payment delay, given the project's thin headroom?
Read the worked answer
Payment delay does not show up in a DSCR that assumes cash receipt in the month of generation, which is why the risk is under-priced in the base case. Work out the working-capital gap: at ₹82 crore annual revenue, 120 days of receivables is roughly ₹27 crore - about half a year's debt service. A DSCR of 1.11 gives annual surplus of only ₹6.8 crore, so the project cannot self-fund a 120-day delay; it would need to draw on reserve or default.
Structural responses, in order of preference:
- Two-quarter DSRA, sized to the observed delay rather than to the contractual 30-day term.
- Escrow of discom receivables with a tripartite agreement, so that payments do not pass through the SPV's operating account.
- Letter of credit or payment security mechanism from the discom, with late payment surcharge enforceable.
- Covenant test on cash DSCR, not accrual DSCR, with a cash sweep once cash DSCR exceeds 1.20.
- Termination right for prolonged non-payment, with assignment of termination compensation to the lender.
The appraisal conclusion should state that a 1.11 accrual DSCR and a 120-day receivable cycle are jointly inconsistent with a 1.20 policy floor, and that the DSCR should be recomputed on a 120-day lag before any sanction is recommended. A DSCR that is met only if the counterparty pays on time is not a DSCR - it is a hope with a spreadsheet attached.