Ceylon Green Power's 10 MW Solar Decision
Ceylon Green Power is evaluating a 10 MW solar plant. Capital cost is LKR 1.3bn, depreciated straight-line over 20 years to nil. The plant should operate at an 18% capacity factor and degrade by 0.5% a year. A 20-year power purchase agreement fixes the tariff at LKR 18/kWh for the first 10 years; thereafter the tariff reverts to an expected market price of LKR 14/kWh. O&M costs are LKR 25m a year, land lease LKR 8m a year, and insurance LKR 5m a year, all fixed in nominal terms. The corporate tax rate is 30%. The project WACC is 11%. The sponsor can defer construction for one year to see whether the grid connection is upgraded; delaying would raise the capital cost by 6% but would allow the plant to run at a 21% capacity factor from the outset. The offtaker is the state utility, whose payment record has been slow.
1. Estimate the base-case annual cash flows and NPV. Show the key operating assumptions.
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Year-1 generation = 10,000 kW × 8,760 h × 18% = 15,768 MWh. With 0.5% annual degradation, average output is about 15.42 GWh in years 1–10 and 14.66 GWh in years 11–20.
Years 1–10: revenue = 15.42 GWh × LKR 18/kWh = LKR 277.6m. Cash costs = 25 + 8 + 5 = LKR 38m. EBITDA = LKR 239.6m. Depreciation = 1,300/20 = LKR 65m. EBIT = LKR 174.6m. Tax at 30% = LKR 52.4m. NOPAT = LKR 122.2m. Add back depreciation: operating cash flow ≈ LKR 187.2m.
Years 11–20: revenue = 14.66 GWh × LKR 14 = LKR 205.2m. EBITDA = LKR 167.2m. EBIT = LKR 102.2m. Tax = LKR 30.7m. NOPAT = LKR 71.5m. Cash flow ≈ LKR 136.5m.
At 11%, the 10-year annuity factor is 5.889 and the years 11–20 factor is 5.889 × 0.3522 = 2.074. PV ≈ 187.2 × 5.889 + 136.5 × 2.074 = 1,103 + 283 = LKR 1,386m. NPV = 1,386 − 1,300 = +LKR 86m. The margin is thin relative to the capital cost.
2. Assess the sensitivity of the NPV to a 10% fall in tariff and a 10% rise in capital cost. What does this imply for project risk?
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A 10% tariff cut reduces the first-period price to LKR 16.2 and the second to LKR 12.6. First-period revenue falls to LKR 249.8m, EBITDA to LKR 211.8m, and cash flow to about LKR 167.0m. Second-period revenue falls to LKR 184.7m, EBITDA to LKR 146.7m, and cash flow to about LKR 121.5m. PV ≈ 167.0 × 5.889 + 121.5 × 2.074 = 983.5 + 252.0 = LKR 1,235.5m. NPV ≈ −LKR 64.5m.
A 10% capex increase adds LKR 130m to outlay and LKR 6.5m to annual depreciation. The tax shield rises by LKR 1.95m a year, so operating cash flow falls by LKR 1.95m. PV of that fall over 20 years ≈ 1.95 × 7.963 = LKR 15.5m. NPV ≈ 86 − 130 − 15.5 = −LKR 59.5m.
The project is therefore highly geared to tariff and capex outcomes: either a 10% adverse move turns NPV negative. The base case should not be treated as robust. Management should focus on locking in capex via a fixed-price EPC contract, indexing the tariff if possible, and stress-testing payment delays from the state utility.
3. Evaluate the option to defer for one year for a possible grid upgrade. Recommend whether to invest now or defer, including non-financial risks.
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Deferring raises capex to LKR 1.378bn and lifts the capacity factor to 21%, giving year-1 output of 18.396 GWh. Average output is about 17.99 GWh in years 1–10 and 17.11 GWh in years 11–20. First-period cash flow ≈ LKR 220.7m; second-period ≈ LKR 161.7m. Discounting one year at 11%: PV ≈ 220.7 × 5.889 / 1.11 + 161.7 × 2.074 / 1.11 = 1,171 + 302 = LKR 1,473m. NPV ≈ 1,473 − 1,378 = +LKR 95m.
The deferral NPV is only about LKR 9m higher than investing now, so the option value is small on these assumptions. It becomes valuable if the probability of the grid upgrade is high or if waiting avoids a large downside. Deferral also preserves the option to abandon.
Non-financial risks matter: slow payment by the state utility could create a liquidity gap; grid curtailment could reduce output; and a one-year delay may lose the current tariff. Recommendation: invest now only if the EPC price is fixed and the offtaker payment risk is manageable; otherwise defer, but set a decision deadline and negotiate a tariff guarantee before waiting.