Wind IPP Tariff Bid, DSCR and Payment-Delay Risk
You are structuring a 50 MW wind IPP in Sindh. Total capex is USD 60 million, funded 70% by a 12-year USD amortising loan at 6.0% and 30% equity. The plant is expected to operate at a 35% capacity factor. O&M is USD 1.20 million per year, fixed. The 20-year PPA tariff is USD 0.055/kWh with no escalation. The offtaker is a central power purchaser with a history of payment delays; the sponsor requires an 18% USD equity IRR and lenders require a minimum DSCR of 1.30x. Assume no tax, no working capital, and annual debt service. The government is considering a sovereign guarantee but has not committed. The sponsor asks whether to bid at the offered tariff or seek a higher one.
1. Calculate annual revenue, EBITDA, DSCR and equity IRR at the offered tariff of USD 0.055/kWh.
Read the worked answer
Generation = 50 MW × 8,760 hours × 35% = 153,300 MWh per year. Revenue = 153,300 × USD 0.055 = USD 8.432m. O&M = USD 1.20m, so EBITDA = USD 7.232m.
Debt = 70% × 60 = USD 42.0m. Annual debt service on a 12-year amortising loan at 6% = 42 × [0.06/(1 − 1.06^−12)] = 42 × 0.11928 = USD 5.010m.
DSCR = 7.232/5.010 = 1.44x, above the 1.30x minimum. Equity = USD 18.0m. Equity cash flow = EBITDA − debt service = 7.232 − 5.010 = USD 2.222m per year for 20 years.
Equity IRR: 18.0 = 2.222 × annuity factor. Annuity factor = 8.10. At 10%, the 20-year factor is 8.514; at 11%, it is 7.963. Interpolating, IRR ≈ 10.7%, well below the sponsor's 18% target. The offered tariff satisfies lenders but not the sponsor.
2. What minimum tariff satisfies both the 1.30x DSCR and the 18% equity IRR? Which constraint binds?
Read the worked answer
For an 18% equity IRR, required annual equity cash flow = 18.0 × [0.18/(1 − 1.18^−20)] = 18.0 × 0.1868 = USD 3.362m. Required EBITDA = debt service 5.010 + 3.362 = USD 8.372m. Required revenue = 8.372 + 1.20 = USD 9.572m. Required tariff = 9.572/153,300 = USD 0.06244/kWh, or about 6.24 US cents.
Check DSCR at that tariff: 8.372/5.010 = 1.67x, above 1.30x.
For the 1.30x DSCR constraint alone, minimum EBITDA = 1.30 × 5.010 = USD 6.513m; revenue = USD 7.713m; tariff = USD 0.0503/kWh. That is below the offered tariff.
The equity IRR constraint binds. The sponsor should bid no lower than about USD 0.0624/kWh unless it can reduce capex, lower O&M, extend the loan tenor, or accept a lower equity return. At USD 0.055, the project is creditworthy but not equity-attractive.
3. How should the sponsor price and structure the payment-delay risk from the central power purchaser?
Read the worked answer
Payment delays are a cash-flow timing risk, not just a credit risk. If receivables stretch by 6 months, the project needs liquidity to service debt. Structure a debt service reserve account of at least 6 months' debt service, or USD 2.5m, funded at financial close. Lenders will often require this anyway.
Second, require an escrow arrangement or a letter of credit from the offtaker, or a sovereign guarantee if available. Without either, the sponsor should add a tariff premium of 3-5% or seek a government support agreement. A guarantee is worth more than a higher tariff if it reduces the probability of a liquidity default.
Third, negotiate a liquidity facility or standby equity commitment from the sponsor to cover delays beyond 90 days. The model should be run with a 6-month receivables lag to test DSCR; at the offered tariff, a 6-month lag would push DSCR below 1.30x unless reserves are in place.
Finally, do not bid at USD 0.055 if the guarantee is not committed. Either bid at USD 0.062-0.065/kWh with a 6-month DSRA, or walk away. The sponsor should not accept unsecured offtaker risk for an 18% target return.