For India’s Renewable Energy Projects: A Creditworthiness Assessment Framework

India has set itself an ambitious target of meeting 50% of its energy requirement from renewable sources by 2030. To help power India’s sustainable energy vision, Renewable Energy (RE) projects must be sustainable by themselves which can only be attained through robust credit worthiness assessments in the RE sector. A reliable framework is essential to evaluate the financial strength and capability of key stakeholders involved in RE projects. The RACI Matrix can help achieve that with a focus on three pivotal stakeholders: Engineering, Procurement and Construction (EPC) firms and Independent Power Producers (IPPs) with a legacy/data trail, new age IPPs with little or no data trail, and Equipment Suppliers.

Dealing With Companies Having a Data Trail

For established EPC companies and IPPs with a rich legacy or data trail, a credit assessment is relatively straightforward as past data can be leveraged to gauge future risks.

In this regard, the past performance of the project developer stands as the biggest testament to their capability. Successful completion of projects, adherence to timelines, and operational efficiency are crucial indicators of a healthy business. Lenders must scrutinize the historical performance of the developer in meeting commissioning timelines.

An effective credit worthiness assessment would also consider the developer’s ability to raise funds in the past. A successful track record in fundraising demonstrates financial stability and trust from the market. The credibility of past sponsors can also be utilized for assessing credit worthiness. Lenders can evaluate the reputation and financial standing of entities associated with the project.

Novel Solutions for New Age Businesses

For new age IPPs lacking a substantial data trail, the assessment parameters must be tailored to address the inherent uncertainties.

As there is no historical project data, the expertise and credibility of the management team becomes central. Lenders must analyze the industry experience and competence of key decision-makers involved. Their market standing and reputation must be assessed which will serve as the key indicator of the project’s potential success. To mitigate risks further, lenders may insist on full or partial recourse on the sponsor. This ensures that the sponsor has a financial stake in the project’s success, keeping them invested in more ways than one.

However, promoters may still plan to exit the project when it becomes financially lucrative to do so. In such scenarios where promoters may exit the project, lenders can have a put option which provides them with a safety net.

Perhaps the best way to evaluate the credit worthiness of new age IPPs is to scrutinize their choice of EPC contractor. It is one of the biggest decisions an IPP has to take and it is pivotal for project success. Lenders can evaluate the track record and financial strength of the selected contractor to better gauge the overall project viability.

Assessing Equipment Suppliers

While evaluating the credit worthiness of IPPs is an important first step, lenders must also deep dive into the supply chain behind RE projects. A credit assessment of Equipment Suppliers is equally important to ensure seamless execution of RE projects.

In solar energy projects, a critical aspect lies in insisting on procurement from an approved list of suppliers, thereby mitigating risks associated with subpar equipment quality. Additionally, for new manufacturers, lenders may adopt prudent measures, implementing extended credit approval cycles to thoroughly assess their reliability.

For wind energy projects, the focus shifts to the Revised List of Modules & Manufacturers (RLMM). Lenders should frequently consult the RLMM to streamline the assessment process, identifying approved modules and manufacturers. This meticulous evaluation ensures that equipment suppliers not only meet stringent quality standards but also adhere to a framework that minimizes uncertainties, contributing to the overall success and reliability of renewable energy projects in India.

Other Critical Assessment Parameters

Renewable energy projects in India are notorious for the land acquisition challenges that they face. In this context, the geographical location of the renewable energy project is a critical determinant of its credit worthiness. Lenders typically require 100% land acquisition as a condition for loan disbursements. However, recognizing the practical challenges in India coupled with strategic importance of these projects, lenders must adopt a more pragmatic approach.

Although, when the chosen site poses environmental challenges in itself, lenders must require assurances that these challenges are adequately addressed. Mitigation measures and adherence to environmental standards should be closely monitored throughout the project’s lifecycle.

While qualitative parameters are important, quantitative metrics must go hand-in-hand for a truly robust credit assessment. The Internal Rate of Return (IRR) serves as a pivotal metric in assessing the credit worthiness of renewable energy projects. The IRR is indicative of the serviceability of debt, reflecting the project’s ability to generate sufficient cash flows to meet its financial obligations. Maintaining a Debt Service Coverage Ratio above 1.2 needs to be non-negotiable. It serves as a crucial safeguard against project finance defaults. Most of the bad debts cases on project finance in India are as a result of a low Debt Service Coverage Ratio.

Moglix also plays a role as a key sourcing partner, through efficient sourcing of fabrication materials, ensuring quality and cost-effectiveness. From the complexities of importing equipment and materials , to mitigating risks associated with global procurement. Moglix also extends its support through credit services.

Conclusion

As India advances towards a sustainable energy future, a meticulous creditworthiness assessment framework is indispensable for the successful implementation of renewable energy projects. By focusing on the key stakeholders in the RACI Matrix and tailoring assessment factors to the unique challenges of the Indian RE landscape, the industry can foster a conducive environment for investment and innovation. A comprehensive credit assessment process not only safeguards against risks but also lays the groundwork for India’s renewable energy projects to thrive and contribute significantly to a sustainable energy future.