Manuscript - Financing Modeling of Renewable Energy Projects

Financing Terms in Renewable Projects - 1
Debt Service Coverage Ratio (DSCR) for Renewable Projects
• Typically, a bank will base the financial model on the ‘exceedance cases’
provided within the energy assessment for the project.
• The mean estimated production of the project (P50) may be used to decide
on the size of the loan, or in some cases a value lower than the mean (for
example P75 or P90).
• This depends on the level of additional cash cushioning that is available to
cover costs and production variation over and above the money that is
needed to make the debt payments.
• The debt service cover ratio (DSCR) and is the ratio of cash available at the
payment date to the debt service costs at that date.
• For example, if €1.4 million is available to make a debt payment (repayment
and interest) of €1 million, the DSCR is 1.4:1.
Deb Sizing
• Banks loan money depending on the difference between the cash flow and
the amount of the debt service – this is the debt service coverage ratio
• The higher the risk the higher the debt service coverage ratio, because
banks need a margin.
• A project with a lot of risk may have a debt service coverage ratio of 1.8
whilst a project with little risk may have a DSCR of 1.2. (Look at graphs
on the next chart)
• Once you have the DSCR, you can find the level of gearing from the
DSCR (using the goal seek).
• The equity IRR which is the main thing that the sponsors are concerned
about depends on the debt terms
• It is better to have longer tenor
• It is better to have level debt service instead of declining debt service
(annuity payments)
• It is better to have lower DSCR
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Statistical Analysis Used in Sizing Debt
• Computation of deviation in wind from period to period
• Distribution of wind
• Difference between risks
• New Technology and Consulting or Scientific Study
• Statistical Properties of Prices
• Mean Reversion of Weather
• Standard terms of debt define value and cost of capital
• Optimization of Capital Cost and Operating Cost
• Tax Incentives