Sunnier show by solar projects this fiscal, but some still fall short, says Crisil

The performance of solar power turned sunnier this fiscal, with 75% of the projects expected to exceed their P90 level of generation, compared with only 59% last fiscal, according to Crisil Ratings.

The metric however, still indicates underperformance as 25% did not meet their P90 level.

“Though an estimated 25% of the projects are expected to underperform this fiscal, their median ratings are largely unaffected as 55% of these had generation just 0-1% below their P90 level (at which they were modelled) and another 20% fell short by 1-1.5%,” said Says Manish Gupta, Senior Director, Crisil Ratings.

Annual P90 generation estimate indicates the generation that is likely to happen with 90% confidence during the project’s tenure, every year. For instance, a P90 value of 10,000 kWh for the annual output of a solar power unit implies it will generate over 10,000 kWh 90% of the time.

Gupta added that this level of underperformance reduces the debt-servicing cushion, but cushion but does not impair debt-servicing capability. “This is because generation is dependent on levels of irradiation, which are volatile, and hence, debt servicing levels of projects typically have cushions to absorb such variation,” Gupta said.

A study of 115 solar projects aggregating 4.6 gigawatt (GW), with an operational record of at least one full year to eliminate performance volatility during the stabilisation phase, indicates as much.

The performance on the P90 metric is crucial as it is used widely to estimate the cash-flow cushion available for debt servicing. A project’s future cash flows are estimated at generation corresponding to the P90 level of confidence to appropriately account for volatility in solar irradiation.Thus, a material and continuous underperformance with respect to P90 may result in lower-than-expected cushion for debt servicing. Generation that is 1 percentage point lower than P90 level reduces debt servicing cushion by 15% and lowers return on equity by 1.5-2.0 percentage points.

Further the performances are expected to recover over the medium term.

“Irradiation levels are expected to be mean-reverting. There have been cycles of weaker years and better years compared with long-term averages earlier as well,” said Ankit Hakhu, Director, Crisil Ratings.

Hakhu added that 2015 to 2017 were good years with irradiation levels 2-5% higher than average, followed by weaker 2018 and 2020 Indeed, two-thirds of the underperforming projects did so because of lower irradiation.

“Hence, as irradiation levels improve, the performance of these projects should also recover towards expected levels.”