Solar Note Book EDITION 1 4/14/2015 Financial Modelling of Solar power projects Basic Terms Mohit Kathel www.indianpowerindustry.com
1. Capital: It is the total cash/money/asset required to set up a solar power plant. Capital = Equity + Debt 2. Debt: total cash/money loaned from Banks or other sources. 3. Equity: The money/cash invested by a company/organisation/individual in a project. 4. DSCR: Debt Service Coverage Ratio, It is the amount of cash flow needed to pay the monthly loan repayment (Principal amount) and monthly interest on the loan or debt. A DSCR of less than 1 would indicate a negative cash flow. = For Example, A DSCR of less than 1 say 0.90 means that the organisation have only enough cash flow to cover up 90% of the Debt and interest payment payment. 5. Working Capital: It is the capital or cash needed to run the power plant or project on Monthly/yearly basis. 6. Moratorium: The time period for which an exception of no loan repayment is allowed to the investor. That is it is the time duration in which company does not have to pay any debt after the commercial operation date of the plant. 7. Working Capital: Amount needed in a month to run the project. Working capital usually includes wages, operation & maintenance expenses, all receivables and any other component required to run the project even if there is no revenue generating. = Working capital is the indication of efficiency of the organisation whether the organisation or the company has the enough short term assets or capital to cover its short term debt. 8. Interest on Working Capital: It is the amount of interest that would be received if the working capital used in the project would be used somewhere else or in some other project on which the return is assured. 9. Depreciation: A decrease in asset value due to usage, wear & tear and market conditions. That is depreciation indicates how much of an asset's value has been used up. For tax purposes, company or organisation can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with income tax rules about how much the deduction may be taken based on the value and type of asset and the total time period for which the asset would be used. In solar power generation depreciation is accounted on the basis of straight line method. That is the depreciation taken into account will be the same for all the years. Mohit Kathel www.indianpowerindustry.com 1
As per the section 80-IA of the income tax Act 1961, a deprecation of upto 80% of written down value is allowed on machinery and plant cost in case of renewable energy projects. Rate of Depreciation for Income Tax, As Applicable from the assessment year 2007-08 onwards Block of assets Depreciation allowance as percentage of written down value AYs 2003-04 to 2005-06 AY 2006-07 onwards PART A TANGIBLE ASSETS III. MACHINERY AND PLANT (1) Machinery and plant other than those covered by sub-items (2), 25c. 15c. (3) and (8) below : (8) (i) Wooden parts used in artificial silk manufacturing machinerye. 100 100 E. Electrical equipment: (xiii) Renewal energy devices being (a) Flat plate solar collectors (b) Concentrating and pipe type solar collectors (c) Solar cookers (d) Solar water heaters and systems (e) Air/gas/fluid heating systems (f) Solar crop driers and systems (g) Solar refrigeration, cold storages and air-conditioning systems (h) Solar steels and desalination systems (i) Solar power generating systems (j) Solar pumps based on solar-thermal and solar-photovoltaic conversion (k) Solar-photovoltaic modules and panels for water pumping and other applications (l) Windmills and any specially designed devices which run on windmills installed on or before March 31, 2012 (m) Any special devices including electric generators and pumps running on wind energy installed on or before March 31, 2012 (n) Biogas plant and biogas engines 80 80 Mohit Kathel www.indianpowerindustry.com 2
(o) Electrically operated vehicles including battery powered or fuelcell powered vehicles (p) Agricultural and municipal waste conversion devices producing energy (q) Equipment for utilising ocean waste and thermal energy (r) Machinery and plant used in the manufacture of any of the above sub-items 10. Accelerated depreciation: It is the term used when an additional benefit of depreciation is provided to the organisation, industry, project etc. As per the Income Tax Act 1961 there is no term defined such as Accelerated depreciation. In renewable energy generation accelerated deprecation is a method to depreciate the value of an asset to a large extend in the first few years of the commercial operation of the project. This method benefits the company in Tax saving. Accelerated depreciation is applicable on tangible assets like Machinery, Plants, land etc. 11. Tax Exemption: following the depreciation allowed in case of solar projects certain benefits on tax can be taken. Due to the allowed deprecation the tax levy on the investment along with the income generated after recovery of investment will be exempted. 12. Net Present Value: It is the present value of the incoming and outgoing cash flows over a period of time. Since, due to time value of money concept or due to the inflation the value of an asset depreciate over the time. Therefore it is important to calculate the present value of such investment or cash flow to depict the feasibility of the project. The present value of a cash flow to be happen in future is calculated by discounting the cash flow of the project. For the discounting purpose a discount rate is set, which could be the inflation rate, rate of interest which bank would on depositing the investment amount in the bank, etc. 1 = (1 + ) + 2 (1 + ) + 3 (1 + ) = (1 + ) Where, R1, R2, R3 etc are the return (incoming cash flow) in time duration 1, 2, 3 etc. i is the discounted rate I0 is the Initial Investment made in the project. NPV is the net present value of the project. Example: Suppose a solar project involves an initial investment of Rs. 800 lakhs and is expecting Inflow in 12 years as 100 Lakhs per year So, NPV Would be Mohit Kathel www.indianpowerindustry.com 3
Time Period (years) Cash OutFlow Cash inflow (r) Discounted rate (i) (1+i)^n R/(1+i)^n Sum of R/(1+i)^n NPV 0 800 0 791.29-8.71 1 105 8% 1.08 97.22 2 105 8% 1.17 90.02 3 105 8% 1.26 83.35 4 105 8% 1.36 77.18 5 105 8% 1.47 71.46 6 105 8% 1.59 66.17 7 105 8% 1.71 61.27 8 105 8% 1.85 56.73 9 105 8% 2.00 52.53 10 105 8% 2.16 48.64 11 105 8% 2.33 45.03 12 105 8% 2.52 41.70 13. IRR (Internal Rate of Return): it is the rate of return at which the investment made in the project will be recovered. Suppose for a project a total capital of 800 Lakh was invested and the return on the project is expected till 25 years, so the rate at which the Rs. 800 Lakh will be recovered at present value of time will be the IRR. Mathematically, the IRR can be found by setting the Net Present Value (NPV) equation equal to zero (0) and solving for the rate of return (IRR). 0 = (1 + ) With the above formula it can be said that i = IRR will be the rate at which the present value of return equals to the investment made (I0). 14. PAT: Net profit after paying the Tax. 15. PBT: Profit before tax 16. MAT: Minimum Alternate Tax 17. Levelised Tariff: A single tariff that represents the worked out tariff of over the time period of the project. 18. Levelised Cost of Energy: Total cost incurred on the project over the time for per unit of energy to be generated. Mohit Kathel www.indianpowerindustry.com 4
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