2020

Project Finance in Wind Farm Power

Business : An Experiential Study
 A

Summer Internship Report

On

‘PROJECT FINANCE IN WIND FARM POWER BUSINESS:

AN EXPERIENTIAL STUDY’

Submitted by –

Jay Modi

(Roll. No. – 119063)

Submitted To –

B. K. School of Professional and Management Studies,

Gujarat University,

Ahmedabad – 009.

Academic Year – 2020-21

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CERTIFICATE

This is to certify that "Jay Modi", student ofFull Time MBA (2019-21 Batch) at B. K. School of
Business Management, Gujarat University, Ahmedabad have prepared a Summer Internship
Report on "Project Finance in Wind Farm Power Business An Experiential Study" in partial
fulfilment of two years full-time MBA Program of Gujarat University. This project work has
been undertaken under the guidance of "Dr. Nilam Panchal" - Professor at B.K. School of

Business Management, Gjarat University, Ahmedabad and found satisfactory

Date Dr. Nilam Panchal

Place: Ahmedabad Professor,
BKSPMS, Gujarat University
Declaration

I, Jay Modi, hereby declare that the Summer Internship Report titled ‘PROJECT FINANCE
IN WIND FARM POWER BUSINESS: AN EXPERIENTIAL STUDY’ is an authentic work
of mine under the valuable guidance of Dr. Nilam Panchal submitted as a report of summer
internship done by me as a part of MBA program at Vardhan Consulting Engineers as a
Finance Intern.

It is my original work and not submitted to any other degree/diploma/fellowship or other

similar titles or prizes to any other institution/organization or university by any other person.

Name – Jay Modi

Place – Ahmedabad
Date –
Sign –

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Acknowledgements
The internship opportunity I had with Vardhan Consulting Engineers was a great chance of
learning and professional development. Therefore, I consider myself as a very lucky
individual as I was provided with an opportunity to be a part of it. I am also grateful for
having a great learning experience even in this WFH internship type.

Bearing in mind previous I am using this opportunity to express my deepest gratitude and
special thanks to the Ashish Kumar, Founder CEO of Vardhan Consulting Engineers who in
spite of being extraordinary busy with his duties, took time out to hear, guide and keep me on
the correct path and allowing me to carry out my project at their esteemed organization and
extending during the training.

I express my deepest thanks to Neha kumari, Manager HR & Internship Coordinator for
giving necessary advices and guidance and arranged all facilities to make life easier. I chose
this moment to acknowledge her contribution gratefully.

I perceive as this opportunity as a big millstone in my career development. I will strive to use
gained skills and knowledge in the best possible way, and I will continue to work on their
improvements, in order to attain desired career objectives.

Last but not the least; I would like to thank Dr. Nilam Panchal for constantly guiding me for
preparing this report. Her invaluable guidance for every small matter makes my journey in
preparing this report wonderful and pleasurable. I thank ma’am for this. I am also thankful to
Dr. Prateek Kanchan, the Director of B. K. School of Professional and Management Studies
for helping us in various important matters regarding SIP. Hope to continue cooperation with
all of you in future.

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Table of Contents
Introduction .............................................................................................................................. 10
WIND ENERGY - BASICS ............................................................................................. 10
What is wind energy? ....................................................................................................... 10
How wind turbines work .................................................................................................. 10
Windmills vs. Wind Turbines........................................................................................... 11
What is a wind farm? ........................................................................................................ 11
How wind energy gets to you ........................................................................................... 11
FINANCING OF WIND FARM POWER BUSINESS ................................................... 12
What is Project Finance? .................................................................................................. 12
Ways to Finance a Project ................................................................................................ 13
Corporate Financing V/s Project Financing ..................................................................... 14
Important Terminologies related to Project Finance ........................................................ 15
Literature Review..................................................................................................................... 17
Project Finance and Wind Energy in the Academic Literature ........................................ 17
Research Gap .................................................................................................................... 21
Methodology ............................................................................................................................ 22
Title................................................................................................................................... 22
Objectives of Study .......................................................................................................... 22
Data collection Sources .................................................................................................... 22
Research Design ............................................................................................................... 22
Data Analysis Tools / Techniques .................................................................................... 22
Scope of study .................................................................................................................. 22
Limitation of study ........................................................................................................... 22
Details about the project ................................................................................................... 23
Formulation of the problem .............................................................................................. 23
Methodology adopted for the study ......................................................................................... 24
Methodology adopted for the study .................................................................................. 24
Model Inputs - Assumptions............................................................................................. 24
Assumption Chart ............................................................................................................. 25
Analysis and results ................................................................................................................. 31
IRR.................................................................................................................................... 31
DSCR ................................................................................................................................ 32
Conclusion ............................................................................................................................... 35
Bibliography ............................................................................................................................ 36

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About the Company
Vardhan Consulting Engineers (VCE) is a consulting company founded by group of
engineers who have strong academic background with decades of management experience
while working in companies all across the globe. VCE is providing solutions to the complex
engineering, management and financial issues of clients. They are specialized in providing
engineering and project management consultancy to energy projects. Especially Solar PV
power project (Utility Scale Large Sized Projects), Pyrolysis Projects (Plastic to Oil).

Services the firm offers include;

− Feasibility Analysis, Detailed Project Report, Financial Analysis.
− Financial Closure through Debt or Private Equity for Project Finance.
− On-site and Off-site Project Management and EPC-Management Services.
− Documentation and Transaction Services for Sale of Project.
− Project Development and Transfer of Rights at NTP.

Firm provides engineering and management consultancy services for small and medium size
businesses. The firm usually deals in following projects - Solar PV Project, Waste to Energy,
Sustainable Development, M&A and PE.

Apart from the businesses mentioned above, VCE also believe in give back to the society for
building a greater future of our country. The various initiatives on VCE Society Pay Back
are-
− Vardhan Merit Scholarship
− VCE Internships and Training

In this initiative, Firm selects students from various engineering and management colleges
and provide them internship and training. The internships and training are very unique in
nature and it’s especially for the students of Core Engineering Sector (Electrical, Mechanical,
Civil and Energy Engineering) and Finance Management for preparing them to corporate /
industry ready. Thus, Vardhan Consulting Engineers (VCE) is a pioneer organization to
fulfill the current generational needs of students and companies. Right now VCE is providing
internships for project finance, climate change, case study and analysis, solar power and
simulation, electric vehicle, waste management and green building projects. In future firm is
planning to go for institution for providing counseling and corporate trainings.
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Role of an Intern
In this internship every intern has to go through four modules. They are as below –
Module-1 : Basics of Project Finance
In this module, intern needs to go through the basics of Project Finance and Non –Recourse
Debt. How its different from Corporate Finance. What are the eligible sectors of project
finance and why? All other relevant information and terminologies related to Project Finance.
They need to prepare a list of 20 new terms that they learned and understand in this module.
Module-2 : Understanding Financial Modeling of Projects
In this module, we will provide a simple financial model of a project having individual equity
and non-recourse debt. The intern need to analyze the model and understand each applicable
model and understand each applicable calculation on respective sheets.
Module-3: Understanding Revenue Models of Sectors
In this module, the intern needs to understand the revenue models of the different sectors/
projects where project finance is feasible. The revenue detailing along with the rationale of
project finance should be analyzed.
Module-4: Financial Modeling and Final Submission
In this module, the intern needs to prepare a detailed financial model of a project from the list
provided. They need to prepare final internship report using our corporate standard format.
Then after final checklist the internship will be over.

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Executive Summary
Vardhan Consulting Engineers (VCE) is a consulting company which provides engineering
and management consultancy services for small and medium size businesses. The firm
usually deals in following projects - Solar PV Project, Waste to Energy, Sustainable
Development, M&A and PE. The firm offers internship program to management and
engineering students. This report is describing my work at firm as an intern for finance
management profile. The report is prepared on the tile – project finance in Wind farm power
business – an experiential study.

The report is prepared under the five major heads namely – Introduction, Literature Review,
Methodology, Methodology adopted for the study, analysis and results. The first part i.e.
introduction depicts all the details for wind energy that what it means, how it is generated,
what is wind farm, how energy generated at wind farm reaches to us, methods for financing
wind farm projects, difference between project finance and traditional corporate finance,
technicalities behind project finance, etc.

Second part depicts all the literature work for project finance and wind energy. Research
gives us an idea how much potential we are having for generating wind energy, which is one
step towards clean energy, sustainable development, and self reliant energy generation.
Research done in USA gives us a clear idea for the same. To finance such wind farm huge
amount is required, and for that it is researched that project finance is the most attractive and
cost efficient option we are having.

Third part presents objectives of the study, data collection sources, research design, tools and
techniques adopted for the analysis, scope and limitations of study. Followed by third, fourth
part presents assumptions considered for the study, financial model – cost sheet, revenue
sheet, finflow sheet, debt repayment schedule. Analysis and results are presented in fifth part
of the study

Wind farm power business is a typical project finance business. This was able to provide us a
generic view of how project finance works, how financial modeling techniques are used for
projections, etc. Also the positive results of the study have provided us a great example for
wind farm businesses.

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Introduction
WIND ENERGY - BASICS
What is wind energy?

W
ind energy (or wind power) refers to the process of creating electricity using the
wind, or air flows that occur naturally in the earth’s atmosphere. Modern wind
turbines are used to capture kinetic energy from the wind and generate
electricity. There are three main types of wind energy:

Utility-scale wind: Wind turbines that range in size from 100 kilowatts to several megawatts,
where the electricity is delivered to the power grid and distributed to the end user by electric
utilities or power system operators.

Distributed or "small" wind: Single small wind turbines below 100 kilowatts that are used to
directly power a home, farm or small business and are not connected to the grid.

Offshore wind: Wind turbines that are erected in large bodies of water, usually on the
continental shelf. Offshore wind turbines are larger than land-based turbines and can generate
more power.

How wind turbines work

When the wind blows past a wind turbine, its blades capture the wind’s kinetic energy and
rotate, turning it into mechanical energy. This rotation turns an internal shaft connected to a
gearbox, which increases the speed of rotation by a factor of 100. That spins a generator that
produces electricity.

Typically standing at least 80 meters (262 feet) tall, tubular steel towers support a hub with
three attached blades and a “nacelle,” which houses the shaft, gearbox, generator, and
controls. Wind measurements are collected, which direct the turbine to rotate and face the
strongest wind, and the angle or "pitch" of its blades is optimized to capture energy.

A typical modern turbine will start to generate electricity when wind speeds reach six to nine
miles per hour (mph), known as the cut-in speed. Turbines will shut down if the wind is
blowing too hard (roughly 55 miles an hour) to prevent equipment damage.

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Over the course of a year, modern turbines can generate usable amounts of electricity over 90
percent of the time. For example, if the wind at a turbine reaches the cut-in speed of six to
nine mph, the turbine will start generating electricity. As wind speeds increase so does
electricity production.

Another common measure of wind energy production is called capacity factor. This measures
the amount of electricity a wind turbine produces in a given time period (typically a year)
relative to its maximum potential.

For example, suppose the maximum theoretical output of a two megawatt wind turbine in a
year is 17,520 megawatt-hours (two times 8,760 hours, the number of hours in a year).
However, the turbine may only produce 7,884 megawatt-hours over the course of the year
because the wind wasn’t always blowing hard enough to generate the maximum amount of
electricity the turbine was capable of producing. In this case, the turbine has a 45 percent
(7,884 divided by 17,520) capacity factor. Remember—this does not mean the turbine only
generated electricity 45 percent of the time. Modern wind farms often have capacity factors
greater than 40 percent, which is close to some types of coal or natural gas power plants.

Windmills vs. Wind Turbines

Sometimes people use the terms “windmill” and “wind turbine” interchangeably, but there
are important differences. People have been using windmills for centuries to grind grain,
pump water, and do other work. Windmills generate mechanical energy, but they do not
generate electricity. In contrast, modern wind turbines are highly evolved machines with
more than 8,000 parts that harness wind's kinetic energy and convert it into electricity.

What is a wind farm?

Oftentimes a large number of wind turbines are built close together, which is referred to as a
wind project or wind farm. A wind farm functions as a single power plant and sends
electricity to the grid.

How wind energy gets to you

The turbines in a wind farm are connected so the electricity they generate can travel from the
wind farm to the power grid. Once wind energy is on the main power grid, electric utilities or
power operators will send the electricity to where people need it. Smaller transmission lines,
called distribution lines, collect electricity generated at the wind project and transport it to

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larger "network" transmission lines, where the electricity can travel across long distances to
the locations where it is needed. Finally, smaller distribution lines deliver electricity directly
to your town, home or business. You can learn more about transmission here.

So this is all about basics of wind energy – how it is being generated, its distribution, so on
and so forth. Now let’s move towards the main theme of the report i.e. how wind power
business is financed, and how the projected financial models are prepared for getting the idea
of viability of business.

FINANCING OF WIND FARM POWER BUSINESS

Wind farm power business is not financed like regular business loans – considering the
financial position of the firm. The financing of such business comes under the purview of
PROJECT FINANCE. So let’s first understand what project finance is, how project finance is
different from corporate finance, its important terminologies, etc.

What is Project Finance?

A large part of the existing literature agrees on defining project finance as financing that as a
priority does not depend on the soundness and creditworthiness of the sponsors, namely,
parties proposing the business idea to launch the project. Approval does not even depend on
the value of assets sponsors are willing to make available to financers as collateral. Instead, it
is basically a function of the project’s ability to repay the debt contracted and remunerate
capital invested at a rate consistent with the degree of risk inherent in the venture concerned.

Project finance is the structured financing of a specific economic entity—the SPV, or special-
purpose vehicle, also known as the project company—created by sponsors using equity or
mezzanine debt and for which the lender considers cash flows as being the primary source of
loan reimbursement, whereas assets represent only collateral.

The following five points are, in essence, the distinctive features of a project finance deal -
1. The debtor is a project company set up on an ad hoc basis that is financially and legally
independent from the sponsors.

2. Lenders have only limited recourse (or in some cases no recourse at all) to the sponsors
after the project is completed. The sponsors’ involvement in the deal is, in fact, limited in
terms of time (generally during the setup to start-up period), amount (they can be called on

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for equity injections if certain economic-financial tests prove unsatisfactory), and quality
(managing the system efficiently and ensuring certain performance levels). This means that
risks associated with the deal must be assessed in a different way than risks concerning
companies already in operation.

3. Project risks are allocated equitably between all parties involved in the transaction, with
the objective of assigning risks to the contractual counterparties best able to control and
manage them.

4. Cash flows generated by the SPV must be sufficient to cover payments for operating costs
and to service the debt in terms of capital repayment and interest. Because the priority use of
cash flow is to fund operating costs and to service the debt, only residual funds after the latter
are covered can be used to pay dividends to sponsors.

5. Collateral is given by the sponsors to lenders as security for receipts and assets tied up in
managing the project.

Ways to Finance a Project

A sponsor can choose to finance a new project using two alternatives:
1. The new initiative is financed on-balance sheet (corporate financing).
2. The new project is incorporated into a newly created economic entity, the SPV, and
financed “off-balance sheet” (project financing).

Alternative 1 means that sponsors use all the assets and cash flows from the existing firm to
guarantee the additional credit provided by lenders. If the project is not successful, all the
remaining assets and cash flows can serve as a source of repayment for all the creditors (old
and new) of the combined entity (existing firm plus new project).

Alternative 2 means, instead, that the new project and the existing firm live two separate
lives. If the project is not successful, project creditors have no (or very limited) claim on the
sponsoring firms’ assets and cash flows. The existing firm’s shareholders can then benefit
from the separate incorporation of the new project into an SPV.

One major drawback of alternative 2 is that structuring and organizing such a deal are
actually much more costly than the corporate financing option. The small amount of evidence

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available on the subject shows an average incidence of transaction costs on the total
investment of around 5–10%. There are several different reasons for these high costs -
1. The legal, technical, and insurance advisors of the sponsors and the loan arranger need a
great deal of time to evaluate the project and negotiate the contract terms to be included in the
documentation.
2. The cost of monitoring the project in process is very high.
3. Lenders are expected to pay significant costs in exchange for taking on greater risks.

On the other hand, although project finance does not offer a cost advantage, there are
definitely other benefits as compared to corporate financing -
1. Project finance allows for a high level of risk allocation among participants in the
transaction. Therefore, the deal can support a debt-to-equity ratio that could not otherwise be
attained. This has a major impact on the return of the transaction for sponsors (the equity
internal rate of return [IRR].
2. From the accounting standpoint, contracts between sponsors and SPVs are essentially
comparable to commercial guarantees. Nonetheless, with project finance initiatives they do
not always appear off-balance sheet or in the notes of the directors.
3. Corporate-based financing can always count on guarantees constituted by personal assets
of the sponsor, which are different from those utilized for the investment project. In project
finance deals, the loan’s only collateral refers to assets that serve to carry out the initiative;
the result is advantageous for sponsors since their assets can be used as collateral in case
further recourse for funding is needed.
4. Creating a project company makes it possible to isolate the sponsors almost completely
from events involving the project if financing is done on a no-recourse (or more often a
limited-recourse) basis. This is often a decisive point, since corporate financing could instead
have negative repercussions on riskiness (and therefore cost of capital) for the investor firm if
the project does not make a profit or fails completely.

Corporate Financing V/s Project Financing

The essential major differences between project financing and corporate financing are
summarized in below table.

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 Factor Corporate Financing Project Financing

Guarantees for Assets of the borrower (already-in-

Project assets
financing place firms)

Effect on financial Reduction of financial elasticity for No or heavily reduced effect for
elasticity the borrower sponsors

Off-balance sheet (the only effect

Accounting will be either disbursement to
On-balance sheet
treatment subscribe equity in the SPV or for
subordinated loans)

Main variables
Customer relations
underlying the
Solidity of balance sheet Future cash flows
granting of
Profitability
financing

Depends on cash flows generated

Degree of leverage Depends on effects on borrower’s
by the project (leverage is usually
utilizable balance sheet
much higher)

Important Terminologies related to Project Finance

Here are the terminologies that are often used with project finance -
1. Special purpose vehicle – During Project Financing, a special purpose vehicle is
appointed to ensure that the project financials are managed properly to avoid non-
performance of assets due to project failure.

2. Non-recourse debt – Non recourse debt is a type of debt in which lender cannot go
after the assets of borrower even if the borrower defaults, the lender can only go after the
assets that were assigned as collateral for the loan.

3. Limited recourse debt /loan – Limited recourse debt is a debt in which the creditor has
limited claims on the loan in the event of default.

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 4. BOT – build operate and transfer - Build – operate- transfer is a form of project
financing wherein a private equity receives a concession from the private or public sector to
finance, design, construct, own, and operate a facility stated in the concession contract.

5. Off balance sheet financing – Off balance sheet financing is an accounting practice
whereby a company does not include a liability on its balance sheet. It is used to reduce the
impact of project on the shareholder’s debt capacity, allowing others to use their debt
capacity for other investments.

6. Mezzanine finance – Mezzanine financing is a hybrid of debt and equity financing

that gives the lender the right to convert to an equity interest in the company in case of
default, generally, after venture capital companies and other senior lenders are paid.

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Literature Review

Project Finance and Wind Energy in the Academic Literature

Project Finance is one method of getting finance which is usually been used by particular
type of industries like energy sector firms, construction firms for constructing houses, dams,
highways, airports, etc. So the logic behind it says that when the project involved is highly
capital intensive and the technological risk involved in the project is less. Then the project
finance is the best suitable method for it. (Ghosh & Nanda, 2010)

Usage of project finance in wind farm power business is worldwide. The reason behind this is
been seen in a research paper published by Lawrence Berkeley National Laboratory named –
‘Alternative Wind Power Ownership Structures: Financing Terms and Project Costs’. The
authors of this research paper have done a research for the United States Government. They
have suggested some ownership structures and the costs associated with each to produce 1
mill power of electricity in US $ in 1996. The image is as below -

Source - (Wiser & Ryan, 1996-05-01, p. 37)

After having view on this I think we are having clarity that the wind power plants financed
through project finance with the PPA agreements is the most cost efficient option for
generating electricity through wind power. Here PPA agreements for wind farm power plants
mean the contract of Build – Operate- Maintain is being provided to private party while the
ownership is still of government only.

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This way generating electricity with the help of wind farms is a good option. Wherever there
is a potential to generate electricity with the wind farm technology- government must try to
have such power parks, because having these will help the economy in many ways like – no
carbon emission, more employment opportunities, billions of private investment, etc.

A report from American Wind Energy Association named – ‘Factsheet on Wind Energy in
the United States’ state the following benefits from the wind power in the USA –

1. 109,919 MW of operating wind capacity at the end of quarter two, 2020; which is
now the largest source of renewable energy in the country.
2. In 2019, the US wind industry has supported 120,000 jobs across 50 states. Only
Texas has 25000 people working in this sector. Thus it proves that wind energy
industry is a boon for employment generation.
3. Wind Energy generated 7.2% of the nation’s electricity in 2019, which is enough to
power 27.5 million homes.
4. US wind industry has invested $ 208 Billion in various wind projects across the
country, out of which $ 14 Billion investment just happened in 2019. So this sector
infuses lots of money in the economy.
5. Wind projects pay $ 1.6 billion to state and local governments and private landowners
every year.
6. Wind energy avoided 198 metric tons CO2 emissions in just 2019 for USA and has
saved around 103 billion gallons of water for country. (AWEA, 2020)

So this report presented very eye catching facts. This was for USA only. Every country has
now started working for this. Now let’s see the statistic for India from the report of National
Institute of Wind Energy –

NIWE has installed over 800 wind-monitoring stations all over country and issued wind
potential maps at 50m, 80m and 100m above ground level. The recent assessment indicates a
gross wind power potential of 302 GW in the country at 100 meter above ground level. Most
of this potential exists in following windy States as given below:-

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 S. No. State Wind Potential (MW)
1 Gujarat 84431.33
2 Karnataka 55857.36
3 Maharashtra 45394.34
4 Andhra Pradesh 44228.60
5 Tamil Nadu 33799.65
Source - (NIWE, 2018)

Now if look for the India’s position in World Wind Power Installation – it is forth. As per the
data from World Wind Energy Association – June 2020 report this is as below -

From 1981 to 2020 if we look the world’s journey for wind energy then we came to know it
has increased multifold times in the last decade. This is been reported in the report of World
Wind Energy Association.

Source - (WWEA, 2020)

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India has wind energy potential of 302 GW. Out of which only 35 GW capacities has been
installed. So to have more wind farms and more electricity production in India there is a need
of great policy. The present Union government has put forth certain incentives and
regulations to have more promising growth in this sector. The steps are as below –
1. Concession on import duty on specified wind turbine components.
2. 10 year income tax holiday for wind power generation projects.
3. Concessional custom duty exemption on certain components of wind electric
generators
4. 100% exemption from excise duty on certain wind turbine components.
5. REC Mechanism.
6. Waiver of Inter State Transmission System (ISTS) charges and losses for inter-state
sale of solar and wind power for projects to be commissioned up to March, 2022.
7. Permitting Foreign Direct Investment (FDI) up to 100 percent under the automatic
route.
8. Notification of standard bidding guidelines to enable distribution licensee to procure
wind power at competitive rates in cost effective manner.
9. Declaration of trajectory for Renewable Purchase Obligation (RPO) up to the year
2022.
10. Implementation of Green Energy Corridor project to facilitate grid integration of
large-scale renewable energy capacity addition.
11. Technical support including wind resource assessment and identification of potential
sites through the National Institute of Wind Energy, Chennai.
12. IREDA finance scheme for wind power projects.
13. Special incentives provided for promotion of exports from India for various
renewable energy technologies under renewable sector specific SEZ.
14. Feed-in-Tariff (FIT) scheme for wind projects upto 25 MW.
15. Accelerated Depreciation – ended in 2017
16. GBI scheme for grid interactive wind power projects commissioned before 31 March
2017.
Source – Amendments in the various wind policies, (GOI, 2019)
Thus we are also going to have a good wind farm power generation situation in India. Now
after having all these, the one problem that is left is of financing for which this report has
been prepared.

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Research Gap

Renewable energy has lot many benefits for economy from less pollution to more
employment generation, etc. In India we are blessed with unique geographical proportion
having good wind throughout the year. So to establish wind farm power plants are very good
step toward creating better society for future. But the installation of wind farm power plants
are very costly in nature, it requires huge investment. So to afford it there is a special kind of
mechanism in finance – which is project finance. To have better understanding of it and to
know whether it is viable or not; we are taking a 10 MW wind farm details to do research
whether it is viable or not considering the financial statements. So this report is based on this
research.

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Methodology

Title
Financial Modeling and Analysis of 10 MW Wind Power Project in Porbandar, Gujarat IN.

Objectives of Study
Primary Objective –
- To understand the project finance structure and it’s affecting variables in the wind farm
business
Secondary Objective –
- To prepare the exemplary financial model that can be applied to wind farm business.
- To know whether the wind farm power plant which we are going to establish will be able
to generate sufficient cash flows for fully covering the operating costs and service the
debt. Along with that there should be some residual funds to pay dividends to sponsors.
- To do the lender’s analysis of project finance for risk assessment using various tools like
IRR, DSCR, etc.

Data collection Sources

Secondary data sources like American Wind Energy Association, Indian Wind Energy
Association, Ministry of New and Renewable Energy, etc.

Research Design
Exploratory Research Design is used here.

Data Analysis Tools / Techniques

Here I have applied financial model to analyze the data obtained from secondary sources. In
that financial model, I have applied DSCR and IRR as data analysis tools to come on
conclusion.

Scope of study
The scope of study over here is to have the better idea from the finance perspective whether
the business is viable or not.

Limitation of study
The projections that have been done over here with respect to the current data may fall
wrong. If so, the results would be incorrect. So this is the main limitation of study.

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Details about the project
• Wind Farm near Porbandar, Gujarat, India.
• Capacity – 10 MW
• Contract information – PPP based project on the basis of BOT (Built- Operate- Transfer)
for 25 Years.
• Contractual Parties – Owner – GUVNL,
Developer & Operator - Techvardhan Power Pvt. Ltd.

Formulation of the problem

Techvardhan Power Pvt. Ltd. ‘CLIENT’ has signed a PPA for 25 years with GUVNL for 10
MW Wind Power Plant in Porbandar, Gujarat at fixed tariff of Rs. 3.50 /kWh.

They are expecting a net annual energy production of 18 Million kWh/year with a
degradation of 1% per annum. The expected CapEx is Rs. 3 Crore/MW and OpEx is Rs. 30
Lacs/per annum for the whole plant.

They are seeking a non-recourse debt (project finance) with 70:30 as D/E ratio from leading
commercial banks in India as a 12 years term loan.

Prepare a financial model showing cost break ups with the expected revenue and cash flow.
Also analyze the project with the lender’s perspectives using various tools like IRR and
DSCR.

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Methodology adopted for the study

Methodology adopted for the study

Financial Modeling with the use of Spreadsheet is used for producing and analyzing the
results of this project.

This will review the main building blocks of information and assumptions used for
projections that are assembled to create inputs for a project’s financial model, namely: macro-
economic assumptions; project costs and funding; operating revenues and costs; accounting
and taxation assumptions.

The final model outputs will confirm the viability (or otherwise) of the project from the point
of view of investors and the costs to the Contracting Authority, or users. Lenders use the
model to carry out sensitivity calculations to ensure that their loan is not unduly at risk in
downside scenarios.

Model Inputs - Assumptions

The input assumptions for the financial model for the Project Company can be classified into
five main areas:

• macro-economic assumptions e.g. inflation, commodity prices, interest rates, exchange

rates, economic growth

• project costs and funding structure e.g. debt /equity ratio, capital expenditure break up, etc.

• operating revenues and costs e.g. revenue parameters, fixed tariffs, etc.

• loan drawings and debt service e. g. moratorium period, interest rate, debt tenure, interest
payment period, etc.

• taxation and accounting e.g. taxation rate, MAT rate, tax holiday, etc.

These inputs need to take account of the terms of the Project Contracts, including expected
and required Project Completion, timing of payments or receipts, and calculation of penalties
or bonuses.

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The basis for the inputs must be clearly documented; the standard way of doing this is for an
‘assumptions book’ to be compiled. This takes each line of the financial model and sets out
the source for the input or calculation of that line, with copies of (or references to) the
documentation to back this up.

To calculate the investors’ returns correctly the financial model should cover the whole
period from when the initial development costs on the project are incurred to the end of the
project life, although for the purposes of the lenders the model is only needed from Financial
Close, with past expenditure on project development being ‘day 0’ figures. The project life is
either the term of the Project Agreement or the expected economic life of the project if it is
not operating with such a contract. A residual value of zero, with the whole of the Sponsors’
equity having been repaid by the end of the project life, is normally assumed unless there is
good reason to the contrary.

Assumption Chart
(Amount in million Rs.)

The above assumptions has been included in the following sheets representing –
1. Cost Sheet

2. Revenue Sheet

3. Finflow Sheet

4. Debt Repayment Schedule Sheet

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 Cost Sheet
(Blue coloured cells are inputs)

Project Cost (CapEx)

% of Project
Rate (Rs/MW)
10 Cost

Development and Project Management 3,084,000 30,840,000 10.28%

Wind Turbines 14,940,000 149,400,000 49.80%
Balance of Plants 5,526,000 55,260,000 18.42%
Installation and Commissioning 6,450,000 64,500,000 21.50%

Total CapEx / Project Cost 30,000,000 300,000,000

Operating Expenses
Rate (Rs./MW)
1

BoP / Infrastructure Maintainance 14,640 146,400

Operations Management Fee 29,280 292,800
Distribution /Input Power Charges 48,780 487,800
Maintainnce Reserve 14,640 146,400
Insuarance 21,960 219,600
Land Rental 17,070 170,700
Warranty, Operations and Maintanance 153,630 1,536,300

Total Operating Cost (Per Annum) 3,000,000

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 Revenue Sheet

(Blue coloured cells are inputs)

(Revenue is in million Rs.)

Revenue Parameters

Tariff Rate (Fixed) (Rs./kWh) 3.5

Annual Energy Production (1st Year)
(Million kWh) 18
Degradation in Energy Production from
Second Year (% per annum) 1%
Term of PPA (In Years) 25

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Numbers in mill INR
Blue coloured cells are inputs

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 Debt Repayment Schedule
Debt Amount 210.00
Debt rate 10.00%
Moratorium 0.25 yrs
Term 12.0 yrs
Payment Periods 48
One period is one quarter
COD 23-Aug-2020
First Quarter End 21-Nov-2020

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Yearly Payment Schedule

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Analysis and results

A
fter preparing the statements of cost sheet, revenue sheet, debt repayment sheet and
finflow sheet, it is the time to draw conclusion from these all details. The data we
provided to the financial model has resulted in these sheets. Now with the help of
various analytical tools like NPV, IRR, DSCR, etc we are going to analyze this project.

For this project we are going to calculate 4 important things –

1. Equity IRR

2. Project IRR.

3. Minimum DSCR

4. Average DSCR

Before explaining these terms and calculations let’s first understand the two important terms
used here – IRR and DSCR.

IRR
Theoretically, Internal Rate of Return (IRR) is the rate that makes Net Present Value (NPV)
of a project zero. It is effectively the measure of cash flow weighted return that a project/
capital investment generates internally using the capital providers’ resources i.e. initial
investment outlay. In the Corporate Finance & Private Equity world, IRR is the most widely
acceptable performance measure of a capital investment.

Two useful classifications of IRR are project IRR and Equity IRR. Project IRR is the IRR
that is calculated on the actual total cash flow generated by a project/investment over the
years. It ignores the sources of capital that was used to fund the project. Equity IRR is the
IRR that is calculated on the cash flow available only to the equity holder’s i.e. free cash flow
to Equity. It excludes the debt financing part from the project cash flow.

Conceptually, Equity IRR has to be greater than Project IRR for the project to add any value
and it usually is. Equity IRR can be less than the project IRR only in case where interest rate

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is too high and debt financing does not make sense because it does not create any value to the
equity holders.

DSCR
In project finance Debt Service Coverage Ratio is very important tool to evaluate any project.
It is a measurement of the cash flow available to pay current debt obligations. The ratio states
net operating income as a multiple of debt obligations due within one year, including interest,
principal, sinking fund and lease payments. So it reflects the ability to service debt given a
particular level of income.

Lenders will routinely assess a borrower’s DSCR before making a loan. A DSCR of less than
1 means negative cash flow, which, means that the borrower will be unable to cover or pay
current debt obligations without drawing on outside sources – without, in essence borrowing
more.

It is always expected that there is a DSCR of 1 or more than 1 every time, but in the case let’s
say it is too close to 1, say 1.1, the entity is vulnerable, and a minor decline in cash flow
could make it unable to service its debt. So many times lenders may require that the borrower
maintain a certain minimum DSCR while the loan is outstanding.

Let’s see the results of this project –

Equity IRR 24.50%

Project IRR 6.89%

Minimum DSCR 1.42

Average DSCR 1.65

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1. Equity IRR

Equity IRR is the IRR that is calculated on the cash flow available only to the equity holder’s
i.e. free cash flow to Equity. It excludes the debt financing part from the project cash flow.

So, Equity IRR = XIRR(C42:AC42,C11:AC11,I4) (Refer Finflow Spreadsheet for cell

references)

Here, XIRR is used for finding IRR,

C42:AC42 is the range of cells for final project cash flow for equity for 25 years
C11:AC11 is the range of cells for date of year ending for next 25 years,
I4 is the discount rate of 10% as given in the Assumption Chart.

2. Project IRR

Project IRR is the IRR that is calculated on the actual total cash flow generated by a
project/investment over the years. It ignores the sources of capital that was used to fund the
project.

So, Project IRR = XIRR(C46:AC46,C11:AC11,I4) (Refer Finflow Spreadsheet for cell

references)

Here, XIRR is used for finding IRR,

C46:AC46 is the range of cells for final project cash flow for 25 years,
C11:AC11 is the range of cells for date of year ending for next 25 years,
I4 is the discount rate of 10% as given in the Assumption Chart.

3. Minimum DSCR

Minimum DSCR is the ratio which lenders demand from the project company. Because
below the minimum DSCR, it is assumed that there is a high risk of default in payment. So,
minimum DSCR is calculated.

So Minimum DSCR = MIN($E$44:$AC$44) (Refer Finflow Spreadsheet for cell references)

Here, MIN is used for finding minimum value in the range of DSCRs,
$E$44:$AC$44 is the range of cells indicating DSCRs for the period of 25 years

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4. Average DSCR

Average DSCR is the ratio which indicates the average value of DSCR which project is
producing. Usually banks demand an average DSCR of 1.35 to 1.70 for infrastructure
projects.

So Average DSCR = AVERAGE(E44:AC44) (Refer Finflow Spreadsheet for cell references)

Here, AVERAGE is used for finding average value in the range of DSCRs,
E44:AC44 is the range of cells indicating DSCRs for the period of 25 years.

Results

The project as we have seen above is generating positive IRR for both Equity and Project
which indicates that there will be sufficient generation of cash flow to pay all expenditures as
well for the debt repayment. With this for getting more conformity we have used DSCR that
to see whether we are not having any default risk in debt payment at any point of time in
business. This also comes in appropriate industry standards, so we can say that this project is
feasible from all angles.

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Conclusion

T
he basic idea behind this study was to understand the project finance structure, its
affecting variables, financial modeling for the project finance business and usage of
the risk management tools like IRR and DSCR for evaluating a project.

We have carried out a detailed study on project finance in the chapter 1. At there we have
seen that the definition of project finance, ways to finance a project i.e. corporate finance and
project finance. We have seen the differences between the two. And at last we have seen the
terminologies related to project finance. Then in the chapter 2, we saw a detailed literature
review on project finance.

In chapter 3, we have seen the basic details for the 10 MW Wind Power Project in Porbandar,
Gujarat – which is a typical project finance business for which we have conducted a study in
this report. This chapter includes various details like objectives of study, formulation of
problem, scope and the rationale of the study. In the 4th chapter we saw the methodology
adopted for the study i.e. the financial modeling. The model was divided into 4 parts namely
– cost sheet, revenue sheet, debt repayment sheet, and finflow sheet. The 5th chapter has
provided a detailed view on the analysis part of the study with the help of various tools like
IRR and DSCR. In a result, at there we found that the project is able to cover all expenditures
and is able to pay the required sum of money as interest and principal to the lender. There we
also checked chances of getting default in debt repayment, but all were getting positive so we
come to a conclusion that the project is feasible from all the angles.

Wind farm power business is a typical project finance business. This was able to provide us a
generic view of how project finance works, how financial modeling techniques are used for
projections, etc. Also the positive results of the study have provided us a great example for
wind farm businesses.

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Bibliography
AWEA. (2020). Wind Energy in the United States - Factsheet 2019. American Wind Energy
Association.
Ghosh, & Nanda. (2010). Venture Capital Investment in the Clean Energy Sector. Harvard
Business School , 8-9.
GOI, M. o. (2019). Ministry of New and Renewable Energy- Government of India.
NIWE. (2018). WInd Power Potential Map at 100m agl. WSOM, NIWE.
Wiser, & Ryan. (1996-05-01). Alternative Windpower Ownership Structures: Financing
Terms and Project Costs. Lawrence Berkeley Laboratory, University of California.
WWEA. (2020). World Wind Energy Association.

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