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Key Steps in determining the feasibility of a solar power plant

In recent years the drive to build solar power plants has increased. The cost of the electricity generated from solar power is much higher than for other renewable energy sources as shown in Table 1.

Despite this fact solar power plants are being installed around the world. There are several reasons for this. These include, reducing a countries dependence on oil, increasing a 'green' image, reducing CO2 emissions and an attempt to create new jobs and reducing a countries dependence on imported expensive diesel for power generation. In some parts of the world Solar power is the only alternative renewable energy that has the potential to provide significant quantities of electricity. The costs for the development of solar panels have been coming down as the technology improves and more facilities to manufacture the panels are being built.

In order to make a solar power project viable a Feed-In Tariff, alternative incentive schemes such as green certificates or high grant subsidies are required. However a Feed-In Tariff scheme maybe the most attractive one for investors. In this kind of incentive system the solar power plant is guaranteed to be able to sell the produced electricity at a pre-determined set price over the life time of the plant.

Table - Electricity production costs

Power source Cost €/MWh
Nuclear 28-35
CCGT (gas) 34-40
Hydroelectric Power 25-60
Solar 350
Wind 60

The key stages in studying the feasibility of a solar power plant project are in determining the:

  • Solar Potential – The amount of electricity that can be produced annually.
  • Capital Expenditures – This includes determining the type of photovoltaic cell to be used, grid connection requirements as well as installation and construction costs.
  • Project Schedule – Development studies, installation and construction, grid connection work, payment schedule.
  • Operating Expenditures – Insurance, operating and maintenance, business taxes, land leases.
  • Profit and Loss Forecasts, Cash Flows, depreciation of capital assets & Debt Structure

It is important that all the stages above are carried out correctly to give the project developer a precise evaluation of its financial need of the project. This will ensure that the project is financially viable at any point in time over the lifetime of the plant including its development.

A good feasibility study should also provide the developer with an estimate of some key ratios, so parties involved in development can appreciate its bankability. If the key first assumptions regarding the CapEx, Opex and electricity production levels show that the DSCR*1 and LLCR*2 ratios are less than zero then the project may have to be adapted so it can be financed according to project finance standards.

Once all these elements have been reviewed and compliance with bank expectation ensured the developer will be able to check that the project Internal Rate of Return is above 20% and look for potential equity partners.

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