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Setting up a solar project can be quite expensive, with costs reaching up to INR 6 crores per MW. Most of this funding typically comes from a mix of equity and debt financing. Equity financing involves raising money from within the company or attracting outside investors. On the other hand, debt financing, which accounts for around 70% of the project's cost, usually takes the form of a loan backed by collateral.
Given these significant expenses, it's crucial for any company considering setting up a solar power project to understand their commercial solar financing options thoroughly. Here, we aim to answer some fundamental questions like how commercial solar projects are financed, what the best financing approach is, and how long solar panel financing can last.
Let’s first explore the various ways a commercial solar project can be funded.
### Domestic Funding from Banks
In India, local banks remain one of the primary sources of funding for commercial solar projects. These banks typically offer loans with interest rates ranging from 11% to 13%. However, they often require borrowers to provide collateral worth up to 100% of the loan amount. Initially, banks were comfortable offering loans for periods of 7 to 10 years. But over time, they have become more flexible, extending loan terms up to 15 years. This change has been driven by the increasing regulatory demands and the extensive formalities required before starting a solar project.
### NBFC Financing
Non-Banking Financial Companies (NBFCs) such as the Indian Renewable Energy Development Agency Limited (IREDA) are another option for financing commercial solar projects. For instance, grid-connected solar photovoltaic (PV) projects can secure loans with interest rates between 10.2% and 11.4%, depending on the project's grade as determined by relevant authorities. Notably, IREDA provides loans for projects that meet a minimum debt requirement of INR 50 lakhs and are both commercially and technically viable. One of the key advantages of IREDA loans is that they only require collateral equivalent to 10-33% of the total loan amount applied for.
### Documents Required for NBFC Solar Financing
When applying for solar financing from NBFCs, certain documents are essential. These include:
1. Quality and safety measures implemented
2. Details regarding evacuation procedures
3. Component supply contracts
4. Permits and compliance requirements
5. Operations and maintenance (O&M) contract
6. Performance certificate (PC) contract
7. Feasibility study report
8. Power Purchase Agreement (PPA)
### International Financiers in India
For those looking beyond domestic options, there are numerous international entities willing to fund commercial solar projects in India. The World Bank’s financial arm, the International Finance Corporation (IFC), provides financial support for solar initiatives across the country. Other alternatives include EXIM Bank, the European Investment Bank, and the Asian Development Bank. Additionally, several green energy funds based overseas also offer affordable financing for solar projects. Importing materials from the lender’s country can sometimes yield better deals on commercial solar project financing.
However, it’s important to note that securing funds from international lenders typically takes longer—usually between 9 to 12 months.
### Due Diligence Costs
Another critical consideration for companies pursuing commercial solar projects is the cost of due diligence. This expense plays a significant role in both the overall project budget and timeline. Key areas contributing to due diligence costs include:
1. Technical appraisal
2. Promoter appraisal
3. Environmental appraisal
4. Financial appraisal
5. Industry-specific appraisal
6. Legal appraisal
7. Loan approval processes
8. Insurance packages
### Conclusion
As demonstrated above, there are numerous options available for commercial solar financing. It’s essential to choose a financier wisely since this decision significantly impacts both the project’s cost and its execution timeline. While Indian banks and NBFCs generally provide the best solutions for utility-scale solar financing, international lenders may be considered if necessary. Always remember to mitigate risks associated with currency fluctuations when dealing with foreign financiers. By understanding these options and considerations, companies can make informed decisions about their solar investments.