According to a recent study by CRISIL Ratings, the performance of solar power projects has improved this fiscal year, with around 75% of the projects expected to exceed their P90 level of generation, compared to 59% last fiscal year. However, the study also indicates that 25% of the projects did not meet their P90 level, which can impact the cash-flow cushion available for debt servicing. This underperformance is not alarming as it is largely due to volatile levels of solar irradiation, which can fluctuate from year to year.
The P90 metric is crucial as it is used 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 account for the volatility in solar irradiation. A material and continuous underperformance with respect to P90 can result in lower-than-expected cushion for debt servicing.
However, the median ratings of the underperforming projects are largely unaffected as 55% of these had generation just 0-1% below their P90 level, and another 20% fell short by 1-1.5%. This level of underperformance reduces the debt-servicing cushion, but does not impair debt-servicing capability.
Two-thirds of the underperforming projects did so because of lower irradiation, while others underperformed due to operational issues such as machine or plant breakdown and grid unavailability, which are temporary and controllable. Once the issues are rectified, their performance should improve.
CRISIL Ratings predicts that the performance of these projects should recover towards expected levels, as irradiation levels are expected to be mean-reverting. The solar sector’s long-term credit health and growth depend on improving irradiation levels, which can reduce confidence on modelled cash flows and curtail interest from debt and equity investors if they continue to dwindle.