The performance of solar power turned sunnier this fiscal, with ~75% of the projects expected to exceed their P90¹ level of generation, compared with only 59% last fiscal. But the metric still indicates underperformance as 25% did not meet their P90 level. However, these assets still have adequate cash-flow cushion for debt servicing. Their level of underperformance is not alarming either and recovery in performance is expected.

A study of 115 solar projects aggregating ~4.6 gigawatt (GW), with operational record of at least one full year to eliminate performance volatility during the stabilisation phase, indicates as much.

The performance on the P90 metric is crucial as it is used widely 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 appropriately account for volatility in solar irradiation.

Thus, a material and continuous underperformance with respect to P90 may result in lower-than-expected cushion for debt servicing. Generation that is 1 percentage point lower than P90 level reduces debt servicing cushion by ~15% and lowers return on equity by 1.5-2.0 percentage points.

Says Manish Gupta, Senior Director, CRISIL Ratings, “Though an estimated 25% of the projects are expected to underperform this fiscal, their median ratings are largely unaffected as 55% of these had generation just 0-1% below their P90 level (at which they were modelled) and another 20% fell short by 1-1.5%. This level of underperformance reduces the debt-servicing cushion, but cushion but does not impair debt-servicing capability. This is because generation is dependent on levels of irradiation, which are volatile, and hence, debt servicing levels of projects typically have cushions to absorb such variation.”

Further the performances are expected to recover over the medium term.

Says Ankit Hakhu, Director, CRISIL Ratings, “Irradiation levels are expected to be mean-reverting. There have been cycles of weaker years and better years compared with long-term averages earlier as well. For instance, 2015 to 2017 were good years with irradiation levels 2-5% higher than average, followed by weaker 2018 and 2020 (refer to chart in annexure). Indeed, two-thirds of the underperforming projects did so because of lower irradiation. Hence, as irradiation levels improve, the performance of these projects should also recover towards expected levels.”

Others underperformed on account of 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.

That said, improvement in irradiation is weather-induced and remains crucial for the long-term credit health and growth of the solar sector. A further period of dwindling irradiation can reduce confidence on modelled cash flows, and thus curtail interest from debt and equity investors alike.

¹ Annual P90 generation estimate indicates the generation that is likely to happen with 90% confidence during the project’s tenure, every year. For example, a P90 value of 10,000 kWh for the annual output of a solar power unit implies it will generate over 10,000 kWh 90% of the time. This is arrived at by a) estimating average energy levels at various confidence intervals at the project site using historical satellite and site-specific data and b) superimposing those energy estimates on generation performance of the modules and balance of plant per unit of energy level.