Introduction

‍The bankability of renewable energy projects hinges on robust financial modeling that accurately assesses risk and return. With razor-thin margins in competitive bidding, a minor error in assumptions can turn a profitable project into a non-performing asset (NPA). This paper guides CFOs and investors through the critical inputs of a renewable financial model, including sensitivity analysis for interest rates, currency fluctuation, and generation curtailment.

Key Inputs: LCOE and Debt Service Coverage Ratio

‍Two metrics define the health of a project.

• Levelized Cost of Energy (LCOE): This is the net present value of the unit-cost of electricity over the lifetime of the asset. It must be competitive against grid parity. Models must account for degradation (0.5% - 0.7% annually) and inflation in O&M costs.
• DSCR (Debt Service Coverage Ratio): Lenders require a DSCR typically above 1.2x. The model must stress-test this ratio against "P90" generation scenarios (a conservative estimate where generation is met 90% of the time) rather than the optimistic "P50."
• Depreciation Benefits: In many jurisdictions, accelerated depreciation allows for significant tax deferrals in the early years, drastically improving the project's Internal Rate of Return (IRR).

Risk Sensitivity and Mitigation Strategies

‍Financial models must be dynamic, not static.

• Interest Rate Risk: With renewable projects being capital intensive, floating interest rates pose a major threat. Hedging strategies or fixed-rate refinancing options must be built into the long-term model.
• Currency Hedging: For projects importing modules or foreign debt, currency depreciation can erode returns. The cost of hedging instruments must be factored into the LCOE.
• Counterparty Risk: The model must assess the creditworthiness of the off-taker (power purchaser). Payment delays from state DISCOMs require working capital buffers to be built into the financial structure.

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