The Karnataka farmer’s scheme, which was launched in 2015, has been one of the most attractive schemes.

It provides Rs 8.4/kWh as the tariff, one of the highest in the country, and farmers holding land in Karnataka could bid for upto 3 MW.

The scheme was so attractive that the online bidding, done on a first-come-first-served basis, concluded within one minute for the entire 300 MW!

As it happens in our movies, the first part was the positive and happy part of the story. What is happening after the  PPA has been signed by over a hundred farmers is a more challenging story (not different from the post interval theme in our movies).

What indeed is the challenge?

The real challenge is in the financial closure.

Let me explain. For a solar power plant, the total project cost has to be partly brought in as the developer’s equity, while the other part cam be covered by debt, coming in the form of loans from banks.

The debt/equity ratio for a solar power plant will be about 30:70 (30% equity and 70% debt). In some cases, it can go as much as 25:75, but let us stick to 30:70 for our discussions here.

Given that a MW of solar Power Plant costs about Rs 6 crores (including all project costs), a farmer with a 1 MW PPA needs to be able to be able bring in Rs 1.8 crores as equity and show collateral for Rs 4.2 crores (or at least about Rs 3 crores) for the bank loan.

Not suprisingly, many Karnataka farmers have not been able to raise the equity or debt. Some of my folks own land and property in my village, and I am aware that some farmers out there are indeed wealthy, but only a few of them will be able to show wealth of Rs 5 crores (required for equity and collateral together, for a MW).

With this as the context, a good number of farmers who have signed these attractive PPAs are not able to bring in either the equity for the project as they do not possess enough money on their own, nor raise a bank loan as they are not able to provide the collateral the banks need for loans for solar power projects.

Not sure what they had in mind for financing when they signed the PPA, but now with the entire thing becoming thicker by the day, they have surely started getting their minds to think.

Solar Mango is aware of many of these farmers trying out various methods to get financial closure, some of them fairly unorganized ones. Not surprisingly, only a few have succeeded in getting financial closure.

And now, the clock has started ticking as they need to complete their projects by the end of 2016. If they do not get a financial closure within the next couple of months, they will find it difficult to complete their projects on time.

With just 10 months to go, dozens of farmers holding an attractive PPA are in a quandary.

This challenging situation for the farmers is creating an opportunity for some investors. How?

The real opportunity the investors see is the tariff.  At Rs 8.4/kWh, your project and equity IRRs are sky high, with the capex / MW significantly less than Rs 6 crores (without trackers). For one our clients who has this PPA and is lucky (wealthy) enough to get a financial closure on his own, we did the math and found that with trackers, Project IRRs are around 22%. Mind you, these are withp conservative or at least acceptable assumptions on interest rate (12%), capex (6.2 crores/MW, excluding other upfront costs such as costs for approvals, interest during construction etc), and yield (19 lacs/MW/year).

This implies that, even assuming an investor shells out an equivalent of Rs 1 crore /MW as a premium (either in capex or through revenue sharing), he ends up with a 25 year project that has a project IRR of over 18%! (once again, these are estimates for projects with trackers, and without trackers it might be about 2% less on IRR, still very attractive).

Let us say I have convinced the prospective investor that it is indeed a great tariff, but he is going to ask, “How can I participate as this PPA has been signed and owned by the farmer?”

While the PPA has been signed by the farmer, the agreement allows ownership of the PPA to be fully transferred to third parties after the first year. Thus, if you are investor looking for a good PPA (and Rs 8.4/kWh is as good as it will ever get anymore in India), you could be mighty interested in talking to the farmers now. From what Solar Mango has estimated, even after the financial incentives the investor need to give to the farmer for getting this opportunity, the returns to the investor could be quite attractive, given the high tariff for the scheme (Rs 8.4/kWh)

The next question that pops up from a prospective investor is: “Is it a good idea to invest now, as I cannot claim ownership at least for a year from the start of operations?”

Well, the ownership issue might not be such a problem after all. The reason is, according to the PPA agreement, the farmer has to own a only minimum of 26% share in the special purpose vehicle even in the first year. Thus, as an investor, you could actually start part owning the power plant right from the start, and own it fully after a year.

Is it any wonder that at Solar Mango we are getting a few calls every day from prospective investors keen on investing in this scheme? Sure, the nature of the PPA does present some challenges, but I know of investors who have already invested in a few MW of this scheme through well crafted agreements.

But, while it indeed is an attractive opportunity, because of the unorganized nature of this market, both from the investors and the farmers contexts, many investors are not able to talk directly to farmers directly, and many farmers keen on high quality investors are not able to identify them.

In fact, a few investors we interacted with are quite concerned about some farmers demanding unacceptable amounts as premium. These investors are also kind of put off by the “unprofessional” attitude of some farmers who essentially seemed to say “put down your money on the table and we will talk” – surely not the way you should ask for money from professional investors! Another challenge seems to be the presence of so many brokers and aggregators, some of whom are not even allowing access to talk to the farmers they represent – I can assure them no professional investor would be interested in talking to them either, if this attitude persists.

For some of the same reasons noted above, we at Solar Mango were also unsure whether we should try to play a role in assisting the farmers to find investors. And for a while, we actually decided not to. But in the past two weeks, we have had some of the better farmers enquiring if we could help, and we said, why the heck not.

Well, let me admit that the situation is fluid, but at Solar Mango we have formed a small team to focus on this and help both the investor and the farmer. Our focus is to identify some really serious farmers who are willing to approach this in a professional, positive manner with a win-win mindset. 

So, here’s the nub:

  • If you are an investor interested in exploring investing opportunities in the Karnataka Farmer’s scheme or in other attractive solar power plant opportunities,
  • Or a farmer who owns a PPA and is seeking a high quality investor

Solar Mango can be of assistance in connecting you with serious farmers/investors: Do send a note to Ramya – .

Please note that we are keen on interacting directly with farmers only, and hence middlemen/aggregators may kindly excuse.