A research group has proposed to cover the standard risk in the PV activities at the utility company by assuming credit standard waps. The new methodology was tested through a series of Montecarlo simulations and has reportedly demonstrated how PV activa owners can transfer the standard risk to a security seller at affordable costs.
An international research team led by Concordia University in Canada has created a new financial instrument that can help reduce the standard risk in PV projects on solar energy.
The new approach uses Credit Default Swaps (CDS) to offer an extra low financial security for PV project developers. A CDS is a contract between two parties in which one party buys protection from another party against losing the standard of a borrower.
“Although PPAs are traditionally served as the cornerstone of income security for renewable energy projects, they do not fully protect against risks such as standard scenarios, inaccuracies for resources or changes in tax and market conditions,” the researchers said. “A CDS offers a mechanism to transfer the standard risk from lenders to third parties, who function in the same way as an insurance contract.”
In the study “Risk reduction in project financing for PV projects on solar energy on Utility scale“Published in ENERGY ECONOMYThe research team explained that the proposed framework implies the presence of a sealed PPA in a project financing agreement. Furthermore, it assumes that a special vehicle (SPV) if the buyer of protection acts by paying a premium to the protection seller, which the SPV compensates in the event of a standard.
According to the conditions of this agreement, the SPV is obliged to make periodic premium payments to the protection seller until the CDS deal expires or is issued as standard.
The new risk reduction strategy also includes the use of a formula with a closed form for the evaluation of the standard opportunity (DP) for a certain period of time, the scientist said that it is the key to the prices of the CDs.
The framework was tested via Monte Carlo simulations on a 10 MW solar PV energy plant in Iran. For the analysis, the group trusted satellite-based solar existing data or ground-measuring sun data through site adjustment. “This analysis shows the impact of the quality of solar radiation on the standard chance and CDS prizes, which emphasizes the financial sensitivity of solar energy-PV projects on Utility scale for variations in the availability and accuracy of resources,” ” the academics said.
The factory was supposed to be built at € 600 ($ 624)/kW installed and has a PPA price of € 45/MWh secured. The life of the project was estimated at 30 years, while the loan had a duration of 20 years.
The scientists said their simulations showed that the proposed approach considerably reduces the standard chance, while the lever ratios and the feasibility of the project are improved. “We also emphasize the crucial role of electricity buying agreements (PPAs) in stabilizing income flows and reducing risks after construction,” she added. “Our sensitivity analysis reveals that maintaining a minimal PPA price threshold is essential for guaranteeing the viability of the project at higher leverage ratios.”
Looking ahead, they want to expand the new methodology to other low -carbon projects and regions with different stimulation structures and mechanisms. The team also included researchers from the Australian Engineering Institute of Technology and Tarbiat Modares University in Iran.
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