FINANCING
Financing a solar project: project finance, senior debt, gearing
Practical guide · ~10 min read
Most renewable projects are financed in project finance: a structure where the debt is repaid by the project flows, housed in a dedicated company (SPV), with limited recourse to the shareholders. Here are the levers and ratios that matter.
1. The structure: SPV, senior debt, equity
The project is held by an SPV. Its financing combines senior debt (priority) and equity. The gearing (share of debt in CAPEX) measures leverage: the higher it is, the more the equity IRR is lifted… and the higher the risk.
2. Sizing the debt: gearing vs sculpted DSCR
- By gearing: a fixed percentage of CAPEX (simple, but rigid).
- By DSCR (sculpted debt): repayment is calibrated year by year to hold a target DSCR — the debt profile then follows the cash-flow profile.
The bank thinks in prudent generation (P90), not P50.
3. The banking ratios
| Ratio | Measures |
|---|---|
| DSCR | Debt service coverage, year by year |
| LLCR | Coverage over the whole loan life (Loan Life Coverage Ratio) |
| Gearing | Share of debt in the financing (leverage) |
4. Covenants and cash sweep
Covenants frame the project: a debt service reserve account (DSRA), a distribution lock-up (no dividend if the DSCR drops below a threshold), sometimes a cash sweep (excess cash prepays the debt). All of this is modelled in the business plan.
5. Lender due diligence
Before lending, banks run audits (technical, legal, insurance, financial). A clear, tested and auditable business plan speeds up this process — exactly where a traceable model beats a fragile spreadsheet.
6. The cost of debt and rate hedging
The interest rate of project debt breaks down into a base rate (market reference) and a credit margin reflecting the project's risk. As the debt runs 15-20 years, lenders often require a rate hedge (swap) to lock the cost and protect the DSCR against a rate rise. The business plan must model this all-in cost and the effect of the hedge: an unhedged rate can make equity returns drift from one year to the next.
7. Beyond senior debt: the capital structure
Senior debt is only one layer. Depending on the project, you may add: mezzanine debt (subordinated, more expensive, raising leverage), shareholder loans, and, at group level, corporate (holdco) debt. Refinancing after commissioning — once construction risk has disappeared — is a classic value-creation lever for the shareholder. At portfolio level, all of this consolidates: see portfolio valuation (NAV).
FAQ
What is project finance?
It is financing backed by the cash flows of a project held in a dedicated company (SPV), with limited recourse to the shareholders. The debt is repaid by the project's cash flows, not by the parent's balance sheet.
How does the bank size the debt?
Either by a gearing (a percentage of CAPEX), or by sculpting the debt to meet a target DSCR each year. The bank thinks in prudent generation (P90) and imposes ratios and covenants.
Which ratios do lenders watch?
Mainly the DSCR (annual debt service coverage), the LLCR (coverage over the loan life) and the gearing (leverage). Covenants restrict distributions while these ratios are not met.
What is non-recourse debt?
It is debt repaid solely from the project cash flows and secured by the SPV assets, without recourse (or with limited recourse) to the shareholders' balance sheet. On default, the lender is paid from the project, not the parent — which isolates risk but requires solid coverage ratios.
Why refinance a project after commissioning?
Once the plant is built and operating, risk drops sharply. Refinancing then secures better terms (margin, gearing, tenor), releases cash for the shareholder and improves the equity IRR. It is a frequent value-creation lever in project finance.
PUT IT INTO PRACTICE
Build this business plan in Wattvalio.
P50/P90 generation, offtake contracts (feed-in, PPA, merchant), debt, taxes, NAV valuation — from a single asset to the consolidated portfolio, with bankable figures.
Or estimate returns with the free calculator →Read also: IRR, NPV, DSCR, LCOE · Portfolio valuation (NAV)