ICRA'S GRADING METHODOLOGY FOR RESCOS AND SIs
Background
Grading Scale
Grading Methodology
Framework for Grading of System Integrators (SIs)
Framework for Grading of Renewable Energy Service Companies (RESCOs)
UNDP Fee Subsidy for Solar Thermal Entities
Procedure to claim subsidy
Product Brochure
Contact Us
Background
The Jawaharlal Nehru Solar Mission (JNNSM) launched in January 2010 is a major initiative of the Government of India (GoI) and State Governments to promote ecologically sustainable growth while addressing India's energy security challenge. It will also constitute a major contribution by India to the global effort to meet the challenges of climate change
The immediate aim of the Mission is to focus on setting up an enabling environment for solar technology penetration in the country both at a centralized and decentralized level. The Mission will adopt a 3 phase approach. The first phase (up to March 2013) will focus on promoting off-grid systems to meet and supplement energy requirements for power, heating and cooling needs. Since the sector is in its nascent stage, and is characterised by a high dependence on imported technology, the GoI feels that significant interventions are required to reduce costs and ensure viability. Moreover, the key challenge would be to provide an enabling framework which would aim to support channel partners in efficient and effective development of this sector.
With an objective to make solar off-grid projects commercially viable and workable on a sustainable basis, the mission envisages to provide capital and interest rate subsidies. A critical requirement for Wide-scale and meaningful implementation of the mission would be involvement of only credible channel partners, as their capability to provide technical support to project developers and execute projects in a timely manner would have an impact on the achievement of the mission’s objectives.
In order to ensure that only the capable and well-meaning channel partners are allowed in the sector, Ministry of New and Renewable Energy (MNRE) has mandated that all such entities get an accreditation by reputed rating agencies engaged by the ministry.
ICRA's accreditation process would categorise the entities participating in the JNNSM into grades based on various parameters. The grading assigned would facilitate in identification of channel partners which have the capacity and capability to undertake such projects. This benchmarking exercise would act as an effective tool for identifying the stronger entities in the sector and also enable the channel partners to showcase their capability in executing projects to various other stakeholders like lenders, customer, suppliers and community groups. The grading process will also function as a tool to monitor performance capability over time, incentivize efficient players and at the same time penalize weaker performance, The grading would also provide a tool for comparison of these channel partners through a rational and objective framework and a uniformly applicable scale.
Grading Scale
ICRA's grading will reflect “The performance capability and financial strength of the channel partner to undertake off-grid solar projects”. The grading would be done for channel partners like Renewable Energy Service Providing Companies (RESCOs) and System Integrators (SIs).
The grading would be done on a 5x3 matrix. This matrix will assess the entity on two broad parameters; performance capability and financial strength. Performance capability will include aspects such as track record of the entity, the diversity of its product profile, customers’ and suppliers’ feedback on performance, as well as factors like technical competence, adequacy of manpower, and quality of management of the entity. Financial strength would assess the entities with respect to revenue generation, profitability, financial flexibility etc. The grading scale is given below:
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Financial Strength
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High
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Moderate
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Low
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Performance Capability
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Highest
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SP 1A
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SP 1B
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SP 1C
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High
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SP 2A
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SP 2B
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SP 2C
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Moderate
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SP 3A
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SP 3B
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SP 3C
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Weak
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SP 4A
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SP 4B
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SP 4C
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Poor
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SP 5A
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SP 5B
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SP 5C
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The grading will be valid for a period of two years for entities with the highest performance capability (graded 1A/1B/1C); for all other entities, the grading will be valid for a period of one year.
Grading Methodology
Framework for Grading of System Integrators (SIs)
System Integrators (SIs) are entities which will be involved in the end-to-end execution of the entire project and will also be responsible for maintenance of the equipment/system. The parameters for the grading of system integrators are summarised in the table below:
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Performance Capability
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Financial Strength
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1
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Promoter Track Record
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1
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Sales
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a)
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Solar Capacity Installed
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2
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Return on capital employed (%)
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b)
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Promoters' relevant track record
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3
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Total Outside Liabilities/ Tangible Net worth
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c)
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Quality of second tier management team
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4
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Interest Coverage
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2
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Technical competence and Adequacy of Manpower
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5
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Net worth (Entity + Promoter)
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a)
b)
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Technical competence
Adequacy of Manpower
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6
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Feedback of bankers on conduct of account and integrity
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3
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Quality of Supplier And Tie-Ups
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7
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Current Ratio
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a)
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Quality of suppliers
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b)
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Supplier feedback
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4
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Customer And O&M Network
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a)
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Customer Feedback
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b)
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O&M capabilities
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Performance Capability Grading
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Financial Strength Grading
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ICRA Solar SI Grading
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Performance Capability Assessment
A brief description of the performance capability indicators are given below:
1. Promoter Track Record
a) Solar Capacity Installed – the track record of the entity in terms of solar capacity installed will reflect its capability in terms of size of projects executed and the ability of the management to effectively manage projects of various dimensions. As there is an upper limit of 100 Kwp per site for projects, smaller players are expected to participate and as such, players having experience of installing higher cumulative capacity will get a higher score.
b) Promoters' Track Record in Similar Business – the number of years of relevant experience of the promoters in a similar business will be factored into the assessment. Experience in similar business would enable promoters to have a better understanding of the sector. Further, aspects such as performance of group companies, gearing levels of group companies and risk appetite displayed by the promoters would also be taken into consideration.
c) Quality of second tier management – the ability of the second tier management to successfully execute projects will also be taken into consideration. In case part of the project execution is being sub-contracted, the quality of the sub-contractors, their track record and experience would be assessed. The ability of the management to arrange the necessary resources for successful implementation of the project would be critical.
2. Technical Competence and Adequacy of Manpower
a) Technical Competence - this is an important parameter in technology oriented business as knowledge or understanding of solar cells/collectors, panels and other components will be a pre-requisite to operate this complex technology. Since most of the SIs will also been taking up the O&M functions, therefore technical know how will be a critical. Moreover, long term sustainability of entities would require introduction of new products and services and thus technical competence would serve as an important factor for determining management capability.
b) Adequacy of manpower - this parameter would assess the adequacy of manpower available to the entity as wells as its ability to reach out to customers. ICRA will assess not only the manpower that an entity possess but also the quality of manpower. Quality of manpower would be is important as personnel with diverse knowledge and experience would be required to undertake repair and upkeep of multiple equipments. The proportion and nature of work outsourced by the entity will be assessed to evaluate the quality and adequacy of the personnel. An entity which carries out most of the activities including design, installation and O&M using its own resources will be assessed more favourably as compared to an entity who would subcontract these activities to a third party.
3. Quality of Supplier And Tie-Ups
a) Quality of Suppliers – this parameter will assess the credentials of the supplier in terms of its operating history, track record of successful implementation of projects and customer profile. The quality of supplier is important as life span of key components will determine the operating costs and cost per unit of power generation.
b) Supplier Feedback - this parameter will focus on assessing the level of involvement between the entity and its supplier, delays in payment and length of relationship between the entity and its supplier. The assessment will also link the actual feedback with the payables as per the financial statements.
4. Customer and O&M Network
a) Customer Feedback - this parameter will focus on assessing the quality of service delivered to customers in terms of timeliness of service delivered and level of customer satisfaction, in case the entity has already completed a few projects. It will also reflect the length of relationship between the customer and the entity.
b) Operations and Maintenance Capability – after sales service play an important role in solar power projects. In order to determine the operation and maintenance (O&M) capability of the entity, the geographical spread of the O&M network that has been established and availability of qualified and trained manpower will be evaluated. In addition, the track record of renewal of annual maintenance contracts (AMCs) by clients will also be a reflection of the O&M capability of the entity. Some of the other aspects which to be evaluated under this parameter would be the AMC policy, turnaround times, geographical reach etc.
Financial Strength Assessment
ICRA will only consider audited financials of the entities for the purpose of assessing its financial strength. The various parameters used to assess financial strength are described in detail below -
1. Sales - For entities with a meaningful operating history, the quantum of sales provides an insight into the capability of the SI as well as the capacity to execute projects. A certain size also provides benefits in terms of attracting manpower, scale economies and financial flexibility the quantum of sales and growth in sales is also a good indicator of amount of revenues that a business can generate in the future.
2. Return on Capital Employed (ROCE) - Return on capital employed indicates the returns generated by a company on the total capital employed in the business. The ratio comprehensively indicates the profitability generated by the business and how well the entity is run by its management. A consistently low ROCE reflects the company’s poor viability over the long term.
3. Total outside Liabilities by Tangible Net worth - the nature of an SI’s business requires it to have very low fixed assets and most of the funding is towards managing the working capital. An analysis of the total outside liabilities (debt as well as current liabilities) to the tangible net worth of the entity provides a good indicator of the overall indebtedness of the entity. The lower this ratio, the better the financial strength, since it gives the entity flexibility to take on additional liabilities to contract higher business volumes if required.
4. Interest Coverage - Interest coverage represents the extent of cushion that an entity has in meeting its interest obligations from surpluses generated from its business operations. This ratio is important as it reflects the ability of the entity to service its interest obligations in a timely manner. Entities with higher interest coverage ratios can absorb higher levels of adverse business conditions and have better financial strength.
5. Net worth (Entity + Promoter) - Net worth or capital (in case of firms) reflects the promoters’ funds deployed in the business. There is no fixed repayment or servicing obligation on these funds, which thus act as a cushion against adverse business conditions. For the purpose of this computation, the framework includes even the personal net worth of the promoters (unencumbered fixed assets and liquid assets). As most of the SIs are expected to be present in this business for a relatively shorter time period, these entities are not likely to have high capital investment by promoters. However, if the promoters have the ability to infuse additional funds, for the purpose of undertaking more projects, through their personal means, then that will be considered for the purpose of measuring financial flexibility. A net worth certificate from a chartered accountant will be relied upon to arrive at the extent of the promoter’s personal net worth that will be considered in this analysis.
6. Feedback from Bankers – This will involve an assessment of the entities’ relationship with the banker, timeliness of submission of various reports to banks, instances of overdrawn accounts or bounced cheques or any other irregularities. As bankers form an important source of information on the operations as well as quality of management of an entity, their feedback would provide important insights into the entity.
7. Current Ratio - The current ratio indicates a company’s overall liquidity position. It becomes even more important for entities relying on short-term liabilities to fund their working capital. Hence, the current ratio will be good indicator of the financial health of the entity and its ability to take on incremental projects.
In case of companies that are recently established, substantial emphasis would be placed on promoter strength and their ability to infuse funds into the business, as required.
Framework for Grading of Renewable Energy Service Companies (RESCOs)
RESCOs are entities which will be engaged in setting up of solar power projects and then monetizing the energy produced from such projects. RESCOs are thus different from SIs which are entities engaged in installation and execution of projects for RESCOs. Given the difference in the nature of businesses of a RESCO and an SI, the grading framework for the two would also have some differences t. The framework for assessing RESCOs is given below:
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Performance Capability
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Financial Strength
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1
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Promoter Track Record
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1
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Net Worth
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a)
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Promoter’s qualification & technical competence
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2
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Banker Feedback
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b)
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Monetary value of capacity installed
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3
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Financial Flexibility
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c)
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Promoter’s track record
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Project Related Assessment
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d)
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Quality of Management
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4
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Gearing
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e)
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Tie-ups with system integrators
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5
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Debt Service Coverage Ratio
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2
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Project Management Capability
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6
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Interest Cover
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a)
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O&M capabilities and tie ups
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7
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Project IRR
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b)
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Quality of EPC contractors and equipment suppliers
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c)
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Supplier / EPC feedback
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3
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Customer concentration, quality, and ability to manage receivables
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a)
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Quality of customers
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b)
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Collection capability
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Performance Capability Grading
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Financial Strength Grading
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ICRA Solar RESCO Grading
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Performance Capability Assessment
A brief description of the performance capability indicators are given below:
1. Promoter track record: The experience or track record of a RESCO needs to be measured in terms of the number of projects undertaken in the past. In case of newly constituted RESCOs with limited track record, ICRA would also lay stress on factors like technical backgrounds and experience in related areas and the capacity or size of these projects.
a) Monetary value of Solar Capacity installed – the track record of the entity in terms of monetary value of solar capacity installed will reflect its capability in terms of size of projects executed and the ability of the management to effectively manage projects of various dimensions. As there is an upper limit of 100 Kwp per site for projects, smaller players are expected to participate and as such, players having experience of installing higher cumulative capacity will get a higher score
b) Promoters' track record in similar business – the number of years of relevant experience of the promoters in a similar business will be factored into the assessment. Experience in similar business would enable promoters to have a better understanding of the sector and would also be indicative of their execution capabilities. Promoter Track Record will be important as it is envisaged that most entities seeking grading would be smaller entities recently established by persons who have some technical experience in the sector.
c) Quality of management - the ability of the management to successfully execute projects will also be taken into consideration. The competence could stem from promoters' personal qualification and experience or from contracted suppliers. In case part of the project execution is being sub-contracted, the quality of the sub-contractors, their track record and experience would be assessed. The ability of the management to arrange the necessary resources for successful implementation of the project would be critical.
d) Promoter’s qualification and technical competence - this is an important parameter in technology oriented business as knowledge or understanding of solar cells/collectors, panels and other components will be a pre-requisite to operate this complex technology. This parameter will evaluate the technical competence of the promoter and his ability to conduct business.
e) Tie-ups with System Integrators - The quality of tie-ups that an entity has with its system integrators would be an important determinant of the likely success of the RESCO in executing projects. If a RESCO has tie-ups with established system integrators who have extensive experience in setting-up projects, the execution of projects will be easier for the RESCO and result in lower execution risk.
2. Project Management Capability
a) Operations and Maintenance Capability - Given the fact that solar technology is relatively new in the country, the capability of the System Integrator to provide O&M facilities to the project developers becomes vitally important. Having personnel with technical expertise would ensure that the maintenance of the projects would be carried out in a timely and appropriate manner and accordingly contribute towards higher efficiency in the operations. Some of the aspects addressed under this parameter are - availability of O&M network or tie-up with a service provider in the project area, graphical spread of the O&M network, presence of qualified people to address possible breakdowns, measures taken to train the staff, policy on annual maintenance contracts.
b) Quality of EPC contractors and equipment suppliers - It is important to understand the profile and quality of the entities from which the RESCO sources its equipments. This will indicate the degree of reliability of the quality and life of the product and in turn have an impact on operating costs and returns. A RESCO sourcing its material and equipment from reputed suppliers will be viewed favourably as compared to an entity which does not have a continuous relationship with a supplier.
a) Supplier / EPC feedback - This parameter will focus on assessing the level of involvement between the entity and its supplier, delays in payment and length of relationship between the entity and its supplier. The assessment will also link the actual feedback with the payables as per the financial statements.
3. Customer concentration, quality and ability to manage receivables
a) Quality of customers - This parameter will consider the type of customers whom the RESCO will be servicing after the completion of the project. The focus will be to understand the profile of the customers and the ability of the RESCO to recover dues from its customers on a timely basis. Inability to recover the dues from the customer will impair the RESCO from servicing its term debt and also slow down its ability to take up new projects. RESCOs undertaking projects for established industrial customers are more likely to be able to recover dues than those servicing agricultural applications, schools or rural households. Customer concentration will also be assessed as a very high concentration of customers exposes the entity to huge risk due to non payment by a single large customer.
b) Collection Capability (Past experience in managing collections + adequate manpower to collect + collection efficiency displayed) - A critical aspect of the continued operations of a RESCO will be the ability to collect dues from the customers. This will be important for the survival of the RESCO and its ability to service debt. Management’s experience in any other business of collections or an established team which focuses on collections will be a key differentiator.
Financial Strength Assessment
RESCOs will be responsible for the generation and distribution of power and collection of dues from customers. As RESCOs will be the key beneficiaries of the subsidy scheme being implemented by MNRE, it will be essential to evaluate the extent of debt that the RESCO can service, liquidity and accruals of the entity. A brief description of the financial strength indicators are given below:
1. Net worth (Entity + Promoter) – Net worth or capital (in case of firms) reflects the promoters’ funds deployed in the business. There is no fixed repayment or servicing obligation on these funds, which thus act as a cushion against adverse business conditions. For the purpose of this computation, the framework includes even the personal net worth of the promoters (unencumbered fixed assets and liquid assets). For a RESCO, the net worth becomes important as for every project it will have to invest 20% of project cost as its contribution towards the project. Hence, in order for the RESCO to execute more projects, the net worth of the entity and the promoter should provide sufficient cushion to fund future projects. The promoters’ ability to infuse additional funds, for the purpose of undertaking more projects, through their personal means, will be considered for the purpose of measuring financial flexibility. The promoters’ net worth also provides an avenue for tiding over temporary exigencies faced in the project.
2. Feedback from bankers - This will involve an assessment of the entities’ relationship with the banker, timeliness of submission of various reports to banks, instances of overdrawn accounts or bounced cheques or any other irregularities. As bankers form an important source of information on the operations as well as quality of management of an entity, their feedback would provide important insights into the entity.
3. Financial flexibility - The financial flexibility of the RESCO would be assessed to ascertain the amount of external funding that the entity can bring into the business. This is essentially important in the event of delays or exigencies occurring in the project execution. The amount of cash balances and flexibility to draw down from other sources are considered favorable for a RESCO. This financial flexibility may also need to be looked at in respect to the quality of customers of the RESCO as that will determine the amount of receivables it will have to fund through own funds.
4. Gearing - Gearing reflects the extent of borrowed funds vis-à-vis owned funds in the entity’s funding mix. A company’s gearing or debt/equity structure is a function of the management strategy and risk bearing ability. A higher quantum of debt increases the financial risk profile, especially for businesses that are not mature. Moreover, high gearing will also limits the entities’ ability to take further debt which will constrain it ability to take on new projects.
5. Debt Service Coverage Ratio (DSCR) - DSCR indicates a company’s ability to service its debt obligations, both principal and interest, through earning generated from its business operations. ICRA will assess the DSCR of the proposed project by sensitizing the projections provided by the RESCO to various key project parameters. DSCR is an important parameter given the fact that the RESCO will be operating in project mode and the DSCR is a good indicator of the likelihood of the projects being viable. ICRA will assess the DSCR over the life of the project, rather than on a static basis.
6. Interest coverage - Interest coverage represents the extent of cushion that an entity has in meeting its interest obligations from surpluses generated from its business operations. This ratio is important as it reflects the ability of the entity to service its interest obligations in a timely manner. Entities with higher interest coverage ratios can absorb higher levels of adverse business conditions and have better financial strength.
7. Project Internal Rate of Return (IRR) – IRR is a rate of return used to measure and compare profitability of investments. The assessment would factor in ICRA's assumptions on the projects and accordingly compute the value based on expected revenues. The combination of capital subsidy and interest rate subsidy envisaged in the mission ensure that projects even with an IRR of 6 to 7 per cent will be viable and ensure adequate returns to the promoters.
UNDP Fee Subsidy for Solar Thermal Entities To encourage increased participation of channel partners in the scheme, solar water heating system integrators and solar water heating system RESCOs can avail of subsidies on grading fees. The United Nations Development Program (UNDP) will subsidise 50% of the initial grading fees, subject to a maximum of Rs.2.5 lakh, under the Global Environment Facility. This subsidy on grading fees will be applicable only for published gradings.
Procedure to claim subsidy To claim subsidy on grading fees, the channel partner (solar water heating system integrator/solar water heating system RESCO) will first pay the entire fees to ICRA. Once the gradings are published, ICRA will forward the names, along with other requisite documents of the eligible solar water heating system entity to UNDP-GEF for claiming and routing the subsidy to the eligible solar water heating system entity.
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