Structuring a 1 MWp rooftop solar PPA (commercial scale)
A project company builds a rooftop plant and sells the power under a 20-year PPA. Does the tariff work for the offtaker, the lender and the sponsor at once?
- Equity IRR
- 20.0%
- Project IRR 15.6%
- Minimum DSCR
- 1.27x
- Average 1.52x
- LCOE
- R1.04/kWh
- Tariff R1.15/kWh
- Equity payback
- Year 7
- 20-year PPA
Read it your way
For engineers, plant and facility managers
1,000 kWp at 1,650 kWh/kWp gives 1,650 MWh in year 1, degrading 0.5% a year. A 10% shortfall in yield takes minimum DSCR to 1.13x: the yield estimate is a credit question, not only an engineering one.
Go to the technical lensFor CFOs, investors, developers and lenders
Equity IRR 20.0% on 65% gearing, but minimum DSCR is 1.27x in year 1, near the edge of what lenders accept. Stretching the tenor to 12 years lifts it to 1.40x.
Go to the financial lensThe brief
Cheaper daytime power, with no capital from the building owner
A commercial building owner wants cheaper daytime electricity without spending capital. A project company (SPV) will build, own and operate a 1 MWp rooftop plant and sell its output to the building owner under a 20-year power purchase agreement. The tariff has to be low enough to save the offtaker money, high enough to cover a senior lender with room to spare, and still leave the sponsor an acceptable equity return.
Technical lens
Energy first: yield, degradation and what the roof can take
Energy, demand, yield, metering and savings: what the site or plant can actually do.
- 01Energy. 1,000 kWp × 1,650 kWh/kWp gives 1,650 MWh in year 1, degrading 0.5% a year.
- 02Operating costs. R180/kWp in year 1, escalating with CPI at 5%: one line for all operating costs.
- 03Self-consumption. Revenue assumes the offtaker takes every kWh. That holds only if the building's daytime load sits above the plant's output, which is the first thing to check against half-hourly meter data before anything is signed.
A yield shortfall is a credit event, not a rounding error. A 10% shortfall in specific yield cuts revenue exactly as a 10% tariff cut does, and takes minimum DSCR from 1.27x to 1.13x. The engineering estimate of kWh/kWp, its degradation and its availability is what the lender is really underwriting.
Generation, reference case
- Year 1
- 1,650 MWh
- Year 10
- 1,577 MWh
- Year 20
- 1,500 MWh
- Specific yield
- 1,650 kWh/kWp
Financial lens
Funding, tax and the waterfall
Returns, debt cover, tax and timing: what it is worth, and to whom.
- 01Revenue. PPA tariff R1.15/kWh in year 1, escalating 5.5% a year.
- 02Funding. Capex R12.00/Wp (R12.0m), 65% senior debt at 11.5% over 10 years (level annual payments in arrears) and 35% equity.
- 03Tax. 27% company tax. The full capex is deducted in year 1, as section 12B allows for solar PV not exceeding 1 MW (larger plants deduct 50/30/20 over three years). The assessed loss this creates is carried forward until it is used up.
- 04Waterfall. Cash flow available for debt service (CFADS) is EBITDA less tax. DSCR is CFADS divided by interest plus principal. Equity receives what is left.
- 05Returns. Project IRR on unlevered post-tax cash flow; equity IRR and NPV at 16% on levered cash flow; LCOE at 10% on capex and opex.
Key numbers, reference case
- Project IRR
- 15.6%
- Equity IRR
- 20.0%
- Minimum DSCR
- 1.27x (year 1)
- Average DSCR
- 1.52x
- Equity NPV at 16%
- R1.50m
- LCOE
- R1.04/kWh
- Equity payback
- Year 7
What the numbers say
The binding constraint is year 1. The year-1 deduction creates an assessed loss that shelters income until year 9, so early cash is untaxed, but revenue is at its lowest while debt service is flat. DSCR starts at 1.27x and climbs as the tariff escalates. Lenders commonly look for a minimum DSCR somewhere around 1.2x to 1.35x on contracted solar, so this case sits near the edge and the downside matters more than the base case.
Gearing at 11.5% against a 15.6% project return lifts the equity IRR to 20.0%. A 10% cut in tariff takes minimum DSCR to 1.13x, below most lenders' comfort. Stretching the tenor to 12 years spreads the same debt over more years and lifts minimum DSCR to 1.40x, with equity IRR at 20.9%.
| Case | Equity IRR | Min DSCR | Equity NPV at 16% |
|---|---|---|---|
| Reference case | 20.0% | 1.27x | R1.50m |
| Tariff 10% lower | 16.7% | 1.13x | R277k |
| Yield 10% lower | 16.7% | 1.13x | R277k |
| Capex 10% higher | 17.3% | 1.15x | R545k |
| Interest +2 points | 18.6% | 1.17x | R1.03m |
| Tenor 12 years | 20.9% | 1.40x | R1.72m |
| Debt 55% of capex | 18.9% | 1.50x | R1.24m |
Commercial lens
Seven counterparties, one tariff
Contracts, tariffs and who carries which risk.
The year-1 tariff of R1.15/kWh sits about 10% above the R1.04/kWh LCOE. That is a thin margin for a 20-year contract, which is why the structure matters as much as the plant: who carries the yield risk, who pays if the roof needs work, and what happens to the PPA if the building changes hands.
Figure 1. Project-finance structure and cash-flow waterfall for a rooftop solar PPA.
The project company (SPV) owns the plant and signs every contract, so lenders look only to its cash flows. Solid arrows are annual operating cash; dashed arrows are one-off or contingent flows. Numbers give the order of payment.
Text description
- Equity sponsor, shareholders' agreement: funds 35% of capex at financial close; receives dividends last (step 4).
- Senior lender, loan agreement: funds 65% of capex; receives interest and principal each year (step 3) before equity.
- EPC contractor, EPC contract: paid the contract price at year 0 to design, build and commission the plant.
- Offtaker, power purchase agreement: buys the plant's output and pays the tariff per kWh, the SPV's only revenue.
- O&M contractor, insurer and landlord: paid the O&M fee, premiums and roof rent as operating costs (step 1). Insurance claims, if any, flow back to the SPV.
- Waterfall inside the SPV: revenue, then operating costs (1), tax (2), senior debt service (3), distributions to equity (4). Cash available for debt service (CFADS) is revenue less opex and tax; DSCR is CFADS divided by debt service.
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