inancing-companies-accountable
Holding Solar Financing Companies Accountable
By Brian Farhi, SolarNexus
January 24, 2012 | 2 Comments
The increase in residential and light commercial project funding from leases
and PPAs is a boon to the solar industry but comes with unique risks that
require careful management. With financiers and investors holding these
smaller assets for 10 to 20 years, their risk now must be managed more
seriously, like that of industrial and utility scale projects. Quality of
equipment, field-level workmanship and ongoing performance will be critical
for investors to appropriately assess the risk in financed systems. These
risks are manageable, but will have severe consequences for the entire
industry if not addressed. Several of these risks are discussed below, along
with potential means of limiting them.
With securitization of these assets in the works for many lease and PPA
providers, there is a beneficial opportunity for the industry.
Securitization is the process of combining the leases / PPAs into a
financial instrument that can be bought and sold. This incents more funding
agents to deploy capital for solar projects and allows more home and
building owners to have a system installed. However, the underlying assets
must truly produce the cashflows specified by the firms that create the
security. Many people may fear the use of such securitization methods due
to the adverse outcomes when applied to the mortgage industry. However,
there's nothing inherently 'dangerous' about these securities provided the
various forms of risk are appropriately characterized and limited, and there
is a clear audit trail to calculate the real value of fielded assets.
With solar securities, risk comes in multiple forms. Although there are
many areas to consider, three of the most serious threats come from: 1)
quality of equipment, 2) quality of installation, and 3) long-term
performance and its implications.
Quality of Equipment
In a world where these leases and PPAs are securitized, the PV hardware
becomes the underlying asset that is the source of the cashflows for
extended periods into the future. Therefore, equipment risks in the forms
of performance and reliability are a legitimate concern. Third-party
agencies like BEW Engineering, PV Evolution Labs, and TÜV Rheinland PTL, to
name a few, have competently quantified technical risks.
Most financing agents will only allow their financial instruments to be used
with a limited list of products they consider to be bankable, so the
technical risk to investors has largely been minimized so far. However,
market pressure could encourage lower-cost, non-bankable equipment into
systems supported by long-term leases and PPAs; if that happens, the
equipment's performance and reliability (and the manufacturer's
survivability to handle warranty claims) will become a more serious issue.
Quality of Installation
Installation quality is the second potential wild card in evaluating the
risk of such a security. Some organizations like SolarCity help to manage
this by employing their own crews and processes. As the organization that's
also responsible for long-term operations and maintenance, they're incented
to deploy high-quality installations more so than those companies that
deploy capital but may not be directly responsible for managing the fielded
assets.
Many financing companies have a more distributed means of scaling their
operations, and deploy their financing via networks of solar contractors
(e.g. SunRun, Sungevity, and Clean Power Finance). This creates a challenge
in managing the quality and consistency of the customer experience.
One way that many such financing companies manage this is through
third-party inspections. Organizations like Burnham Energy handle such
independent quality assessments. This outside assessment helps financing
companies ensure their assets are producing what they should at
commissioning and are free from obvious issues that will limit the
performance of those systems in the longer-term. Even more
vertically-integrated companies use these services to validate their own
quality systems.
Long-term Performance
Long-term performance is the third primary risk area, and one that seems
more easily quantifiable than is necessarily the case. This long-term
system output is dictated by both general system availability and the degree
of production based on enumerable variables such as weather patterns,
soiling, shading, module degradation, inverter MPPT optimization, and
connection resistance, among many, many others.
Availability is a well-known metric in utility-scale PV systems. To
underscore that point, central inverter warranties are often provided on
this basis. However, when evaluating long-term residential or light
commercial systems, the economics of providing corrective maintenance
changes dramatically, thereby changing the decision-making on when or
whether to repair systems. In a residential system, even with a
"significant" outage, kilowatt-hours can be lost on a daily basis as
compared to megawatt-hours for commercial or utility-scale systems. As a
result, the benefit of a rapid truck roll is more often about customer
satisfaction than hitting performance estimates.
To make systems easier and less costly to maintain, there are solutions
that provide a way for contractors to easily capture, track, and access
detailed system information on-demand, and some also provide ways of
tracking fielded hardware and can even combine this with performance data.
All of these services help to ensure enough is known about the fielded
assets in advance to limit the costs of corrective maintenance and long-term
operations. As a result, systems can be more cost-effectively maintained
and generate more optimal returns. Limiting these operations and
maintenance costs is typically more straight-forward than forecasting and
reporting output with high accuracy. But even if enough documentation and
knowledge about the fielded assets are available, long-term monitoring of
the assets is also required to validate the energy output matches what's
specified by the individual systems in the securitized fleet.
Typically, future output is forecasted based on performance models involving
onsite measurements and/or satellite imagery. These estimates are relevant
because they fundamentally predict cashflows. Therefore, it's important
that models do not over-estimate performance or the financier / security
holder will have assets that underperform. It's important to not
under-estimate performance or the financing agent selling the security won't
reap the full benefits of the security they've sold. However, even if
performance is appropriately estimated and the other forms of risk discussed
above have been managed, the long-term performance measurement and cashflow
generation is still a risk.
Most financing companies have partnered with solar monitoring companies to
help ascertain the performance of fielded systems. These monitoring
companies, like Locus Energy, Draker Laboratories, and DECK Monitoring, have
systems to help communicate with fielded sites containing a wide range of
technology. They provide better insight into operations and maintenance
needs by transmitting information about service codes when systems fail or
underperform. Many of these companies have also have teamed up with and/or
offer their own meter data management service (MDMS) to provide
revenue-grade metering for billing purposes.
The challenge arises when financing companies do not use such third-party,
high-accuracy reporting services. If this performance data is not
independently validated, there's little that theoretically stands in the way
of an unscrupulous financing agency from modifying the performance data and
either mis-reporting the energy delivered or (in the case of PPAs) charging
customers more than the appropriate fee for the energy delivered. This
could be an issue for lease providers as well, since performance is
guaranteed and linked to payment. If such malfeasance occurs, this could
lead to wide-scale concerns about all such financed systems and securities
based upon those. And if it becomes challenging to detangle the real from
the misstated, the entire market of project-backed securities that is likely
to develop could suffer. Clearly, an auditable trail that can be
independently validated is of critical importance to help prevent any such
risks to the industry at large.
Non-profits SolarTech and CalCEF have each recognized this need and have
started working to identify market gaps with respect to quantification of
project risk, capital formation, and bankability. These efforts are timely,
and if they lead to accepted industry standards this could be a major
benefit to investors and the industry alike.
There are no grounds for immediate concern around potential misreporting
thus far; however, given our industry's precarious public perception after
the events of 2011 and the trade fracas with China that threatens to
destabilize the market, we serve ourselves well to ensure that any solar
securities have quality assets and cashflows underpinning them and to
support initiatives that reduce the risk of the underlying solar assets.
Solar Energy
The information and views expressed in this article are those of the author
and not necessarily those of RenewableEnergyWorld.com or the companies that
advertise on its Web site and other publications.
2 R
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