Emerging from the 2008 financial crisis with new incentives, innovative business models, and rapidly declining costs, photovoltaics (PV) have gone on to achieve installation at rates unprecedented in their 40 year-long U.S. commercial history. And, despite some headwinds, PV deployment will likely see sustained levels of investment and deployment in the near term.
These headwinds require some examination, however, as they could significantly impact the industry, especially when the 30% investment tax credit expires at the end of 2016, Collectively, they comprise a set of risks that complicate U.S. PV project bankability, including: volatility in the manufacturing sector; module quality issues; uncertain project performance; and, the complexity of tax equity finance. This assortment of risks has, among other things, limited PV's access to capital and raised the cost of capital to those firms able to access it. These higher financing costs are reflected in energy prices, and thus represent an opportunity to decrease PV's levelized cost of energy (LCOE).
The bright side is that the PV industry—despite its long history—is still relatively young and very dynamic. Best practices, standards, and experiential learning are improving every year. Risk management, in particular, is becoming an increasingly important discipline for all parties along the project development value chain. Robust risk management can ensure that: projects meet their milestones; any potential losses are covered; generation targets are achieved; and, financiers are paid on time and in full. Further, understanding PV risks and developing the diligence standards to mitigate them are likely to shave some basis points on a project's cost of capital.
To summarize the current state of risk management in the PV industry and to explore the opportunities for improvements and efficiency gains, the National Renewable Energy Laboratory (NREL) has published a new study, co-written with Sandia National Laboratories, titled Continuing Developments in PV Risk Management: Strategies, Solutions, and Implications. The report frames the risk landscape facing PV projects, and offers perspectives on mitigation strategies, risk management innovation, and the implications for financing. Data and insights for the report were largely collected from a series of interviews that NREL and Sandia held with professionals from the insurance, PV, and financial industries in 2012. Some of the key findings of these interviews include:
While significant knowledge gains have been made over the last few years, the risks inherent to PV project finance, development, and operation are still not well understood among the larger community of financiers and insurers. Continuing Developments in PV Risk Management is meant to stimulate a dialogue between the PV, insurance, financial, and policymaking communities about how to best identify and address PV risk so as to achieve meaningful cost-reductions and enable more widespread PV deployment in the United States.
This article was originally published on NREL Renewable Energy Finance and was republished with permission.
Lead image: Risk blocks via Shutterstock