Solar power generation is rapidly increasing and helping thousands of Americans embrace clean energy technology. According to Solar Energy Industries Association, “more than 4,400 megawatts of PV solar will come online throughout 2013.” The jump in solar development is driven by a dramatic drop in solar panel prices since 2011 along with state and federal incentive programs driving increased tax equity investments.
Despite the industry’s explosive growth in recent years, economic uncertainty and risks in developing, building, operating, owning and investing in solar projects remain daunting. If concerns remain unabated, they could have a chilling effect and prevent investors and bankers from financing more projects. Already fewer than 5 percent of the 6,500 banks in the U.S. finance solar project according to truSolar, an industry consortium of solar's leading companies.
Risk and uncertainty are present throughout each phase of the solar project lifecycle from construction to operation and through its lifecycle to decommissioning.
Manufacturers struggle to compete in a marketplace where prices are low and profits slim. Project developers and engineering and procurement contractors feel the weight of working with razor thin margins too. Many of these risks are present in conventional construction projects and business operations and require strong due diligence and risk mitigation. Left unchecked such market conditions threaten the quality of projects being built now as participants up and down the value chain look to cut costs that may reduce equipment quality and ongoing operations and maintenance standards.
According to a May 28, 2013 article, “Solar Industry Anxious Over Defective Panels,” published in The New York Times: “Worldwide, testing labs, developers, financiers and insurers are reporting similar problems and say the $77 billion solar industry is facing a quality crisis just as solar panels are on the verge of widespread adoption.”
The quality crisis stems from allegations that some solar manufacturers looking to reduce costs are using cheaper, less reliable materials in order to remain competitive. The totality of those cuts may not be readily evident now but could result in lower energy generation in the future.
Quality issues may manifest themselves as years go by, reflecting ongoing degradation of solar energy output from the equipment. Those problems may reflect poor manufacturing processes, poor due diligence practices during installation or poor operations and maintenance (O&M) standards. It is important not to lose sight that seemingly simple things, like solar panel cleaning, can have a dramatic effect on energy output. A well-maintained solar installation can perform 10 to 30 percent better than an installation not maintained. However, a good O&M program can’t eliminate every problem embedded into a project.
Methods for Mitigating Risks
In addition to ongoing O&M, solar industry participants are adopting a variety of mitigation strategies to de-risk projects and instill confidence in the solar market. Insurance and specialized protection products are important tools in this effort. These coverages transfer or reduce the financial impact of equipment breakdowns, physical damage from natural perils, theft and liability exposures associated with owning and operating a solar system.
Original Equipment Manufacturers (OEM) warranties are one of the most relied upon methods to reduce risk in the solar industry.
Warranties provide protection against financial and operational risks resulting from defects in design, materials and workmanship. Conventional terms and conditions in a warranty outline the manufacturer’s responsibility to replace, repair or provide financial compensation for defective equipment. Warranties also provide performance guarantees, stipulating that a product will perform as promised by the manufacturer during a set period of time. If the equipment fails to meet up to the levels promised under the performance guarantee, the manufacturer is required to repair, replace or provide financial compensation. Typical warranties on solar panels extend from 20 to 25 years. Inverter warranties usually are for 10 years. Due to the length of their duration, warranties help alleviate some, but not all, concerns about equipment quality.
Warranties commonly exclude defects caused by failing to properly maintain the product, limit liability for damages and include disclaimers for implied warranties. They also do not cover the cost of labor for repairs or shipping costs. In addition, manufacturers are the ultimate arbitrator of whether a problem with the equipment is deemed defective and covered by the warranty or not. A warranty from a foreign manufacturer also may be difficult to enforce if that company’s provisions are governed by laws and regulations of their home country. A warranty could include a jurisdiction requiring privity of contract, which voids a warranty unless the party seeking to enforce its terms purchased the product directly from the manufacturer. The biggest worry, however, is that the manufacturer will not exist to honor their warranty five or 10 years from now. It may be impossible to make a claim and have it honored once a company is dissolved.
Innovative warranty programs and insurance products are working to fill the gaps on warranty coverage and reduce the risks associated with equipment quality. These programs transfer the fiscal responsibility for the warranties from the manufacturer to the insurance company if warranty claims are valid.
Warranty management programs provide a critical backstop by honoring the terms and conditions of the guarantee even if the manufacturer goes out of business. These programs provide a one-stop solution for all major solar project components covered by a warranty such as solar panels, inverters and racking systems regardless of the manufacturer. They go beyond traditional warranty coverage to pay for costs associated with testing, de-installation, shipping and re-installation of covered equipment.
In addition, solar project revenue protection products will recover lost revenue, including solar renewable energy credits, due to system equipment defects, degradation of output, operations and maintenance service contractor malpractice and even the lack of sunshine.
These ground-breaking protection products complement more traditional insurance products such as general liability and property insurance, standard coverages for solar projects.
Liability insurance protects against claims of bodily injury or other physical injury or property damage that may occur from business operations. Typically, this coverage will often exclude losses or damages caused by poor quality workmanship. Liability coverage frequently is coupled with property insurance, which coverage provides protection for the physical property and equipment of a business against losses from theft, fire and natural perils.
Specialized policies such as contractor’s equipment, equipment breakdown, delay in start-up and business interruption insurance also are available. These provide additional coverage that can be critical throughout the construction and operation phases of a solar project, protecting developers, owners and investors alike.
Contractor insurance fills in the gaps in traditional liability insurance. It provides coverage for negligence or errors related to the engineering, design and/or installation or poor workmanship project installation that could lead to a loss in energy production. Equipment breakdown provides coverage for electrical or equipment that is used in the generation, transmission or utilization of energy resulting mechanical or electrical failure. As its name implies, delay in start-up coverage protects against the loss of anticipated earnings due to project delays caused by natural perils or equipment failure. Business interruption insurance adds another layer of important protection, replacing business income in the event that there is project disruption due to natural peril or equipment breakdown.
On the cost side, it is sometimes argued that the expense of insurance coverages and protection plans cannot be justified as they eat away at already razor thin margins. The evidence suggests, however, that such risk management strategies are critical to ensuring the long-term viability of individual projects and the industry.
Quality issues are important throughout the process of developing and running a solar project installation whether it is in regards to the design of the system, the installation process or ongoing operations and maintenance. There are risks at all phases of a project. To satisfy lender and investor requirements sound due diligence and risk management strategies which include insurance and specialized protection are essential.
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