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 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.