Archive for the ‘Solar Finance’ Category

The Master of the Solar Energy Industry . . .

. . . is the project finance industry.  With the complexities of the PV industry, it’s easy to lose track of this fact while focusing on other issues, which are important but completely subservient to the finance issue. While subsidies, module efficiencies and other individual solar energy project lines are highly important, what matters most are the project pro forma’s NPV and IRR and long-term viability for project finance entities. That is their bottom line.

U.S SREC Programs Source: SRECTrade

So it’s surprising to me that the debate around Solar Renewable Energy Credits (SREC’s) vs. Feed In Tariff (FIT) is so hotly contested.  An SREC is a certificate representing the “green attributes” of one megawatt-hour (MWh) of electricity generated from solar energy. SREC’s can be sold into trading pools that have buyers (usually utility operators) who need the credits to comply with Renewable Portfolio Standard mandates set by a few states.  The price for an SREC can vary widely based on demand and legislative policy and a host of other factors. A good review of the SREC program can be found here.

A FIT program is a government legislated policy mechanism, which encourages generation of solar energy and other renewable energy.  FIT programs usually require utilities, under long term contracts, to pay a premium for renewable energy generation with the objective of avoiding building new fossil fuel generation facilities with attendant pollution costs. The overall goal is to foster renewable energy uptake where the kWh price of clean energy is reduced and reaches grid parity.

Energy subsidy programs are highly complex and devil is in the detail. But the basic differentiator is that a FIT is a fixed priced mechanism and an SREC is a variable priced mechanism based on demand from un-regulated trading pools. FIT’s provide a long term energy purchase price that give a solar project pro forma long term certainty for solar project financing entities. SREC’s create a difficult situation for solar project owners who are trying to forecast revenue in the near and distant future, an “SREC forward curve” in solar project developer parlance.

FIT = Rapid Adoption of PV

Most SREC proponents claim that it creates the most competitive environment and puts pressure on the solar industry to innovate to lower installed cost. FIT programs, when structured properly, have auction provisions, which achieve the same outcome. The recent Renewable Auction Mechanism (RAM) program by the California Public Utility Corporation is great example of this type of FIT.  The India Nehru Solar Mission is another recent FIT program that selects lowest tariff bids.

Neither the SREC or FIT programs are perfect solutions for stimulating renewable energy demand.  Both have their challenges in implementation due to the highly fractured regulatory environment at both the state and federal level. And FIT programs can lead to a severely overheated marketplace where the program is eventually withdrawn. But a FIT, when designed and implemented properly, will create the lowest risk option for project financing entities and create the steepest solar adoption curve.

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Happy New Solar Year

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The End of the PV Industry as We Know It

As the graphic below demonstrates, 2011 could be a very difficult year for the global PV industry.

Or maybe not. In the many years I have been in the PV industry, I have seen numerous supply and demand forecasts for the same year with disaster and euphoria always just around the corner, depending on the analyst. Take 2009 for example.

After the Lehman Brothers debacle and resulting recession, the global PV industry was forecast to have flat or negative growth, experience large M&A activity and many bankruptcies. Actual was about 30% growth, minor M&A and very few bankruptcies. 2010 has been a banner year with over 80% growth which many pundits were forecasting at 10% – 40% growth.

What Was the Forecasted Cost of These Modules vs. Actual?

The little industry with large adversaries and many naysayers keeps chugging along.

But forecasting the PV industry is not for the faint of heart. There is a number of highly unstable, rapidly changing variables including government subsidies and mandates, government trade barriers, cost of fossil fuel energy, cost of solar modules and BOS, land costs, permitting costs, financing costs, supply chain tracking issues (actual capacity vs announced, tolling, product reselling etc.) raw material bottlenecks and many others.

As it is an immature industry, clarity on any of theses issues is difficult and there are no tracking mechanisms as with old established industries. As an example, I recently had a global Fortune 50 client company with a new solar PV division ask me where to find the trading exchange for modules so they could have understand spot pricing and long term contract trends both historical and futures. My response that there isn’t one was met with exasperation and disbelief.

2011 may be difficult. The graph above is ominous especially when you consider that nearly 6.4GW’s of module production is being added this year (2010) and demand may be flattening do to the well-publicized subsidies being reduced in many EU countries. But the doomsday forecasts may be way off.

With the steep declines in the installed cost of large PV systems and the increasing cost of fossil fuel energy in locales

Grid Parity Forecast, Source: Deutsche Bank

whereeconomies are recovering, true market demand signals are being felt in regions with already high cost energy. Consider these 2 facts: the installed cost of solar in favorable locations is delivering energy at $0.15kWh, and the cost of coal is up sharply in therecent weeks. In Germany, the cost of coal and natural and gas is soaring.  Consequently, the PV industry will need less generous subsidies to compete with highly subsidized fossil fuel energy, but the overall result may be more installation activity in regions that many analysts have written off.

Forecasting the tipping point (see graphic above) where increasing fossil fuel energy costs cross a downward PV installed cost line is highly fluid and difficult at best.   But writing off 2011 as a disaster may be a bit premature.

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The Developing Solar LCOE Toolkit and Solar Energy Bankability

solar panels, solar bankability

Less Subsidies = More BOS Focus

Solar energy subsidy incentive schemes are being reduced globally, and PV module prices continue to drop at astonishing rates. This intersection of policy and market economics is creating extensive focus on lowering the LCOE metric via improvement in the balance of systems (BOS) costs. With lower subsidies, project developers are under greater pressure to deliver strong return on money to project financing entities, the ultimate masters of the solar energy industry.

While the PV industry is closing in on the elusive equalization with grid retail and wholesale energy cost,

Quick mount Solar Panel system

Zep's Patented Auto-grounding, Drop-in Mounting Solar Panel Install Solution

creating projects with return on capital that financing companies will commit to financing en masse is requiring reexamination and upgrading of every component in the BOS category. This includes upgrading project development processes, system design tools and process, installation methods, shipping and logistics, array conduits and components, solar panel racking, inverters and monitoring systems, and operations and maintenance.  New technologies that harvest more energy from a PV system like distributed DC-DC optimizers, are key.

solar energy robotic installation, solar bankability

Gehrlicher Solar Panel Install Robot

A number of new tools are evolving which are creating a new LCOE-lowering ‘toolkit’ for project developers. Good examples include new system modeling software, robotic installation, simplified racking, easier-to-install combiner boxes and the aforementioned DC-DC optimizers.

Looking to the future, this developing LCOE toolkit will have a substantial impact on the solar bankability of all sizes of PV projects. It’s likely that a new level of performance, monitoring and cost will create projects which will confer more confidence and visibility in their financial performance, and be placed in a higher bankability bracket than other projects which are done using outdated BOS methods and products.

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1BOG – Residential Solar Energy Made Easy

This is another great developing story for the solar industry. One Block Off the Grid (1BOG), helps interested residential solar energy customers achieve lower costs and cut through the complexity of government programs, various PV products and solar

residential solar, 1BOG, solar energy

1BOG -Making It Easy

panel installation by offering a unique combination of group purchasing, installation and objective advice.

Their website features some of the most clear and concise marketing I have seen in the residential solar market and is easy to understand for the average customer.

From an article by Warren Schirtzinger on Renewable Energy access, “1BOG’s service organizes homeowners in a given area and allows them to purchase and install solar as a group. In addition to negotiating a volume discount of about 15%, 1BOG acts as an independent provider of quality assurance and objective information. To qualify as a 1BOG vendor, local solar companies must go through a rigorous evaluation of their products, installation practices, and long term stability as a company. Customers are also provided with assistance and support in the areas of rebates/incentives, financing and permits.

“While most people would point to the 15% reduction in cost or the assistance provided with bureaucracy and paperwork as the primary benefits of 1BOG’s program, I believe the true power of their approach is in helping reduce the perceived risk of solar.”

1BOG is partnered with SunRun , SolarCity, REC and other industry innovators focused on bringing solar energy to the residential market segment more efficiently and  in a less costly manner.

While this early 1BOG business model may have some easily solved issues (loss of control by end customer, warranty integrity etc.), overall this is a great new product offering to build on for the industry. Congrats to Mr. Dave Llorens, CEO for his rapid market development progress.

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Solar Energy Grid Parity: How About Now?

As mentioned in previous posts, the installed cost of a photovoltaic (PV) solar energy system has declined by more than 50% in the past 2 years. This is a result of large cost reductions in solar panels, cost reductions in balance of systems and higher efficiency in the design, engineering and installation functions.  Overall, the levelized cost of energy (LCOE), a key metric for project finance entities, is significantly enhanced by these cost reductions, resulting in strong solar project bankability for the finance community. (LCOE is defined as all the expense line items of a PV system’s installed cost + the total lifetime cost of the PV system divided by the total amount of energy output in kW hours that the system will put out over its lifetime,)

At the same time, energy prices from conventional brown fuel utilities have been increasing by an average of 2.5% per year in the U.S. While there has been a temporary flattening of this price increase during the recession, all forecasts point to a 2.5% to 6% annual increase in electricity rates as the economy recovers.

These two factors are rapidly leading to a situation where the retail cost of solar PV electricity at the kWh level (the unit of energy your utilitySolar energy grid parity, solar bankability meter reads) will be same or less than utility-supplied energy (a.k.a. “grid parity”) by 2012 – 13 in vast geographies across the U.S. and globally. Currently, in a few regions solar is already at grid parity, including city centers in California and in New England, where utility rates are above $0.15/kWh with time of use (peaking) charges that are more 5X that rate. An excellent research report about near term, residential solar grid parity in the U.S. can be found here from the highly esteemed people at the National Renewable Energy Laboratory (NREL) which part of the U.S. Department of Energy.

Internationally, a recent announcement about the reduction in the Italian solar subsidy program (Italy has highest utility grid power costs in Europe) is in reaction to this drop in PV costs. Grid parity in that country is imminent.

Solar energy grid parity is not a simple subject. The number of variables, including widely varying utility rate structures from location to location, different insolation (incoming solar radiation), conditions labor costs, transmission and distribution costs etc. make broad generalities less accurate.  Diving down into the detail in a blog format is not possible but the NREL presentation cited above provides solid background on these variables and the process to determining grid parity. What is exciting is that this intersection of downward installed PV costs with rising utility costs will make the need for government subsidies less important.

As page 22 of the NREL presentation shows, 80% or more of the U.S. will be at grid parity with only the 30% federal investment tax credit (ITC) subsidy being applied (it also includes a CO2 carbon policy resulting in 0.3 cents/kWh – 2.5 cents/kWh utility cost increase depending on location). This removes the need for state subsidies and will go a long way toward a national solar energy market rather than the state-by-state paradigm currently hobbling U.S. market growth. Previously, photovoltaic solar energy has only been deployed where a strong state subsidy or mandate could be combined with the ITC to make a solar system economical.

For the first time in the history of the solar energy industry, there will be a demand pull market place on large markets instead of an artificially driven market that is a response to large and complex government incentive programs. While the industry needs the banks to start lending again to finance new solar installations, grid parity will go a long way toward making the industry  more predictable and make solar bankability less risky in the eyes of the finance community.

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We don’t get no respect . . .

As Jigar Shah, (founder of SunEdison, currently CEO of Carbonwarroom) says, photovoltaic solar (PV) energy is a competitive, high value energy generation source that hasn’t received the widespread respect it deserves.

My observation from the past 10 years of involvement in the industry is that part of this respect problem comes from a large and constant drum beat of erroneous and just plain bad journalism about solar energy.  While the intention of many writers is to present the exciting aspects of a rapidly growing green industry, many miss the mark continually due to minimal research on what is otherwise a highly complex and active industry with numerous variables and a large number of different technologies.

A recent example can be found here from Brian Palmer of the Washington Post, and a well-written rebuttal from PV industry veteran Tom Cheney here. When you read the article and then read Tom’s response, you get a very good idea of the complexity and variables the writer missed.

solar panel, solar energy

Weatherized Against Hail. Fragile?

Another preposterous article comes from Alex Kingsbury at U.S. News & World Report. In his piece about the optimism and growth of the solar energy industry, he goes on to make the claim that PV solar panels are highly fragile and need almost constant, round the clock maintenance.  The lunacy of this statement is that simple research reveals that photovoltaic solar modules carry a 25 year warranty and need almost no maintenance annually. The solar panel itself has no moving parts so there are no parts to replace and the solar cells are encased in laminates with a glass cover sheet for weatherization against the environment. The modules meet a rating standard for large hail impact, so I am not sure why he believes solar panels are fragile. While inverters, which condition the power from DC to AC, need to be replaced on a 10 year cycle, this a minor cost compared to the overall photovoltaic solar system benefit.

This type of misinformation is not just reserved for journalists and bloggers. Senator John Kyl from

Solar panel in solar energy farm

Solar PV Farms in Arizona

Arizona wrote an opinion piece recently in the Nogales International publication with a headline of, “Solar energy could be a drain on Arizona’s water supply”.  Clearly there is a behind-the-scenes political issue playing out in the press.  The article is riddled with inaccuracies about Concentrating Solar Power (CSP) which flashes water to steam and powers electric turbine generators.   The author doesn’t even bother to mention that photovoltaic solar energy systems use no water and are highly efficient in the desert Southwest climate. Arizona currently has a number of multiple megawatt PV systems operating within its borders with large, multiple 20MW – 100MW systems in the development stages. This omission is even more surprising given that largest photovoltaic solar company in the world, First Solar (NASDAQ: FSLR), with revenues of over $2B, has its global headquarters in Tempe, Arizona.

Currently, energy generated from PV is at the same price of highly subsidized fossil fuel generated electricity (a.k.a. “grid parity”) in select markets where electric utility costs are high. Think California and many states in the North East. My subsequent post will show how solar grid parity is coming to over 80% of U.S. geographies in the next 3 years. This is a mature energy technology with the financing, technology and integration processes in place now. Respect is just around the corner . . . .

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Are the Electric Utilities the Enemy of the Solar Energy Industry?

There are over 3,000 utilities operating in the U.S.; they are investor-owned, public-owned, cooperatives (owned by the customers served) or municipal-owned, each with their own set of unique operating regulations. All electric utilities are playing by rules set up over the last hundred years and have made large, billion dollar investments in generation, transmission, distribution and operational assets in response to these regulations.

Senior management of many electric utilities find themselves with their heads in a vise these last few years.

Solar energy & the utilities

Can't we all just get along?

Demonized for contributing to global warming, vilified for fighting renewable energy market support mechanisms, and generally disparaged for not being green enough, the utilities have made previous large infrastructure investments with long payback timelines, and are waiting for guidance from the federal government on a multitude of issues including putting a price on carbon dioxide. Before investing any further capital into new generation assets, brown fuel, nuclear, renewables or otherwise, they are rightly waiting on legislators to act. (Capitol Hill continues to dither on a comprehensive climate and energy bill, which includes a price on C02)

This is not to say that utilities don’t bring most of the bad PR on themselves. Their constant campaigns of misinformation regarding the cost of transitioning to clean generation, and application of their large lobbying forces against clean energy legislation of any flavor, positions them as the bad guys. But, in most cases, they do this because they have a business to protect and financial obligations that are long-term.

There are a few progressive utilities that are embracing renewables and especially solar photovoltaics. A sampling from last year’s top 10 utilities in solar includes Excel Energy, PS&G, PSE&G, Salt River Project, Sempra Energy, and Southern California Edison.

While many in the solar energy industry present utilities as the enemy (everyone needs a villain to make a marketing story interesting!), this approach serves no one and only makes for larger, higher walls to be built between the utilities and clean energy providers. Clearly there need to be other ways to bring all parties together so that mature, currently available solar energy and other clean energy products can be rapidly deployed.

solar energy & PSE&GThere are luminaries–unlikely players who are leading the way. A good example is a recent article, “Greening  Our Energy Future” by Mr. Ralph Izzo, Chairman, President & CEO of electric utility PSE&G in New Jersey. Mr. Izzo proposes that utilities have an indispensable role to “bring the benefits of the green economy to farmers, homeowners, renters, business people, the residents of our cities, suburbs and towns – everyone.” He puts forward that the electric utilities need to re-think their role in fostering the green energy revolution, as they are uniquely placed in the market structure to facilitate and drive energy efficiency and clean energy to all constituents that rely on the grid. And he has placed his company at the forefront with strong and growing energy efficiency and solar energy programs.

This is the kind of progressiveness and forethought we need in both camps. But, as Mr. Izzo points out, we also need ACTION by the federal government to change existing regulations so that utilities can monetize their investments in green energy programs. And the solar energy industry needs ACTION by the federal government on placing a price on a unit of C02, among other market driven inducements, so that the kWh cost of the energy playing field is level.

In my opinion the electric utilities are not the enemy of the solar energy industry. The utilities have the ability to be strong partners in rolling out green energy programs with the energy efficiency and renewable energy industries. The real enemy at the moment is the lack of leadership by our elected officials to produce new regulations that would allow for this kind of clean energy partnership.

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The Pain and the Joy of the PV Module Price Decline, or Why I Wish I was Close to 1GW Manufacturing Capacity Already . . . .

As discussed in my previous post, photovoltaic (PV) module prices have dropped by 50% or more over the past 18 months. Recent Wall Street guidance by Tier 1 crystalline (c-Si) companies says that they will easily reach a manufactured cost of $1/Watt by mid 2011.  First Solar, the leading thin film manufacturer, already has an aggressive cost structure at $0.80/W currently (and is heading to $0.74/W in 2011).  Together, these two price drivers make the launch of a new solar energy PV modules product extremely difficult.

solar energy, photovoltaic thin-film, solar cells

Thin-film on Glass Production

Many new thin-film photovoltaic companies have been caught off-guard by the steep economic downturn and the lack of access to technology development and expansion capital. During this time, mature PV module companies greatly expanded their manufacturing capacity, lowered non-material production costs and increased yield ( Grade A salable product) resulting in the cost advantages described above. Thin-film companies’ strategic models created 4- 8 years ago used assumptions that c-Si companies would never achieve a manufactured cost below $1.50/W and they are now scrambling to compete with these new solar energy market dynamics.

Unfortunately for many of these promising companies, the days of doing incremental 50MW to 100MW capacity expansions annually is over. While expansion capital is hard to secure in the best of circumstances, the real problem is the manufacturing economies of scale required to reach production costs below $1W. Most successful companies with aggressive <$1/W cost structures are close to, or exceed 1GW of production capability.  Going from less than 100MW total production to 1GW has never been done before in the PV industry (although Solar Frontier is bravely in that process now). The operational scale-up risks of not “getting it right” is quite high, not to mention that finding approximately $1.3B in capital to finance that scale of production is almost impossible to secure. To overcome this GW scale necessity, new thin-film companies need exceptional (>12% efficient) solar cell technology combined with very lost-cost manufacturing machinery costs. This is a very rare combination, as semiconductor machinery is very high-cost and production line solar cell efficiencies are 6% – 11% depending on technology type. A good piece on this situation from Vinod Khosola can be found here.

photovoltaic thin-film, solar energy

Thin-film Production Line

Products based on amorphous silicon (a-Si) photovoltaic technology are under the most pressure, as solar cell efficiencies are generally below 10% and manufacturing costs are well above $1.45 on average. Recent scaling back announcements from early stage Sunfilm and Signet Solar are examples of this pressure, as is ENER’s running at substantially less than 50% of full production capacity with negative gross margin sales data. These are well run companies that unfortunately have been caught by exceptional market dynamics.

The PV module industry is heading toward the perfect storm of commoditization and temporary oversupply. Downward sales price pressure will continue while solar energy module supply in 2011 will exceed demand by more than 50%. M&A activity along with bankruptcies will be on the rise. And this is happening before the hyper-efficient electronics manufacturing giants such as Samsung, Foxconn and others drive down costs further as they become fully operational in the fast approaching $100B global PV marketplace.

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The Pain and Joy of the PV Module Price Decline

Solar energy, photovoltaics, solar cells

Source" GTM Research

In the past 18 months, photovoltaic module prices have dropped by over 50%. This solar energy market condition has been driven by a number of factors, including manufactured product oversupply, manufacturing capacity exceeding demand by 100% or more, and technology advances. The main activity creating these multiple price reduction drivers is the scale-up to near- or beyond-gigawatts scale manufacturing capacity which is required to achieve photovoltaic manufacturing economies of scale (with the resulting lowest ex-works cost).

This situation has brought pain for entities in the PV module manufacturing supply chain, but sheer joy to large project developers and small system installers. Average system level costs (modeled on a 1MW ground mount installed system) are now hovering around $4.25/Wdc with a kWh cost of energy at $0.17.  Forecasted PV module price reductions, based on publicly traded module companies’ guidance, indicate a system level cost of $3.25/Wdc by mid-2011. These numbers make many more projects viable, increase solar energy penetration, and reduce the need for large government subsidies.

While this is a good scenario for the PV industry generally, the module cost reductions are creating some interesting ripple effects. Modules used to account for as much as 70% of the cost of a completed solar installation but now are less than 45%.  With recent intense focus on the levelized cost of energy (LCOE) of a solar energy installation, the reduction of all non-module costs is under the microscope. These include system design, balance of systems (inverters, controlling electronics), project developers’ overheads, financing costs, installation methodology, labor cost, and operations and maintenance.

PV project developers’ overhead costs are increasing at a time when their supplier costs are decreasing. As mentioned in my post of May 4th, PV project developers face, on average, over a year of work just to bring a small utility scale project to shovel-ready.  While they face many challenges relating to real estate, financing, power purchase agreements, grid interconnection, and permitting, a recent installer survey shows the costs and challenges relating to only permitting can be as high as 20% of total development costs.  These costs can be direct fees paid (as much as 5% of total install cost in some jurisdictions) to the permitting authority and overhead costs relating to long and laborious permitting cycles of local and regional governing bodies.

The long permitting process can be attributed to some degree to unfamiliarity with PV generation plants, but also general indifference to PV. A recent large commercial rooftop installation was subjected to numerous county permitting office signoff delays spanning 2 months after project completion for issues such as having the wrong color placards, insufficient detail on permit document signoffs, and non-conformance to code which was not required in the original permit. When the inspector finally arrived for the final review, the building owner was told, “solar is a passing fad and useless energy.”

With numerous, differing permitting standards and attitudes such as the above inspector, the challenge of permitting solar energy and renewable energy in general needs attention by legislative bodies at all levels of government to reduce this unnecessary developer line item cost.

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Subsidy Removal, $1/W Installed, or Both?

Solar energy, photovoltaics, solar cellsThe panel of speakers for the opening plenary session at the recently held American Solar Energy Conference featured an all-star cast. The moderator was NPR’s Ray Suarez and the panelist included Amory Lovins, Chief Scientist of the Rocky Mountain Institute, Denis Hayes, Executive Director of the Bullitt Foundation, Catherine Zol,  US DOE Assistant Secretary, and Brad Albert of the Arizona Public Service utility.  The challenges and the opportunity for a rapid change to clean energy and solar energy were on full display.

Supporting one of my favorite rants, part of the conversation touched on the large amount of direct and indirect government subsidies that the brown fuel energy generation companies receive which significantly distort market signals. Brown fuel industries receive 10X the subsidies that clean energy receives, and the 100+ years of subsidy history has resulted in large embedded advantages. New clean energy products and services are expected to “compete” in this highly skewed market. Brown fuel energy generation entities are also not required to pay for externalities such as using the local environment and atmosphere as a garbage dump.  Taxpayers foot those bills in the form of health care and environmental degradation costs.  But externalities are a subject for another blog post.

At one point, Catherine Zol talked about the long-term effort being made by the DOE and industry to bring the price of solar enrgy down to $1/W installed (completed array in the ground, currently ~ $4.5/W for larger distributed generation installations). While this effort is highly important, it would also make sense to immediately begin dismantling the large subsidies given to the coal, natural gas, and oil industries which would level the playing field in terms of cost when comparing solar to traditional brown fuel sources.  Earthtrack and EESI are good sources for learning about these subsidies.

Reducing the brown fuel industries subsidies would have an immediate affect on the solar energy industry. The cost ofphotovoltaics, solar cells solar energy brown fuel generated energy would increase, making solar energy more competitive. Solar PV project finance pro formas would show an immediate increase in the internal rate of return, a key metric. Financing entities, who only invest in solar when there is adequate annual payback on their invested capital, would immediately increase their involvement in the industry. At this time, attracting large numbers of project financing entities is the number one problem for the PV industry in the near term because of the recession’s impact on the availability of credit in financial markets, and in the longer term due to minimal returns on investment.

While reducing the cost of solar energy further is important, the DOE and the President can make far quicker clean energy deployment progress by leading congress and the country on a systematic and organized dismantling of the legacy brown fuel subsidies which reduces the hurdle for clean energy and solar project financing entities. Of course, the current inability of our leaders in D.C. to pass climate change legislation where C02 would have a cost assigned to it, is a good illustration of how difficult it is for Capitol Hill to move away from the status quo.

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Solar Module Bankability: Is it Time for Manufacturing Standards?

“Bankability” is a financial industry term that the Collins dictionary defines as “acceptable to or at a bank” and “dependable and reliable.”  However, bankability in the solar energy industry is another word for “risk.”  As solar energy project financing is essentially unsecured lending by banks and other entities, project financiers seek the lowest risk on the many variables present. These risk variables include solar array product quality, completion likelihood, off-taker (power purchaser) credit worthiness, project model quality, and environmental factors.

solar project bankability, solar energy  A key issue for PV project developers, project bankability can be derailed on any number of these variables.

While recent focus has turned to the credit worthiness of an off-taker, who is contractually obligated to buy the power coming from the solar array in a traditional PPA agreement of 15 – 20 years, traditional risk scrutiny has focused on the products used in the array.  The completed PV array has to perform at a levelized cost of energy (LCOE) modeling (predicted performance) that meets the internal rate of return (IRR) commitments made to the financing entities. Consequently, modules, inverters, and other balance of system components must perform to the specifications on their labels.

In the photovoltaic module market, bankability is under the microscope when discussing various technologies and product types. When the recession began in earnest after Lehman Brothers collapsed, the solar industry went from having approximately 40 equity investment entities to 3, almost overnight. The cost of project capital went up significantly just as risk tolerance went down for module product.

Solar panels are the highest cost and most important components of an array, accounting for up to 50% of the system photovoltaic module, solar energy, solar cellscost.  For most financing models, they must have strong power output for 20 years or longer. While output warranties vary from manufacturer to manufacturer, most module manufacturers have a 20+ year performance warranty where the module is performing at 80% of original output, or close to it.  A 5-year manufacturer’s defect warrant is also standard, although some providers have recently raised this to as much as 10 years to gain competitive advantage.

Since the recession set in, crystalline module product with its 40-year history has been deemed the lowest risk and the only acceptable product from Tier 1 vendors like Sunpower, Sharp, and Trina, among others. Thin-film, with the exception of First Solar’s product, has become un-financeable as it is viewed as immature product with a high risk of failure. Some thin-film manufacturers such as Signet offer 3rd party insurance indemnification to assuage this risk.

It’s interesting to understand the technological and business contradictions that are part of the module bankability story. A few include:

  • Tier 1 crystalline module suppliers from China with less than a 7-year business history, and who have weak balance sheets, are considered highly bankable.
  • Manufacturer defect warranties, on average, cover 5 years and yet the product is considered low risk on a 20 year output basis.   What happens in the unlikely event that all modules have a defect that shows up in year 8?
  • First Solar product is considered low risk mostly because of the herd mentality – Bank X has financed it, so it must be safe.  Like all PV companies, long 20 year brand performance history has not been proven.
  • New c-Si cell product coming on the market is considered immediately bankable, yet they have new cell structure, coatings, and manufacturing processes.

When looking at history and performance, solar PV products are exceptionally low risk from proven “technology”solar energy, photovoltaic module, solar cells sources.  Most thin-film technology types (CdTe, a-Si, CIGS) have been out in the field in academic and corporate test apparatus for over 15 years, in some cases over 20. The stability and performance falls well within the bankability warranty requirements and, in my mind, are proven. The same goes for crystalline technology types which have a much longer test apparatus history.

The risk focus is rightfully on each product brand and that brand’s ability to manufacture a high quality product from one of the proven technologies that will perform as well as the test technology.

Manufacturing standards adoption by the industry would go a long way toward easing solar module bankability concerns. As the industry approaches the $100B revenue milestone globally in the next 2 years, standards are already being discussed. Standards would provide a benchmark for financing entities to make a brand risk assessment while leaving the technology risk aside.

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