Financial risk of solar’s growing pains

“We think huge growth is going to happen. I don't mean to say this only on the side of where the need is to build renewable energy, but I also mean it in the sense of where we see investment coming in. That's very important.”

The day before his presentation in Philadelphia, he said he had been talking to managers at a fund looking to invest in renewable projects that has already raised $500 million equity and close to getting another $500 million. Another “shop” was slated to close a $750 million fund, he added.

“If you start adding … it's close to $29 billion over the next four years. People should see this as an opportunity and a risk. With more capital you can be sure that any commodity price we're chasing will go down in value.” [slide]

Bensusan added a very large caveat when investors rely on solar renewable energy certificates (SRECs) for their return on investment, particularly in New Jersey where supply is going to increase.

“Renewable energy credits are designed to go in value to zero not stratospheric because it means we have achieved the goal of having the technology reach the cost we want it to be at.”

The good news is that the consistent long-term price is settling at an average level of $100/MWh, he said.

Forrest David Milder, partner at Nixon Peabody, a Boston-based law firm, said that over-reliance on grants and tax credits could also pose problems for investors.

“We see lots of people who are hoping they did it right,” he said. “They have the elevator problem: they chatted to their tax advisers at the elevators for five minutes and got some advice about what to do and hope that it works.

“You can have a situation where you are counting on getting what you spent and Treasury isn't giving you that much. You can have an investor that's counting on you getting that much and you've really got a problem because you've promised it to somebody.”

Sequestration could also threaten 1603 grants that have been applied for but not awarded, he added. Plus the Inland Revenue Service could audit Treasury awards and scale them back if they were deemed over-allocated on a dollar per watt basis.

Courts had also started to “make a big deal out of selling tax benefits”, he said.

“There's a lot of care that people should be taking to refer to allocating tax credits that people are getting as a benefit of being a limited liability company or partnership.”

Performance risk

Product and performance risk underpin all these layers of complex financing structures.

Matthew Frankel, senior vice-president of global asset management at De Lage Landen Financial Services, said: “The industry and mainstream press consistently report the huge financial pressure that PV manufacturers are under. With the trend of manufacturer failure and consolidations we must continuously reform our views on this topic of bankability. Over just a few short years we've seen tectonic shifts in a global PV market and industry players.

“Less obvious without deeper insight are the smaller more impactful changes in the way PV products are engineered, tested and assembled. It's my belief that these more subtle changes represent a much greater long-term risk than my firm's portfolio and the PV industry as a whole.”

Module design, production and interoperability were all risk areas largely underappreciated by the investment community, he said.

Frankel said the basic PV design was developed and tested by the US Jet Propulsion Lab over a decade from 1975 and was used in the industry for its initial 20 years. Module lifetimes increased from one or two years to 20 to 30 years. Extensive field-testing by the National Renewable Energy Laboratory proved their reliability.

“We know that these modules worked. A critical issue for the industry today is that with all the cost pressure on module manufacturers and the rapid growth model of number of suppliers in the market and their capacity, the modules are no longer made to this fixed design. Today we often don't know what's going into the modules deployed in the field.

“History tells us that the best way to assess performance risk of a system design is to conduct testing on products from the service environment. There's been relatively little of this work done in the PV industry. Accelerated lab tests may not correspond to long-term performance.”

Testing performed by DuPont found some worrying responses to government policy, he said.

“In Japan, a 10-year feed in tariff programme was enacted to spur development of rooftop systems. In response, the Japanese module manufacturers changed their designs to compete on that 10-year horizon. By the way, these were the same designs that were sold into the US market with the 25-year warranties.”

After his own visits to some Chinese factories, Frankel's concerns were not only validated, but heightened, he said.

“Over the course of the past couple of years detectable manufacturing defects in independent finished module testing are up. There can be no doubt of the connection between manufacturer financial pressures and the speed and care with which they build their products.

“The most concerning part of manufacturing defects is that they are not all discoverable through the available testing and inspection techniques, which leaves investors and developers vulnerable to failures years later, potentially after the manufacturer has gone and any warranty support is exhausted.”