Research Flags Risks To US Solar Loans From Chronic Underperformance

California-headquartered kWh Analytics has released the latest edition of its annual report Solar Risk Management, which reveals that wildfires reduced energy production by up to 6% in the Western U.S. in 2020.

Solar Risk Management 2021, which provides investors with latest insights on the evolution of solar generation risk, spans three sections and contains contributions from over a dozen reputed research providers and energy companies in the renewables sector, such as BloombergNEF, PV Evolution Labs, Nextracker, Canadian Solar, among others.

The report highlights that:

• Project underperformance continues to worsen. This year’s contributions identify multiple causes of underperformance, including higher-than-expected degradation, terrain mis-modeling, and bankrupt manufacturers. Prudent investors will rely on these insights and actual field data to continuously calibrate their production assumptions.
• The combination of chronic project underperformance and increasing operating leverage is elevating default risk for newly issued loans, even when loans are sized at the traditional 1.30x debt service coverage ratio (DSCR). Sponsors and lenders will need to work together to structure around these difficult facts, even while still enabling projects to get built.
• Unforeseen impacts from natural catastrophes and a hardening insurance market is leading to increased exposure and costs for insurers and insureds alike. Both insurers and insureds must work together to find data-driven solutions to price, manage, and ultimately mitigate risk.

Following are key excerpts from each of the three sections in the report:

Section 1 : Financial Modelling Risk

Richard Matsui, Chief Executive Officer, and Sarath Srinivasan, Head of Risk Transfer Products, kWh Analytics, explain that solar financiers rely heavily on the accuracy of probabilistic scenarios (e.g., P50, P90, P99 estimates) to structure deal terms and identify appropriate risk mitigation strategies. Last year’s 2020 Solar Generation Index (SGI) report had revealed that solar projects are on average underperforming their target production (P50) estimates by 6.3%. Matsui and Srinivasan bring to light a worrying reality: These trends have continued unabated and 1-in-8 projects have persistently underperformed their downside (P99) scenario over multiple years, exposing newer loans to default risk.

Daniel Liu, Principal Research Analyst, Wood Mackenzie Power and Renewables, writes that digital and advanced technology is shown to decrease inspection costs for PV by up to 60%. Digital technology has become an established tool of plant asset management for renewables operations, however solar lags behind wind in fully deploying these tools. In his estimation, PV industry currently faces three challenges in achieving full deployment of digital technology: Cost constrained environment; equipment and data infrastructure; lack of consistent regulatory support for cybersecurity.

Section 2 : Operating Risk

Adam Shinn, Director of Data Science & Jimmy Dunn, Data Scientist, kWh Analytics, contends that since project revenue is tied to solar generation, understanding how a solar plant will perform over its lifetime is essential to estimating an asset’s revenue generation. He writes, one key input to estimating a project’s “P50,” or expected power generation, is degradation, the quantification of a system’s decline (and thus revenue) over time. Today, the industry uses a single degradation assumption from a 2016 study. However, recent research from the National Renewable Energy Laboratory (NREL), Lawrence Berkeley National Laboratory (LBL), and kWh Analytics shows that the 2016 assumption is outdated and underestimates degradation by up to 1% per year generally and 0.5% in some cases.

Jackie Ahmad, Director of Technical Operations, Radian Generation, highlights that an analysis of nearly 2 GW of utility and commercial solar plants in 2020 shows that 80% of performance-related plant tickets are caused by inverter outages. He believes that these inverter outages result from a continued reliance on the original equipment manufacturer (OEM) warranty services and extreme weather. Additionally, pandemic travel restrictions significantly impacted mean time to repair (MTTR), further impacting project performance and underscoring O&M challenges.

Section 3 : Extreme Weather Risk 

Skip Dise, VP of Product Management, Clean Power Research, writes that one significant type of disaster impacting PV is large-scale wildfires, proved by the fact that these fires reduced energy production by up to 6% in the Western U.S. in 2020 as measured by acres burned and fires detected. Wildfires can cause problems for PV production, since the smoke from fires blocks out sunlight during the summer when production should be the highest. Additionally, residual soiling reduces production over an extended period. These issues are exacerbated by the industry’s nascent ability to accurately predict the duration and impact of wildfires on PV production in forecasting models.

The report concludes that allowing these risks to go unchecked harms investment returns and ultimately damages the industry’s collective credibility. It is now more important than ever for financiers, sponsors, insurers, consultants, lawyers, and engineers to reflect on our current trajectory and to build new solutions to manage these emergent risks.