Soaring US solar insurance costs turn spotlight on site protection

Originally published on Reuters by Ed Pearcey. Edited by Robin Sayles.

More frequent extreme weather and surging insurance demand is creating a financial challenge for solar operators and putting pressure on durability and damage prevention.

US solar developers are bearing the brunt of climate change as more frequent extreme weather events hike insurance costs.

Hail storms, tornadoes and wildfires have pushed up insurance premiums for solar projects, impacted the scope of policies and reduced availability.

Property and casualty insurance premiums for solar plants have increased by as much as 400% over the last two years, kWh Analytics and Stance Renewable Risk Partners said in December.

“With so much of the solar construction taking place in natural catastrophe-exposed regions – Texas for example – the impact for the solar sector is particularly impactful,” Michael Kolodner, US Renewable Energy Practice Leader at Marsh insurance brokers, said.

The above-market corrections for solar are partly due to a "historical underpricing of the risk," Kolodner said. Projects in at-risk regions can face higher insurance costs and lower availability as underwriters limit their exposure, he said.

At the same time, the demand for solar insurance is soaring on a wave of construction that is set to last several years. Utility-scale PV installations are forecast to rise by almost 30% this year to 15.4 GW, the US Energy Information Administration (EIA) said, and similar build rates are expected in 2022 and 2023.

Texas is the fastest-growing solar market and will host 28% of new capacity this year, testing insurance carriers as they adapt to the new climate reality.

Texas trigger

A Texas hailstorm in 2019 highlighted the growing risks for solar operators and prompted insurance carriers to take action.

“We saw a $80 million hail loss in Texas in 2019, damaging 13,000 solar panels at a 160 MW solar farm, which really had a lot of underwriters and carriers taking notice,” Michael Cosgrave, a risk manager with Renewable Guard, a renewable energy insurance firm, said.

Insurance carriers started altering policies and now seldom offer more than $15 million of hail coverage, Cosgrave said.

"Up until that point they were providing full limit coverage," he said.

Carriers are also placing larger deductibles in solar policies and project owners may be required to set up reserves in an escrow account to fulfil investors' risk requirements, Cosgrave said.

“Historically, you would have seen a minimum $100,000 deductible, or 5% of the physical damage limit,” he said. “Over a few years, that grew to $250,000 and 5%, and I’ve seen $1,000,000 and 15% in Texas, which as far as I know is unprecedented.” A 100 MW solar project might have a physical damage limit of $95 million, he said.

Solar project costs are continuing to fall, increasing the importance of rising insurance costs. Back in 2010, insurance premiums made up around 25% of PV operating expenses (opex), according to the National Renewable Energy Laboratory (NREL). Recent data from the Lawrence Berkeley Lab indicates total opex has perhaps halved since then, partly due to longer operational lifespans. Proven performance of solar technology will have affected premiums but suppliers also continue to release new, higher efficiency products such as bifacial panels.

Industry action

Last year, Renewable Guard launched a "parametric" hail insurance policy that is triggered when an event exceeds agreed thresholds, such as hailstones larger than two inches in diameter.

Hail size is measured by an independent weather data provider using advanced 3D radar, an onsite hail station, and a series of algorithms.

The policy includes the supply of real-time weather monitoring to warn operators and allow them to stow the panels in a more protected vertical position, Cosgrave said.

However, hail can be difficult to predict and operators can face a trade-off between wind and hail damage when repositioning the modules.

Some manufactures have developed a passive wind-load mitigation system that automatically rotates modules to the safest position, locking the vulnerable modules in the full-tilt angle, Cosgrave said. Other design improvements include more robust tracking fasteners and framed modules to better distribute load during wind windy spells.

Many larger solar operators are already using advanced weather forecasting systems to mitigate solar intermittency. Cloud cameras and analytics are helping operators optimise downtime and reduce their exposure to swings in wholesale power prices.

Fire risk

Wildfires are also an "increasing” concern and insurers are tightening their policies accordingly, Cosgrave said.

Three solar plants in Rosamund and Bakersfield in California experienced significant wildfire claims during the 2020 wildfire season, Jason Kaminsky, Chief Operating Officer at kWh Analytics, said.

Insurers are adding wildfire deductibles to policies while also working with operators to reduce the physical risks, Cosgrave said.

“They’re looking into things such as clearing a project perimeter, the height of the brush and vegetation in and around a facility," he said.

Before an event, PV operators maintain vegetation to reduce the fuel available to the fire and detect and correct faults which could cause a fire, Andy Walker, Senior Research Fellow, Energy Systems at NREL, said.

Ahead of a storm, actions include securing loose items that could become windborne and ensuring stormwater channels are clear from debris, Walker said.

"Such preventative measures may be required of insurance policies or affect insurance premiums," he said.

Small print

Insurance carriers have also introduced restrictions or exclusions related to "microcracking" that may not be visible to the human eye, Kaminsky said.

Many underwriters now implement these regardless of geographic location and typically require owners to pay for microcrack inspections and testing, he said.

Testing techniques include electroluminescence, which can detect defects untraceable by other methods such as infrared imaging and thermal cameras.

Together, the tighter insurance terms create challenges for operators and developers, Kolodner warned.

Existing projects may find it more challenging to comply with historic investor commitments, while the tougher policies are also "complicating the solar energy industry’s ability to efficiently finance future projects," he said.

Solar Asset Management in 2021: Asset Bankability and Plant Performance

Originally posted by SolarPlaza in the Solar Asset Management in 2021 whitepaper.

From the minute a solar plant starts exporting energy to the grid, a key concern for asset managers is to ensure it meets its performance targets. The U.S. industry as a whole suffers from an average 6% underperformance, according to research from kWh Analytics, a solar risk mitigation firm. The level of energy loss is around 1% to 1.5% across 50 GW of utility-scale plants surveyed by aerial inspection specialist Heliolytics.

Underperformance thus appears to be mostly a problem for small systems, with figures from the U.S. Department of Energy suggesting a performance shortfall of up to 8%. In any case, the numbers show a clear trend towards asset owners and managers overestimating the likely performance of their plants, with potentially significant impacts on profitability.

Some of the losses seen by asset managers are recoverable, for example, when due to dust or vegetation shading. This category, which Heliolytics CEO Rob Andrews refers to as ‘scope 1,’ includes issues that can be fixed and can be split again into limiting or binary losses. An example of a limiting loss might be an incorrect tracker alignment, which still allows for some production, while a binary one could be something like an inverter failure, which stops operation altogether.

Because of their all-or-nothing impact on production, binary failures are given priority in remediation efforts. And plant performance strategies generally should first seek to deal with scope 1 items, which can account for 1% to 1.5% energy loss within a project, Andrews says. However, a growing concern as plants get older is non-recoverable performance or ‘scope 2’ losses, such as long-term module degradation or erosion of components.

“These are difficult to address because they are not necessarily going to be things that are going to impact on any one stakeholder’s KPIs in any given year,” Andrews says. “However, these things can have a big impact on the long-term performance of a project.”

#Solar100’s Jon Powers: The Chief Sustainability Officer of Solar

Originally posted on Greentech Media. In this #Solar100, Founder and CEO of kWh Analytics Richard Matsui speaks with the Cofounder of Clean Capital Jon Powers.

You know him as Cofounder of CleanCapital. You might not know that he’s also an army veteran, former Federal Chief Sustainability Officer under the Obama Administration, and a multi-hyphenate who’s dedicated his career to public service, renewable energy, and sustainability.

In this Solar100, Jon Powers weighs in on his unique career trajectory, lessons from successful asset management, and the implications of upcoming President-elect Joe Biden’s administration on the future of the solar industry.

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STARTING IN RENEWABLE ENERGY

RICHARD MATSUI: People in the solar industry of course know you as the Cofounder of CleanCapital, and before that, as the Federal Chief Sustainability Officer under the Obama administration. But before that, you studied elementary education and history in college and then served as a Captain in the U.S. army. Can you walk me through how and when you first decided to work in renewables?

JON POWERS: I joined the Army before 9/11, and for many of us in the military, 9/11 was a life-changing experience. I deployed to Iraq with my unit in 2003 and spent fifteen months on the ground. It was over in Iraq that I first began to understand energy and energy security. Like many veterans, I came home with the realization that we need a better path forward in terms of energy.

At the time, I didn’t really think of energy security in the context of climate change and clean energy, so before diving into renewables as a career, I actually stayed in national security. I joined a non-profit working with kids in Baghdad and spent a few years trying to prevent 16 to 25-year-olds from being recruited into extremist groups. It was challenging work—the whole reason we have ISIS today is because of that extremist targeting of children.

Following that experience, I ran for Congress in 2008 up here in Buffalo, New York. I lost that election, but losing was flat out the best thing that has ever happened to me. I ran on a platform of turning the Rust Belt into the ‘Green Belt’, and that got me more interested in clean energy. I went back to school at Johns Hopkins to focus my career on energy security and climate security. It was that work that led me, of course, to the Pentagon, and then to the White House and the Obama Administration.

RICHARD MATSUI: That’s incredible. How do you think your previous work informs what you bring to your Cofounder and President role today?

JON POWERS: I was drawn to the work here at CleanCapital from both a mission standpoint as well as an interest in finance as a tool for social change. That sense of mission that drew me to the military is also what led me to clean energy. I became interested in finance in my work in the government—we were doing over $6 billion in third party renewable finance contracts across federal agencies. Bringing those two things together, we founded CleanCapital with a mission to accelerate the flow of institutional capital into clean energy.

Some of the best lessons I learned in government were not about policy, but about how to lead teams. I learned how to play what I like to call ‘nine-dimensional chess’, which was what you had to do if you wanted the Pentagon to move climate policy forward. Many of those skills are transferrable across environments, such as strategy and team building. Other skills I picked up, like successfully navigating through bureaucracy, are not as necessary in my current work. It’s funny; flipping to working at a startup, sometimes I would look for a process of bureaucracy that didn’t exist. And then the challenge would be instead to find ways to make new processes on the fly. 

LESSONS FROM SUCCESSFUL ASSET MANAGEMENT

RICHARD MATSUI: When I think of CleanCapital, I think of a successfully executed rollout of operating C&I portfolios. Is that the right way to think about the business?

JON POWERS: Thomas Byrne, Marc Garrett, and I started CleanCapital with a thesis that there were technology solutions in other verticals like real estate and student loans that we could find and bring into clean energy and clean energy finance. Technology has been at the heart of what we do, in terms of our ability to successfully roll up assets, and our mission was to bring a more efficient cost of capital into the market. Each year we elevated our game in terms of who we partnered with for capital. Capital is so critical for solving the climate crisis—we can and need to get pension funds and other endowments to see clean energy as a desirable, necessary investment opportunity. They talk about it today, but we need to start putting money to work there. 

RICHARD MATSUI: It’s an interesting situation where you can very quickly become a victim of your own success. The market has gotten a lot more comfortable with C&I portfolios since you started the business. 

JON POWERS: That’s 100% right. But you’ve just got to keep one step ahead, and that’s everything in solar.

RICHARD MATSUI: Absolutely. As a large C&I asset owner, what challenges does your team face with financing or asset management compared to the utility-focused players?

JON POWERS: From an asset management perspective, we pride ourselves on building relationships with our off-takers. A lot of financing firms will keep an arm’s length and pay a third party to intermediate the energy manager for the state university, hospital system, school system, or even Amazon or FedEx. We intentionally build that relationship.

The value that strong relationship brings to us is twofold: one, a strong relationship makes problem solving more efficient. If a problem arises, the off-takers know who we are and can collaborate. Two, we gain more opportunities because off-takers view us as partners. For example, when the off-taker likes the solar asset and wants to add storage or another system, it’s just a conversation in an ongoing relationship.

At our scale, the challenge is keeping up with those relationships when you have hundreds of assets. It will only get more challenging as more and more states begin to accelerate the C&I space. 

RICHARD MATSUI: On that note, you’re uniquely experienced in dealing with operating portfolios. Of course, not all of them will perform perfectly. How do you handle that?

JON POWERS: We really focus on front-end diligence to understand any problems. This approach also allows us to highlight some of the B.S. we’re seeing, whether it’s from developers or just simple things like inverters. A system that was built 6 or 7 years ago may have a completely different inverter infrastructure, and you can’t just rip it out and replace it with what’s new to the systems today. Those types of problems are definitely challenging.

We also try to keep it as local as possible. Sometimes that’s an advantage, sometimes it’s a disadvantage. It is an advantage from a cost perspective, but it can also mean a decrease in the leverage you get from only working with large partners. We have some large partners, but we really try to keep it as localized as we can, which can be hard to manage. 

RICHARD MATSUI: I can see that. What processes or tools helped you to identify the ‘problem children’ and implement those O&M improvements?

JON POWERS: That’s a good question. Part of what allows us to identify problems is the way we structured our reporting, not just for our investors but internally as well. This enables us to track any problems and push for timely resolutions. But understanding where the asset management team should focus its O&M time is not always obvious. As an industry we still struggle to understand the drivers of underperformance, including weather and modeling assumptions. At CleanCapital, we approach this by leveraging industry data, including kWh Analytics’ STAR Comps product, which helps us identify addressable performance issues and validate our modeling assumptions. Insights from data products like STAR that utilize market data will inevitably be part of the maturation of the sector.

And to be completely candid, another advantage is that we have an outstanding team. Zoe Berkery, who now leads our asset management, was our first employee. When she started at CleanCapital, she didn’t have solar finance experience—her background was working with me at the White House. Asset management is not easy work, and sometimes it requires that we hold the providers’ ‘feet to the fire’. But Zoe’s a real rock star and has built a team under her that does this solutions implementation work in an incredibly efficient way.

PRESIDENT BIDEN AND IMPLICATIONS FOR THE SOLAR INDUSTRY

RICHARD MATSUI: What’s your forecast for what renewable-related policies we’re going to see under the Biden administration? I feel like you have a better sense than most because a number of your former White House colleagues are getting pulled into implementing policy now.

JON POWERS: I’m excited that this is no longer going to be about proving whether technologies like solar or storage work—we know they do. It’s going to be a question of how to accelerate the market. 

This next generation of leaders is coming in with an understanding of the fundamentals and history of renewables so that they can take this opportunity to seriously invest in infrastructure and accelerate the energy transition. That background knowledge lends itself to complex problems. For example, they might say, “Hey, the tax credit is good, but the tax equity markets are tight right now. So, is that the right solution or should we approach this with a cash grant?”

The President-elect is putting a very strong team together. You have climate people joining across all the agencies, including the Treasury, the Department of Interior, the Department of Energy, the Environmental Protection Agency, and the White House. So we’re not going to have just one or two offices, but an all-government approach to solve these problems.

And in terms of collaboration, for those of us who are working in the industry, we’re going to need to be champions for our policies. We can’t just hope that things will work out—we need to put in the work, too, and make sure that what we know and care about is incorporated into policy.

RICHARD MATSUI: Certainly. What’s the highest impact way of putting in the work for solar policy?

JON POWERS: I have a policy background, so we try to leverage policy partnerships. We’re members of SEIA, we work with the Clean Energy Council, and we’re in 12 different states and try to find local partners. In many cases, it’s a couple hundred bucks here, a couple hundred bucks there to join these memberships, but you get localized intelligence, you can bring your voice to the table, and you can find ways to partner to have an impact. For example, we partnered with different groups, including Tesla, to push back on net metering.

There is a new sophistication across our industry that really hasn’t existed before. Let’s join forces and put some real money to work. Most teams, especially in solar, don’t have money for their own policy shop, but we can contribute to these industry partnerships.

FUTURE OF THE INDUSTRY

RICHARD MATSUI: Moving forward into 2021, we’re asking everyone in the Solar100 series about racial equity in the solar industry. The thought is that the solar industry is of course important because of climate change; it’s also important because there are a lot of people who work in this industry or want to work in this industry. As a respected solar veteran, happy to have you weigh in.

JON POWERS: I’m glad you’re raising this question. It’s something I’ve been in conversation about as well—both what we can do as an industry, and what CleanCapital can do.

One thing we’ve done to tackle this issue as a company is to create an internal volunteer working group of employees to guide these changes. The turnout for this group has been phenomenal, and they brought forward recommendations on what we as a company can do to increase diversity within our hiring, how to support organizations doing important work in equity and inclusion, and how we can ensure that we’re spending money with companies that share our values.

Management has been impressed with their work, and the fact that this has truly been driven by the broader team. It hasn’t been a top-down initiative.

The group is passionate about diversity, and their recommendations have been well-researched and actionable. For example, we’re going to historically black colleges (HBCUs) to do outreach for our internships, something I would not have thought to do proactively.

Additionally, because many people in the working group have tech backgrounds, they’re trying to apply lessons from that industry as well. Tech of course has also struggled with creating a diverse and equitable workforce, and it’s an opportunity to learn both the positives and the negatives from that space, and bring those lessons into solar.

RICHARD MATSUI: That’s fantastic. Are there people or groups within our industry that you think are modeling the kind of actions we as an industry need to take?

JON POWERS: Individually, Devin Hampton from UtilityAPI has some really awesome leadership on this and has put out a challenge along with the Clean Energy Leadership Institute (CELI) that people should check out. It’s called the Edict Pledge, and CleanCapital and kWh Analytics are, as you know, both member companies. For those who haven’t yet heard of it, it’s a straightforward commitment of what you can do as a company.

From a systemic perspective, when it comes to broader questions of equity, I think climate and environmental justice is a significant theme that we’re going to see more of under this incoming administration. We need to have critical conversations on how we ensure that people with low to moderate income can have access to community solar. This is not a nice to have, but a need to have.

pv tech's Review of the Year

Full article available on pv tech.

“Staying in the US, a study conducted by analytics firm kWh Analytics found what it deemed to be a “troubling reality” in October, revealing that swathes of completed solar farms in the country were underperforming against original projections. From a sample of projects assessed, kWh projected that more than 30% of solar farms had missed their productions targets by more than 10%, even accounting for weather fluctuations. The company had suggested that developers may have been too optimistic when taking into account technology evolution.”

kWh Analytics Named to 2021 Global Cleantech 100

Full report available at the Cleantech 100.

“Out of thousands of innovators from across the globe, kWh Analytics, the market leader in solar risk management, was named a 2021 Global Cleantech 100 Company by Cleantech Group. Delivering solutions that will take us from climate chaos to transformation, the 100 companies on the list represent the private, independent and for-profit companies best positioned to contribute to a moredigitized, de-carbonized and resource-efficient future. This is the 12 th edition of the widely respected annual guide.”

Extreme weather causes surge in solar power insurance costs

Full article available on Financial Times.

kWh Analytics was referenced in this article:

"Premiums for some US solar plant owners have soared as much as 400 per cent in the past two years, kWh Analytics and Stance Renewable Risk Partners of California wrote last week."

Solar Revenue Put featured in New Energy Nexus Climate Fintech report

Full Climate Fintech Report available at New Energy Nexus.

“The Solar Revenue Put is a credit enhancement that guarantees the performance of solar assets. It was invented by kWh Analytics, a firm that conducts risk analysis and due diligence on solar project development. Over a 12-year period, kWh aggregated the performance of hundreds of solar projects around the country, resulting in enough data to create an actuarial model and price the risk of consistent solar revenues. With this vast amount of data in hand, they worked with Swiss Re, one of the largest reinsurance firms in the world, to create a product which would guarantee solar revenues regardless of the volatility of energy prices and varying production due to weather fluctuations. “These things take a long time, and the finance community hates new things. But if you can show that risk is mispriced, and offer a product that pencils for the end customer, there is tremendous potential to change how long these projects take,” explains Richard Matsui, CEO of kWh. “The Product improves lender terms by de-risking the asset with an insurance-backed production guarantee for up to 95% ofexpected energy output. This is the tip of the iceberg; there is still untapped opportunity for firms to look at insuring the floor of electricity prices as they drop, or wind resources hedging such as a proxy revenue swap. This space is ripe for additional product creation and innovation.” Investors have long sought assurance that solar power plants will perform as promised. With kWh Analytics and Swiss Re now protecting their investments, stakeholders are better able to deploy the hundreds of billions of dollars that the solar industry requires the coming years.”

Climbing Property & Casualty Insuance Premiums

Originally posted in Norton Rose Fulbright’s Project Finance NewsWire.

By Jason Kaminsky with kWh Analytics in San Francisco, and Sam Jensen with Stance Renewable Risk Partners in San Anselmo, California

Property and casualty insurance premiums have increased as much as 400% over the last two years in the solar market, and some types of coverage may not be available at any price.

Deteriorating terms

The market for property and casualty insurance for solar projects has been hardening over the past 18 months, which is causing concern for both asset owners and financiers of solar projects.

The insurance market goes through cycles of "soft markets," which typically entail easier underwriting, increased capacity, and more preferential terms, followed by "hard markets" with stricter underwriting, reduced capacity and generally worse terms. The current hardening of the insurance market, coupled with other industry changes, has caused disruption in the project finance markets.

The global insurance markets are hardening across the board, with most types of insurance lines experiencing rate increases as insurers absorb and react to losses that have been increasing in both frequency and severity.

As it relates to renewables, this trend has been especially pronounced given both the rapid growth of the renewable energy sector and the increasing frequency of extreme weather events leading to outsized losses.

The solar property and casualty market was disrupted after a $70 to $80 million hail claim on a Texas-based solar project in late 2019. Additionally, two plants in Rosamond, California and a project in Bakersfield, California had significant wildfire claims during the 2020 wildfire season.

Against this backdrop, renewable energy projects are seeing even steeper cost increases, with underwriters and reinsurers struggling to secure adequate coverage for renewables projects. Some types of coverage may not be available at any price.

Five challenges

As a result of this accumulation of losses, solar asset owners are experiencing a number of challenges from the market.

First, buyers are seeing increased premiums for coverage, with asset owners reporting increases of up to 400% over the past two years.

Second, policies have higher deductibles. During soft market conditions, deductibles under all-risk insurance policies were as low as $10,000 or capped at 2% to 5% of the total claim value for catastrophic perils. Deductibles have now shifted to much higher dollar amounts, and deductibles are now typically 5% of the total asset value for catastrophic perils.

Third, insurers introduced natural catastrophe sublimits for certain losses, namely from severe convective storms, such as hail, tornados and straight-line wind.

Large solar projects and portfolios are having difficulty securing capacity above $20 million for key risks amidst increased solar development in areas such as ERCOT, which face severe convective storm exposure.

Fourth, insurers have introduced more nuanced policy restrictions, such as microcracking exclusions. The vast majority of underwriters insuring solar now implement microcracking restrictions regardless of geographic location. These typically appear as policy amendments that place costs associated with testing for microcracks in solar panels with the insured, as opposed to the insurer. The insured must also demonstrate that more than a certain percentage or amount of individual solar modules have suffered microcracks before the policy will respond.

Fifth, the market is seeing inconsistency among insurers regarding policy terms, including terms associated with microcracking, sublimits, contingent coverages, and deductibles.

These changes in the market are introducing risk into the structuring of solar projects, particularly for projects exposed to hail.

Consistent themes

The authors participated in a series of roundtables on this subject with lenders and tax equity investors, and a few consistent themes emerged.

Most tax equity investors and lenders have been asked to waive insurance requirements embedded within their financing documents due to the lack of market availability, as many financing agreements were negotiated during soft market conditions. Investors are beginning to focus on insurance availability as a key underwriting risk prior to the issuance of term sheets. In some instances, lenders require asset owners to provide a guarantee for uninsurable losses. The market is adapting to these changes in real time.

The market conditions have led to a focus on solar risk management, with emerging technologies and certifications that can help mitigate losses from these natural events. Larger developers with more sophisticated risk management programs are more easily able to secure insurance coverage.

Insurers have signaled to asset owners and financiers that insurance may no longer be the main basis for transferring risk, and that traditional risk management, site selection and technology selection must be considered by developers, purchasers and financiers amidst increasingly severe 
weather patterns.

In 2020, the demand for insurance for asset owners and financiers has exceeded the insurance market supply. In 2021, with a large pipeline of solar assets being developed in natural catastrophic prone areas, it will remain to be seen if balance can be achieved.

Property and casualty insurance, and solar risk management, will be an increased area of focus leading into 2021, especially against the backdrop of a tightening in the tax equity market and a flight toward lower-risk transactions.

#Solar100’s William Demas: The Peter Parker of Renewable Finance

Originally posted on Greentech Media. In this #Solar100 interview, Richard Matsui, Founder and CEO of kWh Analytics, speaks with William Demas, Managing Director at Stonepeak Infrastructure Partners.

William Demas didn’t choose to work in renewables—at least, not at first. But, as it’s said: “With great power comes great responsibility.” As one of the earliest analysts in the renewable energy sector, Demas has since taken on the responsibility of helping to push our industry forward, through the 2008 recession and now in the uncertain times of COVID-19 and broader social unrest.

In this interview, Demas discusses his unlikely entry into renewable finance, investment strategies, and a call to action to make our sector more racially equitable.

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FROM A “HAPPENSTANCE” START TO “TURNING IT UP” IN RENEWABLE FINANCE

RICHARD MATSUI: You’ve had a longstanding career in renewable finance. Can you walk me through how you first decided to work in renewables?

WILLIAM DEMAS: To be honest, it was happenstance. I graduated from Harvard in 2005, which was around the time of Facebook and all the big internet IPOs. I had some relevant work experience and decent access to Silicon Valley folks, so I pitched myself as a tech banker—a lowly analyst who was going to bring the Facebook IPO to Lazard. Little did I know that one, an analyst doesn’t get a vote on what to work on, and two, that TMT wasn’t just internet IPOs but also included traditional tech like semiconductors.

The first project I got staffed on at Lazard was led by one of the senior guys that ran the semiconductor business and the telecom business. He had a vision to start the cleantech group at Lazard and said, “Will, I want you to be my analyst and help me put it all together.” At the time I said, “Why? I want to do Facebook IPOs.” But as an analyst I didn’t have a choice, right? I got staffed on that team.

One week later, I became enamored with it and realized it was a huge opportunity. From then on, I’ve been 100% focused on the renewable energy sector. It was a very fortunate happenstance.

Then I got a message from a recruiter about a private equity fund focusing on clean energy and thought, “How many other people out there are looking for a clean energy associate? And how many other people in the world are actually doing this other than me? This is mine.” I also wanted to move back to New York, and almost the day I moved back, I received an offer from Good Energies. At the time, it was the only focused cleantech shop, so it was a pretty incredible opportunity.

I was there for just about two years, through a period of transition. When I joined, it was all good days. Then the recession happened, and Good Energies quickly changed its business plan. Good Energies was backed by a European family that had historically been involved in much less volatile businesses such as retail and real estate, and when they saw the market contract and the valuations go south, they quickly unwound that platform. I was part of  a number of people who were unexpectedly asked to leave—I got laid off.

I remember my colleague who delivered the decision to me  saying, “We didn’t even know if you cared about renewable energy in particular, Will.” I said to myself, “You have no idea.” I remember that so distinctly. At that moment, I was determined that I’m not leaving this industry. I thought to myself, “I’m going to turn it up.” And that’s what I did.

ENERGY STORAGE: WHO CAPTURES VALUE?

RICHARD MATSUI: Where do you see relative value in the market?

WILLIAM DEMAS: First and foremost, the holy grail in renewables has been contracted returns, and we are very much focused on identifying those opportunities within the sector. However, it is increasingly difficult in North America to find such opportunities. It is harder to find in the current market, but the right network and relationships to secure projects on a bilateral basis is one way we find value.

Additionally, as with any other industry, you have to continue to evolve and look for the next opportunity. I believe we can take the learnings of the successful decarbonization of the power industry to other verticals within infrastructure, and that opportunity is a big reason as to why I am excited to join a platform like Stonepeak which covers all aspects of the sector, and not just renewable power. The entire grid is going to have to be reshaped, industrial processes will need to become sustainable and the way we move around will need to change, and these are opportunities.

RICHARD MATSUI: That’s the perfect segue. In retrospect, the early solar investors look very smart right now. In his Solar100 interview, Jigar talked about riding the wave of cost of capital down for clean infrastructure. Should we expect the exact same trend to occur with storage? Where are the exceptions or nuances?

WILLIAM DEMAS: You can’t think of storage as just a PPA or a traditional revenue contract; you have to think about a structure where you can deliver this really incredibly useful swiss army knife of technology to the utilities for their benefit and have them pay you for it. As the commercial framework for battery storage becomes clearer, utilities will say, “Alright, I’m willing to pay a lot of money for this contract because it’s incredibly valuable because in ten years my grid is going to be awfully difficult to manage.”

Neither traditional solar or wind investors nor the utilities have adjusted to that framework shift. Commercially, people have to get comfortable with the fact that storage is, for the offtaker, the utility, and for the developer, not just a simple PPA. We haven’t yet figured out a product that fully values all the moving parts of electricity generated, the ancillary services, capacity, and deficit, but once we do, or if we manage to get our heads around the multiple value stacks associated with storage and that they may not be able to be monetized simultaneously, these assets will be incredibly valuable. It’s going to take some time, but I think it’s slowly happening.

RICHARD MATSUI: You alluded to a framework and I want to try to play it back to you: When I think about wind and solar, it’s really an exercise in discounted cash flow modeling. When you’re describing how storage is a different mental framework, does it parallel ­real estate in that each asset should be viewed as a call option? What is the right mental framework here?  

WILLIAM DEMAS: You can enter into what is basically a toll agreement with the utility. Like a co-op, they have the right to use the facility when they want to use it and they will pay you a fixed rent every month to have that available. But, when that utility is not calling on that battery, it still has a ton of value for other reasons. You can do energy arbitrage, ancillary services, and monetize that. You can build a battery in Washington and monetize in California. The issue is that those cash flows are not really contracted, maybe it will be in the future, when people understand the value, but right now these are just markets that are traded real-time, real-time ancillary services.

As an infrastructure investor, the struggle is that I’m used to telling my LPs that I’m the best in 20-year contracted cash flows. But number one, if I do that for ancillary services, I’m going to get paid nothing. But it’s valuable, so I need to be able to understand that, even though it’s kind of hard to put that commercial product into a fixed contract because it’s usually unpredictable and very hard to quantify the value at that specific time for the utility. I don’t have the answer, unfortunately, but I think these assets will feel merchant compared to solar. I think people see merchant as such a “four letter word”, that they don’t really take the time to understand the economic value proposition.

Fundamentally, you can either give up all your value to your utility—who will undervalue the asset tremendously--or you can take on an active management strategy and optimize as you go. I’ve seen this play out at Advanced Microgrid Solutions and see this is the foreseeable future of energy storage, versus contracted revenues.

FUTURE OF THE INDUSTRY

RICHARD MATSUI: From now into 2021, we’re going to be asking all the leaders in the Solar100 series about racial equity in the solar industry. The thought is that the solar industry is of course important because of climate change, but it’s also important because of jobs—there are a lot of people who work in this industry or want to work in this industry. As a respected solar veteran, I’d be happy to have you kick us off if you’re game.

WILLIAM DEMAS: Definitely.

RICHARD MATSUI: We’re in a moment of broader public protest and change. One, how does that impact (or not impact) the solar industry? And two, what role should the solar industry be taking in this time?

WILLIAM DEMAS: Those are very relevant questions. I think for me, one of the biggest questions of this current social time is: Why aren’t there more people of color in this industry?

I take some responsibility for being somewhat complicit; I’ve been around the sector for a while and have not spoken about this more. It is a shame that the solar and broader renewable energy sector look largely homogenous when it comes to race.

Part of the problem is that because of circumstances in life, a lot of people of color can’t take much risk. So they end up going into law or into medicine—professions where you can work hard and get a pretty stable job, everyone recognizes what you’re doing, and it’s clear you’re going to be able to be financially independent. There is so much new opportunity in the renewable energy sector, but there’s also been more risk. As a result, it doesn’t attract that disenfranchised talent that other fields like law and medicine attract.

Moving forward, I’m committing myself to establishing a senior network of people of color in the renewable energy sector. First and foremost, I want this to be a resource for one another, but I think it’s also important to show that there are people of color doing this work, and that people who look like you can and are flourishing in this sector. This is not just a ‘flash in the pan’ opportunity, but rather, a stable, very sizable industry in which people of color can build a good career. I think more awareness of that will go a long way.

RICHARD MATSUI: That’s an incisive observation. When you and I started in solar 15 years ago, solar was fundamentally an uncompetitive energy technology. Because the industry became so price competitive so quickly, I have forgotten that the industry was tremendously risky. So of course, what does that industry attract? It attracts people who could take that risk.

Are there people or groups in solar that you think are modeling the kind of actions that the broader industry should be considering?

WILLIAM DEMAS: Over the last few months I have been encouraged by the genuine focus that many people in this industry have had on the issue. However, we have a lot of work to do still. I have been speaking almost daily with people in the industry, including other people of color such as Brandon Martin and Richard Ashby, and we have some concrete initiatives and platforms under planning that we are looking forward to sharing with the broader community soon.

Managing solar P50 estimates: Realities and best practices from the field

Originally posted on Renewable Energy World.

Our understanding of solar asset performance is changing. kWh Analytics recently published the 2020 Solar Generation Index (“SGI”), an industry-wide validation study, that found operating assets are underperforming by an average of 6.3% as compared to their P50s, on a weather-adjusted basis. Jason Kaminsky, the Chief Operating Officer at kWh Analytics, had the opportunity to discuss these findings and how the industry is adapting with leaders at Arevon, Clean Capital, VDE Americas, and Solargis during this year’s Solar Asset Management North America (SAMNA) virtual conference. Here are three key takeaways from asset managers, owner’s engineers, and weather satellite companies: 

1.               The “Swinging Pendulum” of Performance Estimates

While the 6.3% underperformance results from the SGI were startling, no one on the panel was surprised. The panelists described maturation of solar coinciding with a gradual shift toward aggressive production assumptions. It was agreed that if you looked at projects five to ten years ago, it was common for them to outperform their production estimates. In contrast, Anand Narayanan, Vice President of Asset Management at Arevon, noted that in today’s competitive landscape with pressure on margins and new modeling complexities, assets are challenged to perform above their P50. He advocates that additional scrutiny of production assumptions is necessary to truly understand performance limitations and the probability of meeting P50 estimates.

When asked to diagnose the reason for this, Brian Grenko, Vice President at VDE Americas, attributed this swing as a gradual change in the assumptions used in technical and financial modeling that results in “death by a thousand cuts.” Grenko summarized it best when he said that today’s P50s represent expectations only “when everything goes as planned.”

2.               It’s All About the Data

Data is key to managing solar P50 estimates. In addition to the macro trends identified in reports like the SGI, panelists also discussed the value of site and portfolio-specific data to improve underwriting and diagnose underperformance issues. This starts from understanding the input data to P50 modeling.

Narayanan emphasized the value of leveraging Arevon’s existing operating fleet to support diligence: “As the largest owner of solar assets in California, Arevon has access to generation and weather data to compare performance numbers and underlying assumptions.” This information ensures asset management is comfortable with the underwriting before they manage the asset. Kaminsky added that the kWh Analytics Solar Technology Asset Risk (STAR) Comps reports provide generation and weather data for projects across the country, and these reports are used primarily for asset due diligence and asset management.

Once acquired and operating, the focus shifts to monitoring plant performance and having the right tools to diagnose drivers of underperformance. An all too familiar goose chase in asset management is verifying the impact of weather. 

Zoe Berkery, Head of Asset Management at CleanCapital, shared that she’s seen inconsistencies when comparing on-site pyranometer results to a weather file used by the IE at the inception of the project. “On-site pyranometers can be very expensive to upkeep and are sensitive to soiling,” she added, “Which has led the team to explore satellite-based weather options. The updated approach has led to more consistent results across projects and reduces variability.” Giridaran Srinivasan, Business Consultant at Solargis, concurred that ground-based readings suffer from several data quality challenges including “data logging issues, calibration errors, and lack of sensor cleaning.” Kaminsky added that one way to address these challenges is by using satellite data run at scale through production modeling software.

3.               The Evolving Role of Asset Management Teams

With growing scrutiny of underwriting accuracy, it is unsurprising that asset management teams are playing a larger role in the project development lifecycle. Narayanan and Berkery both confirmed that their asset management teams are pulled in earlier and earlier to evaluate production assumptions. Narayanan explained that this is driven by his team’s access and understanding of plant data: “We are looking at plants on a daily basis and can identify the factors that have not been modelled properly and make sure those are taken into account in diligence.” 

Solar is a maturing asset class with another trillion dollars to put to work over the next six years. As an industry, we have the tools to course correct the systemic miscalculation of solar generation and guide the evolution of solar. A combination of objective market data, analysis with industry benchmarks, and coordinated effort will be paramount to accurately diligence and manage the industry’s growing solar fleet.

Five large-scale solar innovations to know this month

Full article available on Solar Builder.

“In large-scale solar, every penny counts, so it helps to stay up to date with every way to achieve better construction efficiencies, cost savings or improved LCOE. Here are some innovations and ideas that caught our eye this month.

STAR Comps to avoid Overcomps
Solar risk management firm kWh Analytics collaborated with 10 of the top 15 solar asset owners on a huge industry-wide energy validation study, the 2020 Solar Generation Index, analyzing over 30 percent of non-residential PV systems in the U.S. On average, systems underperformed their initial estimates by 6.3% on a weather-adjusted basis. Not great! The report concluded that performance estimates are systemically over-estimated. In parallel, kWh Analytics launched Solar Technology Asset Risk (STAR) Comps reports with leading sponsors and asset owners, including New Energy Solar and Captona. These will use industry data to validate solar production estimates on more than 1 GW of solar assets. Equipped with objective data and comparables through STAR, the solar industry can course correct and improve accuracy and certainty of its investment returns.”

Early solar project checks key to cutting yield losses

Full article available on Reuters.

“Underperformance of solar assets is occurring far more often than expected and cost pressures and widening technology options will increase the challenge, industry experts said.

A recent report by a group of data and measurement specialists has highlighted the impact of solar asset underperformance on returns.

Report leader kWh analytics found P90 production levels are occurring in more than one out of three years, rather than the expected one-in-10 years. P90 production levels reduce equity cash yields by 50%, it said. The study covered 20% of the US operational fleet.

…”

kWh Analytics tries to solve solar’s overestimation, underperformance issues with new STAR reports

Originally posted on Solar Builder.

Every mature asset class requires market data to improve the accuracy and certainty of investment returns, and solar is getting there, but still needs work. To address this need, solar risk management firm kWh Analytics announced two new initiatives. First, it collaborated with 10 of the top 15 solar asset owners on the “2020 Solar Generation Index” (SGI), the largest industry-wide energy validation study. The report analyzed over 30% of the market’s non-residential systems in the U.S. and found that on average, systems underperformed their initial estimates by 6.3% on a weather-adjusted basis. The report concluded that performance estimates are systemically over-estimated and that assets are often not yielding the expected returns.

“Although underperformance impacts multiple stakeholders, the long-term equity investors are the most exposed to inaccurate energy forecasts. Change won’t happen on its own. It is up to us as an industry to collectively allow hard data to overcome opinions, however well-intended,” said kWh Analytics CEO and Founder Richard Matsui. “We look forward to the shared work of improving our solar industry and accelerating the clean energy transition.”

In parallel, it issued the industry’s first Solar Technology Asset Risk (STAR) Comps reports with leading sponsors and asset owners, including New Energy Solar and Captona, to use industry data to validate solar production estimates on more than 1 GW of solar assets.

STAR Comps explained

The STAR Comps reports are meant to provide an objective standard to assess solar performance for solar asset investors. STAR Comps leverages the industry’s largest database of solar performance to validate or invalidate performance estimates and loss assumptions for similarly designed systems. The STAR Comps report supports deal teams by improving efficiency and accuracy of asset diligence for projects under construction or under consideration for M&A. It also provides asset managers with context on asset performance to identify addressable versus exogenous performance issues.

“The STAR products are an innovative set of tools that combine analytics and industry data to offer unique insight into our systems’ performance. Our asset management team can now validate and contextualize what we see in the field with industry metrics and more accurate weather analytics to inform our O&M strategies,” said Paul Whitacre, Director of Asset Management at New Energy Solar Manager.

Equipped with objective data and comparables through STAR, the solar industry can course correct and improve accuracy and certainty of its investment returns.

“kWh Analytics has data on production results that were previously ‘best guess’ estimates. It was only a matter of time that we began using market data to validate those numbers,” said Captona Founder and Partner Izzet Bensusan. “The STAR Comps product helps bridge the gap between the Independent Engineer reports and actual performance of projects and provides insight into what we can expect as the future owner and operator of a project.”

Solar Revenue Put Transaction Structured on 33MW DC of Solar Power Projects with IGS Solar, ING, & kWh Analytics

Originally posted on BusinessWire. Additional coverage in North American Clean Energy and InsurTech News.

SAN FRANCISCO – kWh Analytics, the market leader in solar risk management, today announced that it structured a Solar Revenue Put for a portfolio of 4,000 projects totaling approximately 33 MW DC of capacity located in the Northeast, Florida and California. The IGS Solar portfolio is being funded by  a private equity Power and Infrastructure group headquartered in Los Angeles, CA .  Back-leverage is being provided by ING Capital LLC (“ING”), a US- based financial services company. Swiss Re Corporate Solutions, a leading global corporate insurer, is providing capacity for the Solar Revenue Put.

The Solar Revenue Put supported a financing with IGS Solar (a division of IGS Energy), ING and others in November 2018 for a 30 MW portfolio of 4,000 projects located in the Northeast U.S., and again for another financing with IGS Solar, ING, and others in April 2020 for a 30 MW portfolio of 4,000 projects.

The Solar Revenue Put is structured as an insurance policy on solar production and PPA revenues, which serves as a credit enhancement for financial investors. Using its proprietary actuarial model and risk management software (“HelioStats”), kWh Analytics developed the Solar Revenue Put to drive down investment risk and encourage development of clean, low-cost solar energy.

“We have again found efficient and reliable execution with our partners, ING, and kWh Analytics,” says Mike Gatt, Chief Operating Officer of Distributed Generation at IGS Energy. “kWh Analytics has proven out a reliable and timely claims process for the Solar Revenue Put, enabling cashflow certainty. We value the equity yield protection offered by the Solar Revenue Put.”

“IGS Energy is committed to building a sustainable energy future for a healthier planet, and this partnership continues to support our goal of being a completely carbon-neutral energy company by 2040.

“We are pleased to have the Solar Revenue Put as credit support for this third financing for IGS Solar,” says Scott Hancock, Director in the Power & Renewables team at ING in New York. “The framework was established with the initial financing with the intention that it could be easily replicated for future financings with IGS Solar.”

Across the industry, portfolios supported by the Solar Revenue Put are securing debt sizing increases of 10% on average. The Solar Revenue Put has been structured on over $1 billion of solar assets, and a survey of the solar industry’s most active lenders indicates that more than 50% of active lenders value the Solar Revenue Put as a credit enhancement. The Solar Revenue Put has been incorporated into both new build financing and refinancing of all types of solar projects, including utility scale, residential, community solar, and commercial and industrial.

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Learn More about us: kwhanalytics.com & kwhanalytics.com/SolarRevenuePut

kWh Media Contact:

Sarah Matsui

sarah.matsui@kwhanalytics.com

IGS Energy Media Contact:

David Gilligan

David.Gilligan@igs.com

614.659.5422 (o) | 614.787.6094 (m)

About the Solar Revenue Put

The Solar Revenue Put is a credit enhancement that guarantees up to 95% of a solar project’s expected energy output. kWh Analytics’ wholly-owned brokerage subsidiary places the policy with risk capacity rated investment-grade by Standard and Poor’s. As an ‘all-risk’ policy, the Solar Revenue Put protects against shortfalls in irradiance, panel failure, inverter failure, snow, and other system design flaws. The Solar Revenue Put provides comprehensive coverage that banks rely upon, enabling financial institutions to more easily finance solar projects on terms more favorable to the sponsor.

About kWh Analytics          

kWh Analytics is the market leader in solar risk management. By leveraging the most comprehensive performance database of solar projects in the United States (20% of the U.S. market) and the strength of the global insurance markets, kWh Analytics’ customers are able to minimize risk and increase equity returns of their projects or portfolios. kWh Analytics also provides HelioStats risk management software to leading project finance investors in the solar market. kWh Analytics is backed by private venture capital and the US Department of Energy.

About IGS Solar
IGS Solar, a turn-key commercial and residential solar developer with significant solar assets deployed and under management, provides businesses, homes, and communities with an opportunity to participate in creating a sustainable energy future. As an division of IGS Energy, IGS Solar is dedicated to delivering innovative solar energy solutions. For more information, visit IGS.com or connect with IGS Solar at linkedin.com/company/igs-solar.

About IGS Energy

IGS Energy is a private energy company that believes it’s both capable and obligated to fight climate change and to promote sustainability and energy independence. The company serves more than 1 million homes and businesses nationwide, offering sustainable technologies and services, including 100% renewable electricity, carbon-neutral natural gas, solar energy systems, and other energy-efficiency products.

IGS Energy empowers consumers to source and manage their energy and protect their homes’ appliances and utility lines. 

The company is committed to a sustainable energy future for a healthier planet. The belief in Conscious Capitalism and a purpose beyond profit prioritizes the needs of IGS Energy’s customers, employees and the planet. For more information visit www.igs.com.

About ING Capital LLC

ING Capital LLC is a financial services firm offering a full array of wholesale financial lending products and advisory services to its corporate and institutional clients. ING Capital LLC is an indirect U.S. subsidiary of ING Bank NV, part of ING Groep NV (NYSE: ING), a global financial institution with a strong European base. The purpose of ING is empowering people to stay a step ahead in life and in business. ING’s more than 53,000 employees offer retail and wholesale banking services to customers in over 40 countries. Please note that neither ING Groep NV nor ING Bank NV have a banking license in the U.S. and are therefore not permitted to conduct banking activities in the U.S. 

About Swiss Re Corporate Solutions

Swiss Re Corporate Solutions provides risk transfer solutions to large and mid-sized corporationsaround the world. Its innovative, highly customised products and standard insurance covers helpto make businesses more resilient, while its industry-leading claims service provides additionalpeace of mind. Swiss Re Corporate Solutions serves clients from offices worldwide and isbacked by the financial strength of the Swiss Re Group. Visit corporatesolutions.swissre.com orfollow us on linkedin.com/company/swiss-re-corporate-solutions and Twitter @SwissRe_CS.

Norton Rose Fulbright Project Finance Newswire: Overestimation of solar output

Originally posted in Norton Rose Fulbright’s Project Finance Newswire.

The solar industry has anecdotally begun raising concerns about whether solar power plants are underperforming compared to their P50 output forecasts.

What began as hushed conversations at industry conferences is now widely discussed and analyzed. Individual engineering firms and asset owners are beginning to review their portfolios to assess whether or not their original P50 forecasts were accurate.

DNV GL published a piece in the annual “Solar Risk Assessment” report identifying a 3% to 5% overestimation bias in P50 forecasts, even after adjusting for weather. NextEra published a technical discovery around biases in hourly-resolution energy predictions that overestimate solar resource availability. Behind closed doors, asset owners will also acknowledge struggles to hit P50 figures as consistently as the definition attributes.

Diving Deeper

Under a P50 forecast, a project is supposed to have a 50% chance of performing at least as forecast. This figure is the base case for the project and is generally the most optimistic projection used in financings. Financiers also run sensitivities by looking at other forecasts — for example, P99 and P90 — as well. A project should have a 99% chance of performing at least at the P99 forecast, if not better.

Generating a production estimate integrates weather forecasting and equipment performance expectations into complex physics models. As with any technical model, results vary based on the assumptions used.

kWh Analytics collaborated with 10 of the top 15 asset owners in the United States to conduct the industry’s largest cross-sectional energy validation study, quantifying the accuracy — or inaccuracy — of solar projects’ P50 estimate. We looked at data from 30% of the operating utility-scale and distributed solar capacity. The results are reported in an inaugural “2020 Solar Generation Index” report.

Projects on average underperformed by 6.3%, even after adjusting for weather.

This means that actual performance of the US solar fleet is closer to P90 expectations than the P50 definition used by project stakeholders.

 It is important to note that while 6.3% underperformance is the average, there is a wide distribution that highlights significant variability among projects. In the bottom quartile, projects are falling more than 10% below forecast while the top quartile performers are meeting their P50 expectations. As a result, we can see that each project is indeed unique, even if the general trend points towards a 6.3% bias.

The issue of energy estimation is not unique to solar. The wind industry similarly struggled to align lenders, owners and operators on expectations around energy output and is still developing tools to address accuracy and biases.

Implications for Shareholders

If unaddressed for solar, systemic asset underperformance can have serious implications for the equity holder cash flows, investor returns and the long-term financeability and credibility of solar as an asset class.

The impacts are discernible from day 1 of operation.

For an equity investor or sponsor who sits last in line behind the tax equity and debt, P90 performance realities mean equity cash yields are cut in half for the life of the asset. For lenders, given the prevalence of P90 scenarios, underproduction poses a risk to debt coverage.

As a risk management company that enables insurers to provide all-risk production coverage to solar assets, kWh Analytics is also observing this trend firsthand through claims against a “solar revenue put” product that actual output will be at least at a guaranteed level. (For more information about solar revenue puts, see “New product: solar revenue puts” in the October 2016 NewsWire.)

To date, insurers have continued to pay all claims in full within 30 days and remain committed to providing sponsors with credit-enhancing insurance products.

However, if unaddressed, inaccurate production estimates and return uncertainty will have long-term consequences for the solar industry.

Every major asset class leverages market data to improve the accuracy and certainty of investment returns. If we look at other mature asset classes like consumer credit or mortgages, companies like Experian and CoreLogic exist to provide market data to validate asset performance and modeling assumptions for investors. Solar is at an inflection point now where we have more than a decade of asset performance data that can be leveraged to inform diligence and improve operating assumptions.

kWh Analytics is using its industry database to offer objective market comparables to evaluate expected yield and performance estimates for pre-construction and operating plants. This new offering, the Solar Technology Asset Risk (STAR) Comparables Report, equips deal teams with historic performance of similar plants to help evaluate performance and financial risk of their projects. In addition, it has helped asset management teams contextualize their portfolio’s performance against projects in the field to improve O&M and asset management strategies.

The solar industry has generated the data required to improve the forecasts. The next step is to leverage that data in investment decisions.

KWh Analytics study suggests US solar fleet underperforming

Originally posted on S&P Platts.

A study of approximately 30% of utility-scale and commercial and industrial solar generation operating in the US between 2016 and 2019 showed the average system underperforming by 6.3% compared to what the performance was expected to be during financing, according to solar risk management company kWh Analytics.

The San Francisco-based consulting firm noted that reliable production forecasts "are the cornerstone to solar financeability." The report said 30% of the fleet that was studied, "a quarter of the projects missed their production targets by over 10%, even after weather-adjustment."

"Fundamentally, it is our hope that this report serves as a platform to discuss the data-driven approaches to inform deployment of capital,"said Richard Matsui, CEO of kWh Analytics, in a statement accompanying the report.

The kWh Analytics report is titled "2020 Solar Generation Index," and was released Oct. 5. It noted that every asset class is governed by market cycles and modeling assumptions, and those assumptions "naturally swing between optimism and conservatism."

There is "optimism that naturally emerges from market growth [that] can inadvertently undermine the long-term stability of the industry as a whole."

The solar asset class has now generated a decade of actual data, kWh Analytics said, that can be used to guide sustainable growth, and some of the data "affirms positive attributes."

But some of the data also reveals "that we have collectively turned a blind eye to realities of solar asset performance," the report said.

P50 expectations

The consulting firm said its study was a "coordinated initiative" with 10 of the 15 largest asset owners in the US.

"Combining the contributed data and kWh Analytics' HelioStats database, this analysis encompassed over 30% of the industry's non-residential solar projects across more than 30 different asset owners," the report said.

It said that all projects analyzed were larger than 1 MW in DC capacity.

The analysis compared data relative to P50 expectations. The P50 estimate is a statistical measure that indicates the base case of predicted energy yield.

"P50 expectations were degraded annually based on the annual degradation factor assumed by the asset owner," the report said. "The results do not incorporate system losses due to utility curtailment."

Stakeholders in a project can be "financially motivated" to increase production estimates, as it is directly correlated to the amount of capital that can be raised. Moreover, developers may be concerned about the near-term impact on solar asset valuations resulting from adjusted P50 estimates.

The analytics group said it believes a "course correction" will enable the solar industry "to continue the structural trend of lower-cost capital entering into the industry."

Real-world data

The report contends that most in the solar industry have used the same software tools and engineering firms to generate production estimates.

"The lack of accepted standards means that production forecasts can vary dramatically depending on who is running the model," it said.

Until now, data has been unavailable to validate production forecasts with real-world operating data at scale, the report said.

"This research highlights the need to bring this real-world data into the project evaluation process to meet investment return expectations," Matsui said.

Predicting energy yields for generation sites did not begin with solar: other generating assets like natural gas and wind also rely on modeling by engineering firms to assess energy yield potential.

"When lenders began doing their due diligence on solar projects, they often borrowed the same 'playbook' to model their exposure and return expectations off of predicted production estimates," Hao Shen, head of data products at kWh Analytics, said in an interview Oct. 7.

"What started as the concerns of a few asset managers has evolved to be the topic du jour at conferences and in the boardroom," Shen contends. "However, these conversations to date have largely been based on anecdotal evidence from single projects or portfolios."

kWh Analytics launches tool to address optimistic pricing, underperformance in solar projects

Originally posted on pv magazine USA and pv magazine International.

kWh Analytics is introducing a new tool to address the solar industry’s systemic overestimation bias and accelerate the adoption of a more data-driven approach to arriving at production estimates.

Finding a way to address and correct the industry-wide bias toward optimistic performance expectations is important because accurate production estimates are a key ingredient to the financeability and growth of the sector, said Hao Shen, director and head of data products at kWh Analytics.

On a weather-adjusted basis, solar assets underperformed their target production on average by 6.3% between 2016 and 2019, according to a recent report by kWh Analytics. One-quarter of projects studied by the company missed their production targets by more than 10%, after accounting for weather.

Production estimates factor into the market valuation of a solar system and the financial models underpinning a solar power plant’s economics, but until now asset owners have not had access to data that could contextualize their portfolio’s performance, kWh Analytics said.

According to Shen, the use of market data to improve the financeability of an asset is an inevitable step in the maturation of the asset class, and kWh’s Solar Technology Asset Report (STAR) Comp took aims to address this gap for solar.

Popular content

Using its STAR Comps, asset owners and investors can input their metadata and receive objective performance yield, weather and loss assumption metrics reports that show how a solar asset stacks up relative to a peer set of comparable industry systems, Shen said.

The solar industry needs these types of risk management tools now because its continued success depends on its ability to reliably deliver the results that it promises to investors, he added.

“The use of objective market data will force accuracy,” said Jigar Shah, co-founder and president of Generate Capital.

In June, kWh Analytics likened the solar industry’s bias toward overly optimistic pricing to the big three credit rating agencies’ pre-financial crisis, saying that the independent engineers that are hired by solar developers to give solar production estimates have an inherent profit motive for giving aggressive projections. At that time, it said that investors needed to take a step back and adjust to the reality that unreliable energy estimates have been baked into projections.

Norton Rose Fulbright Currents Ep123: 2020 Solar Generation Index

Available on Norton Rose Fulbright.

“In Episode 123, Richard Matsui, CEO and founder of kWh Analytics, joins us to unpack a new kWh study that found US utility-scale solar projects are underperforming P50 production estimates on average by 6.3%.”

kWh Analytics Releases 2020 Solar Generation Index and Issues First STAR Comps Reports to Address Biases in Solar Production Estimates

Originally posted on BusinessWire.

SAN FRANCISCO – kWh Analytics, the market leader in solar risk management, today released the “2020 Solar Generation Index” (SGI) in collaboration with ten of the industry’s fifteen largest solar asset owners. In parallel, the company announced that it issued the industry’s first Solar Technology Asset Risk (STAR) Comps reports with leading sponsors and asset owners, including New Energy Solar and Captona, to use industry data to validate solar production estimates on more than 1GW of solar assets.

The 2020 SGI report is the largest industry-wide energy validation study. The report analyzed over 30% of the market’s non-residential systems in the U.S. and found that on average, systems underperformed their initial estimates by 6.3% on a weather-adjusted basis. The report concluded that performance estimates are systemically over-estimated and that assets are often not yielding the expected returns.

Every mature asset class requires market data to improve the accuracy and certainty of investment returns. To address this need, kWh Analytics released the STAR Comps reports to provide an objective standard to assess solar performance for solar asset investors.

STAR Comps leverages the industry’s largest database of solar performance to validate or invalidate performance estimates and loss assumptions for similarly designed systems. The STAR Comps report supports deal teams by improving efficiency and accuracy of asset diligence for projects under construction or under consideration for M&A. It also provides asset managers with context on asset performance to identify addressable versus exogenous performance issues.

“The STAR products are an innovative set of tools that combine analytics and industry data to offer unique insight into our systems' performance. Our asset management team can now validate and contextualize what we see in the field with industry metrics and more accurate weather analytics to inform our O&M strategies,” said Paul Whitacre, Director of Asset Management at New Energy Solar Manager.

“kWh Analytics has data on production results that were previously 'best guess' estimates. It was only a matter of time that we began using market data to validate those numbers,” said Captona Founder and Partner Izzet Bensusan. “The STAR Comps product helps bridge the gap between the Independent Engineer reports and actual performance of projects and provides insight into what we can expect as the future owner and operator of a project.”

“Although underperformance impacts multiple stakeholders, the long-term equity investors are the most exposed to inaccurate energy forecasts. Change won’t happen on its own. It is up to us as an industry to collectively allow hard data to overcome opinions, however well-intended,” said kWh Analytics CEO and Founder Richard Matsui. “We look forward to the shared work of improving our solar industry and accelerating the clean energy transition.”

Equipped with objective data and comparables through STAR, the solar industry can course correct and improve accuracy and certainty of its investment returns. 

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Learn More about us: www.kwhanalytics.com & https://www.kwhanalytics.com/star 

Follow Us at: @kwhanalytics

Media Contact:

Sarah Matsui

sarah.matsui@kwhanalytics.com 

About Solar Technology Asset Risk (STAR) Comps

kWh Analytics leverages the industry’s largest database of solar assets (>30% of the U.S. installed base) to develop representative market comps and objective metrics to benchmark system performance, weather factors, and underlying loss assumptions against your development or operating asset.

About kWh Analytics       

kWh Analytics is the market leader in solar risk management. By leveraging the most comprehensive performance database of solar projects in the United States (30% of the U.S. market) and the strength of the global insurance markets, kWh Analytics’ customers are able to minimize risk and increase equity returns of their projects or portfolios. kWh Analytics also provides HelioStats risk management software to leading project finance investors in the solar market. kWh Analytics is backed by private venture capital and the US Department of Energy.

About New Energy Solar

New Energy Solar was established in November 2015 to invest in a diversified portfolio of solar assets across the globe and help investors benefit from the global shift to renewable energy. The Business acquires large scale solar power plants with long term contracted power purchase agreements. In addition to attractive financial returns, this strategy generates significant positive environmental impacts for investors. Since establishment, New Energy Solar has raised over A$500 million of equity, acquired a portfolio of world-class solar power plants. The Investment Manager, New Energy Solar Manager Pty Ltd, has a deep pipeline of opportunities primarily across the United States and Australia.

About Captona

Captona is a North America-focused investment company specializing in power generation and energy infrastructure assets. The Firm seeks to acquire operating and development assets within the North American power sector and aims to create value through technical and financial restructuring.

#Solar100's Jigar Shah and Van Skilling on The Evolution of The Solar Asset Class

Originally posted on Greentech Media. In this special edition #Solar100, Founder and CEO of kWh Analytics Richard Matsui speaks with Co-Founder and President of Generate Capital Jigar Shah and Former CEO of Experian and Chairman of CoreLogic Van Skilling on the future of the solar industry.

The solar industry continues to grow, even in these unprecedented times. In addition to being a source of nearly 250,000 jobs in America and a systemic response to climate change, solar is also a growing, maturing asset class.

In this special edition #Solar100, solar expert Jigar Shah and data expert Van Skilling meet to discuss the evolution of solar as an asset class

As the Founder and CEO of SunEdison, Jigar Shah unlocked a multi-billion-dollar solar market. He has led a number of the industry’s firsts, including hiring the first Independent Engineer for solar and pioneering “no money down solar.” He’s known as both an expert and as well as an influencer of solar’s history.

As the former CEO of Experian and Chairman of CoreLogic, Van Skilling has overseen the growth of industries ranging from consumer credit to home mortgages. He’s become the expert on all things asset class evolution.

Bringing their respective areas of expertise to bear, Shah and Skilling contextualize solar’s past and present, identify solar’s parallels with other investment asset classes, and forecast the future of the solar industry.

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Looking Back: The Early Days of Solar as an Asset Class

Richard Matsui: I am excited to be joined today by Jigar Shah and Van Skilling, both titans 

in their respective industries. Our company happens to be at the intersection of both asset classes, solar as well as consumer credit, and in this interview we’re inviting Jigar and Van to contextualize and lend insight into our industry’s past, present, and future.

Jigar, this first question on solar’s history is for you. We, alongside ten other solar firms, published this year's Solar Risk Assessment to share quantitative data on qualitative trends we’re seeing in the industry. Contributors included industry leaders Wood Mackenzie Power & Renewables and NextEra. A big headline-grabber this year: DNV GL reported that solar assets nowadays are underperforming by 5.4%, on average, even after adjusting for weather. In the early days of solar, solar was constantly overperforming estimates. Is this a trend you’re seeing in the industry as well, and can you help contextualize this?

Jigar Shah: Yes, and it's a natural phenomenon. When you think about where solar was in 2010, people were getting loan guarantees or being forced to sell their projects to Warren Buffett at highway robbery costs. Then in 2012 people started saying, "How about we make this more efficient?" Then the Chinese solar tariffs came in, and people began to ask, "Where do I flex to make my numbers work?”

Solar developers started shopping around for Independent Engineer reports, in an attempt to get a better fair market valuation and more tax equity. Every variable adjusted in the model was a couple basis points, then a couple more basis points, and so on.

Now that time has passed, I think people are going back through the data and realizing, "Hey, these estimates weren’t true. This valuation wasn't real, and now it's time for a correction." I don't think this course correction is going to kill anybody, though I think some of the returns will be lower for some of the equity holders.

The bottom line is, as an industry, I think that we can do better and we should do better. 

Richard Matsui: Let’s turn back the clock to the first deals you were financing with SunEdison—did this industry always use IEs? How did technical questions get solved in early deals? 

Jigar Shah: At SunEdison, we hired the first IE for solar. I remember we signed a deal with Goldman Sachs in 2005, and Goldman asked us, "Who are you going to use for an IE?" So I went out to the most skeptical solar people that I knew, and I hired them. And they gave me a crappy report that said it would generate 8% less than we all thought. Goldman and SunEdison financed the project using the IE’s estimates.

We were extremely conservative in the early days. We sold a lot of those projects to Wells Fargo in 2007. Today, most of those Wells Fargo projects outperform by about 6-8%. In terms of production, we swept the excess cash so it was a good deal all around. Terms got tighter and tighter after that, but we were forced to be pretty conservative in the early days of solar. 

Richard Matsui: You’ve summarized it well—any incentive structure guides behavior. Lenders, tax equity, and the entire financing edifice rely on IEs for production estimates. These production estimates come from IEs that are hired by either the sell-side or buy-side developer who have a profit incentive to see a certain number from these IEs. When you talk to the IEs with the mics off at a bar at SPI, they'll tell you that they're all competing with thirty other IEs for business, and that there's a very clear outcome that their client is trying to achieve. A prominent solar developer told me that for every large project they sell, they'll hire five different IEs to provide production estimates, and then they're going to pick the highest number. From a pure cost-benefit analysis, you can’t refute the strategy to pay $10,000 for each IE estimate, because they can get a higher P50 that translates to millions in the asset sale price. And over time, there’s a resulting drift in P50s as you said with -- “a couple basis points here, a couple basic points there; turning the soiling knob here, turning the shading knob there.”

It seems IEs haven't seen an end in sight because the industry just continues to push further and further in this direction. How does that line up with you? 

Jigar Shah: The buy-side is into this trend, too. A lot of players on the buy-side actually really wanted the volume and were willing to compete for it. Remember these were funds making fees. They didn't really care about what the LP returns were. 

It is the same in solar; the whole dynamic with IEs was basically the blind leading the blind. But as an industry, we've got another trillion dollars of solar to put to work over the next six years. It's time to course correct, address the problem of incentivized over-estimates, and make sure that everyone gets a more fair deal going forward. 

Richard Matsui: Right. All that behavior between IEs and developers is rational, but it's fundamentally changed the role IEs play; in practice, IEs are now hired to help the buyer or seller to achieve a better asset valuation. This reminds me of the role that lawyers play in the American legal system: Both sides hire lawyers not to find an objective truth, but to argue their respective strongest case. This is sensible in the subjective world of justice, but this is engineering, not philosophy. What do you see as the trajectory of this market incentive structure and its implications? 

Jigar Shah: Well, we're going to fix it now. When a report like the Solar Risk Assessment comes out, and the bosses of the people who had to put money out the door for projects read it, the bosses are going to confront this behavior and say, "Hey, let's stop doing that crap. As we go into the next phase of growth we have to do better.”

The reason our industry is in a good place is because it's inevitable that the industry begins using market data to shine a spotlight on the excesses and biases. With companies like kWh Analytics publishing these insights, we can then fix those estimates. 

It’s also an opportunity to realign the role of market participants and allow them to focus on their areas of expertise; IEs providing technical assessments and not solely relied on for financial estimates.

Van Skilling: Jigar, that realignment reminds me of how home inspectors and appraisers operate in tandem in real estate. Home valuations still leverage technical expertise, but appraisers and now databases like Zillow can help supplement with valuations data using market comps. 

Moving Forward: The Maturation of Solar as an Asset Class

Richard Matsui: Solar is still a relatively young industry. Van, when you look at the evolution of other asset classes, do you see any parallels? 

Van Skilling: I certainly do. Let’s look at an industry I’m very familiar with: consumer credit. Today, consumer debt drives the U.S. economy. And the fuel for that consumer debt is the consumer credit data, which allows the debt to be incurred and repaid.

Ten years from now, I both hope and expect solar, as a growing source of clean energy, to be our largest source of energy. So having the data to support that growth and to allow it, I think, is very important. 

Credit has been around for thousands of years, but it's really a relatively new business. Credit as we know it now was actually started in the 1930s by Sears, who was the Amazon of their time. A substantial number of houses in America had a Sears catalog, and you ordered whatever you needed from the Sears catalog. And so Sears kept credit records of their own customers.

As an industry, credit really didn't take off until 1950 when Diners Club came up with a credit card. With that success came other credit card companies: American Express, VISA, and MasterCard . These were credit companies, but they maintained their information on pieces of paper in these high-tech devices called Rolodexes, and they communicated between their offices by telephone.

In late 1960, one of the founders of TRW, which became Experian, said, "There's going to be a cashless society that captures data on computers. And we know more about using computers for data than anybody else. So we have to get into this business."

As a result, TRW, now called Experian, introduced computerization and data aggregation into a business that improved accuracy and efficiency in credit underwriting. This evolution in credit was inevitable given the availability of data in the market. And I think you're going to see a similar evolution in solar, where the use of data is going to make solar financing better, easier, faster and more reliable. 

Richard Matsui: You’ve pointed out an interesting parallel. To expand on that, today everyone knows what a FICO score is-- a universal market comp for lenders and consumers to assess credit risk. Obviously, there's a time when FICO scores didn't even exist. What was the inflection point that enabled TRW / Experian to gain market adoption and create that standard of comparables to the rest of the market?

Van Skilling: For context, FICO depends on Experian’s data for their model—FICO’s model relies on consumer credit database. FICO scores are universally accepted today, but that wasn’t always the case. What precipitated that change was that all credit investors found that it was in their best interest to contribute their information to the credit bureaus. The more information there was about the individual, the better credit records they could maintain. This enabled a source of truth for market participants to rely on and improved underwriting.

Prior to recognizing the value of contributing data, the consumer credit industry looked similar to the solar industry today, in the sense that each investor largely kept their own records of their assets in-house. If they shared those records, it was only shared on a local or regional basis. So each investor was dependent on a very narrow database to be making your decisions. Consumer credit hit an inflection point in the 90s when stakeholders realized they could improve efficiency and accuracy by granting data access to a database that they could use for finding new customers as well as maintaining their own customer base. Combined with computerization, the database became global. Now virtually everybody uses a FICO score, which is based on consumer credit data.

Jigar, going back to your earlier point about use of data, it sounds like you think solar will undergo a similar inflection point to use market data to fix inefficiencies?

Jigar Shah: Right, I think data will inevitably get reported, the truth will come out, and smart money will demand better. That ball has already started rolling because there's actually a dataset out there. kWh Analytics has a dataset. And there are others who have a dataset. So at some point, use of objective market data will be fully normalized. And to the extent that estimates deviate from that normalization, the buyer side will expose it very quickly, because they're going to say, "Well, the last three deals done nearby had X in their IE report so how is it that you think that your system's going to produce 6% more?" That level of transparency will force accuracy.

Then the fight will be over the next generation of tracking software or panel technology improvement. And frankly, we want to keep encouraging that level of innovation. 

It's constantly a cat and mouse game, but my sense is that the deviation will be lower over time. So instead of a 5% deviation, as we found this time, my sense is that deviation in the future will be 1% or a half percent. And I think that that means that there'll be a little bit more comfort within the financial soundness of the system. 

The people getting screwed now are very sophisticated equity investors who should know better, and what data they're using. So if they are not reading your market reports or listening to the Currents podcast or figuring out how to educate themselves, then shame on them. 

Richard Matsui: Fascinating. You’re right—as an industry, we have the tools to course correct and guide the evolution of solar. It is up to us to take that step forward.