New Concepts for Quality Management and Insurability as a Key for Future Project Financing

By Thomas C. Sauer
Tougher financing environment for the solar industry
The crisis in the solar industry, as in nearly all current industry crisis, also started in 2008 with the bankruptcy of the Lehman Brothers. Suddenly for all companies worldwide it became more difficult to obtain new capital as banks were forced to reevaluate their risks and as a result reduce their issuing of loans.
Additionally in the solar industry the debt ratio was relatively high due to large investments made in the expansion of production capacity as the forecasts for the whole industry sector looked promising. The high debt ratio reached a critical point when, as a result of the Lehman crisis, the stock value of listed companies and therefore equity halved and accordingly debt ratios and financial risk rocketed.
In addition to the bleak financial situation, there were the solar industry’s inherent difficulties: The companies that had until now been growing strongly were unprepared for crisis management; in the good days the acquisition of competencies now necessary in times of crisis had been often neglected. Countries began to reduce down on state financed subsidies (i.e. feed in tariffs) so that suddenly and unpredictably the good looking growth perspectives for solar modules disappeared.
In the very transparent market of solar modules, overcapacity developed and prices decreased, partially not even covering production costs. As a result, demand shifted from industrial nations to emerging markets, but to enter these markets one requires high investments and know-how. In the short term the new markets will not be able to compensate for the industrial countries’ lack in growth perspectives.
As a result of all these developments, solar companies’ share prices slumped to under 5% of their value before the crisis. Many companies went bankrupt and banks withdrew as far as possible from this market.
Additionally there are the performance problems of PV-parks: during the period of growth, modules did not always meet the necessary quality specifications. This was also the case with the quality of the construction work done when erecting a PV-park, so that currently an increasing number of PV-parks do not generate the planned profits.
Today the core challenge is to ensure the bankability of PV-parks in order to stabilize demand for PV-modules.

The EXXERGY solution
Already in 2009 EXXERGY partially forecasted these trends. Negotiations started with leading industrial insurers to find a solution which would guarantee project returns, offer a performance warranty and thus make projects calculable even in the event of a module manufacturer’s insolvency. The goal of the envisaged solution was to lower the technical risk for the financing bank and therefore realizing project financing and improve the financing conditions. At the end of 2012 the first module manufacturer was cleared and for this manufacturer, a project related performance warranty insurance is now available. The insurance policy covers a 20 year period, is irrevocable and insures directly the value of the EPC-project. In the event of damage the insurer has a choice between replacement of the damaged goods or reimbursement of unrealized income. To offer such an insurance solution at marketable conditions, a comprehensive quality insurance project is necessary and will be described as follows.

The module manufacturer audit
The process of quality assurance starts with the audit of the module manufacturer, and continues with the production monitoring of those modules produced for the insured PV-project, the surveillance of the PV-park installation and the final approval of the PV-park. This concept is designed for PV-parks in the MWp league.

1. Production audit: Different to other standard procedures, in this concept the production audit is much more detailed. It consists of the following five aspects:
(a) Comprehensive factory audit
(b) Detailed audit of already existing PV-parks
(c) Accelerated ageing- and stress tests of a sample derived from the end user market
(d) Structured management interviews with key position holders of the module manufacturer as well as an analysis of work flows and structures
(e) Detailed analysis of the financial situation and outlook of the company.

The results of the above mentioned aspects are entered into a well balanced scoring system and lead to the final rating of the manufacturer. The rating in turn is a key parameter for the calculation of the payable and project based insurance premium. The rating is valid for one year and can be renewed twice through a simplified audit before a standard audit as described above needs to be carried out again.

2. Surveillance of production processes: In this step, the production processes for previously registered modules which are destined for the insured projects are monitored and checked. The focus is on compliance with specifications and components used. In this step reviews are done, if suggestions for optimization which resulted from the audit have been realized.

3. Supervision and acceptance of PV-construction: Finally the construction of the PV-park is supervised and approved. One important part of this step is the sample check to specification of the incoming modules at the construction site of the new PV-park.

4. PV-park documentation: The documentation requirements for the up and running PV-park and its maintenance comply with other industry standards. The documentation itself is not to be monitored, but will be checked in the event insured to facilitate the search for the source for the event.

Trend towards tougher and more comprehensive audits by banks
As a growing number of PV-projects will no longer be able to generate the appropriate profits required by the financing bodies, it has to be assumed that banks will turn towards performance warranty insurance with tougher quality assurance and auditing processes.
In future it will no longer be possible to obtain financing based only on the auditing results of a simple tour of the production site. This will certainly be welcomed as a positive development for the PV-market, since the real achievable profits will no longer differ greatly from the planned project profits. This in turn will improve the respectability of the PV-industry.
With regards to different insurance policies available in the market, it is important to check in detail the exact insurance conditions. The following aspects of insurance policies should be compared: coverage, coverage limits, period insured, revocability, transferability, costs and insured legal entity.

Advantages for all
Comprehensive quality assurance involves much effort, but it significantly increases the real chances of reaching the estimated profitability target for a project period of 20 years. Furthermore this quality assurance concept is the basic requirement for the insurability of a PV-park.
The advantages of a good rating for the module manufacturer are increased sales and higher prices as modules are now insurable. The insurability leads to less risk for the financing bank and to a greater chance of acquiring project financing at all. This in turn furthers a manufacturer specific higher demand for its modules. Another advantage is a higher sales margin, resulting from a combination of the following factors:
- Higher demand leads to better production capacity use
- The sales price can be modestly increased due to the insurability
- Experience shows that productivity can rise by 0,5 – 2,0% as a result of the audit
From the project developer’s and EPC’s perspective the chance of achieving financing for the project will rise and financing conditions (i.e. interest rate, mortgaging rate) will be more favorable.