Insights National Quality Assurance Standard: A Bright Idea for the Solar PV Energy Market
The rise of Solar PV is being driven by attractive financing options.
The Residential Solar PV industry is booming due in large part to alternative financing options available through third-party ownership. In fact, third-party ownership models for Solar PV accounted for 74% of the industry growth in 2012 alone.
Today, Solar Leasing providers provide homeowners the benefits of Solar PV through a variety of third-party ownership models including Solar Leasing or Power Purchase Agreements (PPAs). This allows homeowners leasing/services model with little-to-no capital outlay versus purchasing a system up front. Solar PV investors, who range from financial institutions to private equity firms, are providing capital to Solar PV Leasing providers to enable the third-party ownership.
However, while third-party ownership has created increased demand and market growth, the Solar PV industry could suffer similar issues experienced in the housing markets if lessons learned from the mortgage crisis aren't put into place now.
"Those who cannot remember the past are condemned to repeat it"
The mortgage industry experienced significant issues around subprime mortgages in large part because the system of checks and balances designed to ensure risk was managed properly broke down. Appraisers were too close to brokers and agents, and rating agencies were too close to the banks.
Solar has the potential to incur a similar issue. Currently, there is no standard for quality or third-party quality assurance that is being deployed in the industry. In a hyper-competitive market, where every dollar counts, this lack of quality control has a very similar potential to lead Solar in the same direction as mortgage-backed securities. In many cases, there is no third-party verification projects are being installed correctly to a minimum quality standard. This lack of a floor will drive a race to the bottom, especially as new firms enter the market. This is likely to end in poor performance and unhappy investors, and will hurt the entire solar marketplace.
Securitization of Distributed Solar PV Systems
Unlike large-scale Engineering, Procurement and Construction (EPC) Projects where investors are able to assess risk and ROI on a project by project basis, distributed residential leasing will look to aggregate groups of deals together to be sold to Financial Institutions, similar to the mortgage-backed securities market.
The problem is, currently there is no mechanism to rate an aggregated set of systems. The capitalization model for securitization of residential Solar PV leases will only be effective when the assets can be accurately rated and assessed, measured and defined through a national standard. This would include a uniform rating of the installer's qualifications, financial terms, the installation, system performance, maintenance schedules, and all other performance.
To do this effectively, the rating agencies must have assurances the equipment and services are rated on an equal basis through a national standard in order to evaluate the investments. To securitize Solar PV leases, assets must be accurately rated by a third party against widely adopted standards. And without a uniform set of standards - including a national Quality Assurance standard - effective rating cannot happen.
As Solar PV leasing companies grow, they will seek more capital investment and also access debt to meet market demand for Solar PV leasing and service agreements.
A national Quality Assurance standard would create parity and a defined quality of equipment, installation, and maintenance performance. This would enable Solar PV leases to be securitized, because investors would then have an effective ability to rate the assets. Investor capital will fluctuate over the next twenty years and the industry will need to access debt and a finance option just as much as capital; and debt is also a much cheaper cost-of-capital option.
Accelerated market adoption combined with a lack of standards strains the economic model.
There are more Solar PV leasing providers, and service companies entering the market. If the quality and experience of new entrants does not match that of the industry pioneers, the investment community will penalize everyone with higher rates in order to offset the risk of investing in Solar PV "paper" with a high cost of service/repair/replacement due to poor quality in the market. Investors will underwrite the average, thus encouraging a downward spiral of mediocrity as companies try to do the least amount of service per agreement.
The industry is competing with other industries for capital investment dollars. A lack of national Quality Assurance standards will poorly position the Solar PV leasing market compared to other industries who better manage the rating of assets and the conformity to standards. Ultimately, capital investors buying into portfolios need assurance that risk is managed and the portfolio is accurate.
With the widespread penetration of solar nationwide, combined with new financing options, there is increased competition among investors and professional services companies. A lack of national Quality Assurance standards will draw even more non-experts into Solar PV leasing, creating pricing competition that will lower rates while simultaneously decreasing quality. This will then drive down the profitability of Solar leasing providers and service companies who are having to compete at lower prices. Aging equipment, energy rates, and general marketplace conditions will also create future risk and uncertainty as well, which will be hard to manage and mitigate without an effective Quality Assurance standard.
Creating a National Quality Assurance Standard
Creating a realistic and manageable yet comprehensive set of standards is in the best interest of leadership – both private and government – to responsibly assure this growth market remains healthy and viable for generations to come.
Achieving a National Quality Assurance Standard requires active involvement among the investment community and Solar PV leasing providers. IBTS is actively pursuing a dialogue throughout the industry, including with the Department of Energy, SolarTech, Investors and Leasing Providers.
Active involvement from all stakeholders including installer, manufacturer, engineering/design, and the investment community should be engaged. Industry practitioners in particular are needed, as expertise, is essential to best-defining the criteria and process for assuring quality.
The time is now to enact a national Quality Assurance standard. If you are interested in pursuing a National Standard as a solution, please check out our LinkedIn Group, Quality Matters – Solar PV and join the discussion.
The Institute for Building Technology and Safety (IBTS) is a leading provider of Investment Grade Quality Assurance services to public and private sector clients for the past 35 years. As a non-profit organization, it is our goal to provide Quality Assurance services to our private and government partners to ensure reliability, production and safety of installed systems, increase local jurisdiction and utility responsiveness, and provide overall support to enhance the renewable energy industry growth. Christopher Doyle is the Deputy Director for Energy Services, and lives and works in Austin, TX.
 GMT Research. U.S. Solar Market Insight Report. 2012 Year in Review Executive Summary.