PV Performance Guarantees (Part 2): : Page 4 of 4

Proof of Performance & Guarantee Structures

WHAT TO LOOK FOR IN GUARANTEE STRUCTURE 

Many conditions have made their way into performance guarantees. Some are good and some are bad. The following is a brief list of conditions that require deep scrutiny by all parties involved in the execution of a performance guarantee. In all cases described below, there are terms and conditions that could be deal killers.

Historical climate data and expected energy. Climate data sets should always be used within their limits. Simulations are vitally important to project viability, but the performance model outcome needs to be considered within the time frame of the data. For example, typical meteorological year (TMY) data are usually used for system simulation. Despite the outstanding level of detail and painstaking attention to accurate synthesis, these data do not quantitatively predict future energy harvest. TMY data sets are compiled using many years of actual data, so they are most accurate over a similar time frame—well beyond a decade at least. (See “Production Modeling for Grid-Tied PV Systems,” April/May, 2010, SolarPro magazine.)

Historical climate data sets cannot tell anyone how many megawatt hours a system will produce in year one, for example. They can, however, reveal how the system might react to actual conditions over time. Without getting too deep into the derivation of the available TMY data, it is important that everyone involved in solar projects understands this key concept: climate data sets are synthetic representations of the height, depth and duration of key solar indices. Therefore, any performance guarantee that ties a specific energy output value to a system simulation that uses historical data is challenging and perhaps even counterproductive. For example, use of such a model is very likely to miss poor production in an especially cool, sunny year.

100% revenue stream recovery. In the case of a system shortfall, recouped losses usually take the form of $X.XX for every percent of shortfall. This kind of guarantee is highly dependent on both the production model and the expected energy target.

In some cases, investors attempt to recoup all foreseen losses of revenue in direct proportion to assessed damages. In other words, the contractor is expected to pay the owner for the estimated lost production and the revenue therein. From a financial view, this arrangement makes good sense; it is more or less a sure bet for investors. However, system owners have little incentive to get things fixed, since their revenue stream is not affected by underperformance. This type of contract is essentially a complete transfer of financial risk to the EPC contractor from the owner for the guarantee term.

There are two potential problems with this type of structure. First, EPC contractors tend to look for more of a partnership when writing performance guarantees. Second, the federal investment tax credit requires the owner to be clearly at risk. According to the legal definition of at risk, the system must be worth more to the owner if it is on than if it is off. However, if the EPC contractor has guaranteed a return on the owner’s investment regardless of whether the system is operating, then the owner is not technically at risk.

Oversimplified terms. Many PV performance guarantee contracts appear to be stopgaps, with the intention of getting the bank’s approval. In the most oversimplified cases, the PV system owner asks the EPC contractor to take care of everything and make sure that the system pays back as the pro forma documents specify. In other words, the contract language asks the EPC contractor to take care of all system parts, all of the measurement and instrumentation, and pay damages if it does not work out as the power purchase agreement (PPA) projections predict.

It is important that the complexity of PV system operation is incorporated into measurement and cure. The EPC provider is the guarantor not just because of its large balance sheet. It also has the technical understanding and the skills to solve problems. The performance guarantee should not be a financial solution only. The EPC contractor should be able to regularly evaluate system performance and to get involved early to solve potential problems. Oversimplified terms may not facilitate this.

In a slightly more complex model, the owner reads the meter, measures the solar input, compares the two and assesses damages if the expected performance was not achieved. In the most laissez-faire version of this model, measurements are taken all year, these values are summed and averaged at the end of the year, and then damages are assessed. The owner essentially waits all year before sending the bad news to the contractor. This model not only fails to keep the system operating as it was intended, but it is also likely to be unacceptable to the EPC contractor.

Overly complex structures. There are several PV performance guarantee constructs that are mind-bogglingly complicated. For example, there are clauses and detailed procedures for dual methods of sensor drift assessment, soiling approximations and in situ verification, third-order corrections for incidence angle and so forth. These are overly specific at best. They also have the tendency to bring out the worst in project team members.

What complicated structures implicitly call for is a long period of finger pointing when things go awry. A list of detailed calculations, procedures and measurement specifics is basically a long list of things that can be called into question when a shortfall is perceived to happen. In this case, simpler is better.

Limitations of liability. Establishing acceptable limits of liability is essential to a successful performance guarantee. It is common to limit this exposure to a portion of the EPC contract. This is where negotiations typically become sensitive. EPC contractors are comfortable wrapping completion and workmanship, but ensuring future performance is a gray area at best. It is difficult to account for the administrative requirements. In addition, while smaller EPC contractors may offer solid guarantees, they may not have sufficient financial security to give comfort to investors. To make sure that the desired level of commitment is achieved at an acceptable cost, it is critical to have explicit liability limitations, as well as a clear set of rules and formulae for evaluating the strength of the guarantee.

CONTACT

Mat Taylor / Quanta Renewable Energy Services / Greenwood Village, CO / quantarenewable.com

David Williams / dissigno / San Francisco / dissigno.com

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