Technology development in the solar industry continues to accelerate at an unprecedented rate. Over $3 billion was invested in new companies and technologies in 2008 alone, and investments in solar have doubled every year for the last five years.
Manufacturers of traditional photovoltaic (PV) panels continue to drive improved efficiencies, inverter manufacturers boast higher reliability, and as in the case of micro-inverters even offer a different take on older technology– producing AC current at the panel or string level. A variety of innovative new thin film technologies and material systems are also emerging with the potential to offer unprecedented new and lower cost structures. Entrepreneurs are addressing the balance of system as well–looking for ways to reduce costs and accelerate the deployment of PV systems while also increasing quality and reliability.
All of this investment is aimed at reaching renewable energy’s holy grail– grid party, the point at which solar power becomes less expensive than traditional polluting sources of energy. The Levelized Cost of Electricity (LCOE) for solar is rapidly closing in on traditional power due to increasing fuel costs for carbon-based energy sources joined with the introduction of new technologies reducing total solar system costs.
However, no matter how compelling these technology solutions may appear on paper, without mitigation of certain finance and performance-related risks, they may struggle to penetrate a solar market. With Power Purchase Agreements (PPAs) driving the majority of commercial projects, new technologies must meet “investment grade” standards and deliver reliable products to last and perform at predictable levels for the duration of long-term PPA contracts.
PPAs allow customers to shift the burden of paying for and maintaining solar systems to third party renewable energy providers, such as Tioga Energy. This model is so attractive to the market that PPAs funded 72% of the new solar systems during 2008. In the first quarter of 2009, the PPA market continues to show strong growth, even under the current negative economic pressures. This is because PPAs allow customers to forgo the large upfront costs of solar installations and simply pay for the power–not the solar equipment.
Since PPA providers typically contract with customers for 15-20 years, they must choose reliable technology that will last. This demand for healthy, long-term economic outlooks directly impacts the success of emerging solar technologies, because both the PPA provider and the financial backers of these multi-million dollar solar systems need reasonable assurances that the systems will perform as expected for at least 15 years.
Show Me the Data
For providers of traditional solar technology, there is a wealth of performance data available–thousands of projects spanning three decades. Still, these manufacturers must provide 3rd-party test results, long-term warranties, and 3rd-party studies that validate their products’ longevity. For manufacturers of emerging technologies (without such performance data and warranty backstop), this becomes a serious challenge to quick market penetration.
Since PPAs dominate commercial new solar installations, new technology companies should evaluate several risk guarantee strategies in order to accelerate mass adoption.
Three ways to mitigate technology risks for PPA providers include:
1. Proven reliability through accelerated lifetime stress testing by trusted 3rd parties.
2. Technology warranties or performance bonds for at least 10 years and ideally through the duration of the PPA contract, typically 20 years.
3. Component migration strategies that enable system operators to replace failed components, should they occur, with other components (reducing overall risk of the projects’ financial failure).
Unfortunately world class testing is not sufficient on its own to prove reliability–making warranties, guarantees, and risk sharing a necessity. The challenge for startups or undercapitalized technology vendors is that it may be difficult or impossible to fully back long-term warranties with sufficient balance sheet reserves to guarantee a full recall should a major product issue occur.
It’s here, once again, that the PPA can account for discrepancies in product and performance guarantees, balancing a project’s risk and reward profile and offering a path to market for novel new technologies. For example, through innovative deal structures, PPAs allow manufacturers to balance excess risk by discounting front-end pricing or incorporating third party assurance programs,
Today, it can be expected that the most successful new emerging technologies will not only win their share of the market on technological merits, but also on verified testing, risk mitigation, and creative deal structures around PPA relationships. With 72% of the commercial market funded by PPAs, the technologies used in those projects are best positioned to thrive and succeed.
Paul Detering is CEO of Tioga Energy. He is a veteran entrepreneur with 20 years experience in clean technology.