Securitisation of a portfolio of solar installations – technical due diligence considerations

At the Solar expo and conference held in May, I attended a very interesting talk by Jackson Moore, from DNV-GL.  This looked at the securitisation of a portfolio of solar energy projects, and some of the key items to consider when conducting the technical due diligence on bundles of hundreds, if not thousands, of small scale projects.

Now my experience of technical DD work has been on large scale projects (>5MW) where a lot of focus and energy has been given to reviewing the individual project’s merits and risks, to advise interested parties (often the lenders) on the associated risks and opportunities.  The project details and aspects are interrogated and weighed up individually.  It takes time, and thus has a consulting cost associated with it.  For smaller projects, where the budget or project financial model may not allow for extensive transaction or consulting fees, it doesn’t make sense to drill down into each project’s finer details, and the bundling of projects into a larger portfolio of similar projects makes sense.

Risk profile

For me, and possibly for anyone else who has followed, to any extent, the mortgage-based crash in the US that led to the implosion of the financial system in 2008, the securitisation of debt products triggers a warning bell.  Bundling of small debt packages without conducting adequate inspection of the individual projects increases the risk to the lender, as there is not as much scrutiny on the risk profile of each project.

The aim though is to mitigate this risk through having a broad portfolio of projects.  This portfolio will have projects with varying technologies, geographies, installers, owners and other project make-up that help to prevent an overexposure to any one type of project risk.

The lack of inspections worsens the overall risk profile, but the broad range of projects, and the size of the portfolio, aims to address this.

Mitigating against technical risks

While it isn’t possible, or rather feasible, to inspect all individual projects, there are due diligence tools and techniques that can be used to further improve the portfolio’s risk profile.  The main action to be taken is to scrutinise the individual processes used by project developers in the design, installation, commissioning and operation of these smaller facilities.  Processes to be reviewed include:

  • energy modelling;
  • performance guarantee methodology;
  • supplier selection criteria and qualification processes;
  • testing procedures;
  • vendor list management;
  • design and construction quality assurance procedures; and
  • contract development and review.

Let’s look at some of these in more detail.

Energy Modelling

The methodology used in modelling facilities’ performance and anticipated energy output should be a well thought out process.  The methodology should clearly outline how, for example, shading losses will be calculated (using satellite imaging/visual assessment/onsite monitoring etc).  The methodology for determining other technical inputs and assumptions (such as uncertainty values) will also need to be defined and, importantly, the developer should also indicate how they will ensure that their employees are adhering to these processes.  Do they have an internal quality assurance procedure and is this being implemented.

The technical due diligence team would review the procedures and methodologies to comment on their appropriateness, but it is also recommended that a statistically sample of projects is audit and analysed to determine if the methodologies are being followed correctly and if the internal QA procedures are being implemented.

Technical review

Each project will have aspects of it that are unique, and designed according to the relevant local conditions.  However, it is recommended that factors that are likely to be consistent across projects are reviewed for their suitability.  For instance, it would be possible to agree on a short list of Tier 1 module suppliers that may be appointed.  Or an approved list of competent installers, each with an appropriate and demonstrable track record.

This allows for a single review of technical project issues to be applied to a wide range of projects.

Design and construction quality considerations

The main word here is documentation.  As with the energy modelling procedures used, all design, installation, commissioning and operating procedures should have rigorous quality assurance processes in place, to ensure that project activities are carried out according to a suitable standard.  The procedures themselves should be reviewed, but it is very important that the developer is able to provide evidence that the implementation of the procedures has been checked thoroughly.  Documentation such as inspection notes, sign off sheets, certificates or punch lists should be available on each project, and it should be clear that the developer has interrogated these, and is in control of the overall project quality, for each individual project.

This allows the technical DD team to review a sample of the projects, identifying if there appears to be any issue with the developer’s internal quality assurance procedures and processes, or the implementation thereof.

Off-take contracts

There are any number of potential pitfalls when it comes to contracts in energy facilities.  Off-take contracts outline the rights and responsibilities of both the solar facility provider and the customer.  What is most important if projects are to be bundled together, is that these contracts are standardised.  This could either be through standardised Power Purchase Agreements (PPAs) or leasing agreements.  Either way, the terms should be the same across all the projects.  Contracts can therefore be reviewed once, and all projects should have the same type of contract risk associated with them.

In addition, the performance guarantee outlined in the off-take agreements should be relatively low (based, for instance, on a P90 yield assessment or better).  This makes it easier to assess the risk of underperformance, and mitigate against payouts across the project portfolio.

Recommendations for the various parties

In summary, below are some of the recommendations for key stakeholders to improve the overall feasibility and risk profile of their portfolio of projects:

Project developers
  • energy modelling procedures are incredibly important and should be followed carefully
  • all processes and activities are to be documented accurately and thoroughly
  • only projects which are known to have followed the approved processes and procedures should be submitted as part of a portfolio
  • only approved suppliers and vendors should be used
Installers
  • quality of installation is of paramount importance and should be put above anything else
  • the project documentation should be in place and captured accurately
  • if the quality is found to be sub-standard it is likely that the installer will not be included as an approved contractor in subsequent funding rounds
Financier
  • the emphasis should be on process based review, as opposed to individual project reviews
  • a statistical sample of projects should be reviewed to ensure that the processes are being followed and implemented appropriately
  • the increase in risk associated with not carrying out a review of each project should be tempered by the overall portfolio of projects

Note:  I have referred to project developers in this post, but this is interchangeable with project owner or sponsor.  Jackson referred to project sponsors in his talk, but I lean towards the term developers.

Australian battery storage guide – Energy Storage Council

In May I attended a solar and storage conference.  This was put on, jointly, by the Australian Solar Council and the Energy Storage Council, and the two conference streams ran in parallel.  I only attended the talks at the solar stream, but one of the main things I took away from the conference was that most of the discussion in the solar conference focused on storage technologies and options.  While I think this may be a symptom of solar tech having been talked to death in some ways (how many different ways can you talk about irradiation and price predictions), battery and storage technologies, and how they can interact with solar installations are clearly hot topics in Australia at the moment.

The Energy Storage Council announced that they had recently released an Australian Battery Guide, which is a Guide for the sale, design, installation and stewardship of Energy Storage Systems (ESS):

“This guide specifies general requirements for design and installation of all ESS, including those connected, and not connected, to a power distribution system and those that are not connected to a power distribution system.”

It’s a 16 step guide, which looks at key terminologies and concepts, configuration considerations, associated risks and hazards, housing and enclosure considerations, installation and labelling recommendations, and commissioning and maintenance recommendations.  It also highlights the absence of applicable Australian standards relating to storage, and the importance of addressing this going forward.

16 part battery guide scope [Source: Energy Storage Council]
16 part battery guide scope [Source: Energy Storage Council]
It also looks at the various functions that storage plays and the benefits that can be realised by the consumer.  Some installation types listed include:

  • UPS systems
  • Grid connected systems
  • Offgrid systems

In addition, it lists the following as benefits associated with battery storage:

  • Load Shifting
  • Tariff Optimisation
  • Load Support or Demand Reduction
  • Renewable Export Mitigation
  • Network Support

Going forward, the Energy Storage Council indicated that they will be putting together a location database of storage systems, to provide information that is important for policy makers, decision makers, utilities and emergency services (such as fire response teams, who may need to know about the location and nature of battery installations).  They mentioned that they have a working prototype, but it seems clear that there is quite a lot of work (and data aggregation) to be done before this becomes a useful and functioning tool.

In addition, they indicated that they will be putting together a battery product white list.  This will look at international testing processes, to ensure that batteries installed in Australia are tested rigorously.  This is important in the absence of local standards governing the type of batteries installed, and the nature of the installation.

Solar PV guidelines and checklists

About a year ago I posted about a “five minute guide” I wrote while still at Arup in Cape Town.  This aims to flag some of the key technical things to consider if you, as a building owner or manager, are considering installing solar PV on your roof.

I came across another resource today; a checklist produced by the Interstate Renewable Energy Council, in the US.  This list aims to provide consumers in America with a series of questions or items to check when going ahead with a solar installation.  The aim is to have informed customers, asking the right questions and entering into a contract with a good basis of understanding.  This will hopefully result in service providers being held to an acceptable standard, and a reduction in the number of complaints being made against industry parties.

It’s quite a long list, and may be quite complicated for a layman.  It also suggests asking the installer for various bits of documentation; and it’s quite possible that the average homeowner may receive such documentation and not know if it’s adequate.   But it may be quite a good resource for larger consumers to implement, particularly where both PPA and leasing options are available.  You can find the checklist here.

IREC_Checklist

Health impacts of coal mining and power stations on local communities

A couple of weeks ago I wrote an article on environmental justice, as I had been listening to an Energy Gang podcast on the subject.  In this, I looked at a report commissioned in the US, called Coal Blooded.  This week, I came across another similar report, entitled Health and Social Harms of Coal Mining in Local Communities, commissioned in 2012 by Beyond Zero Energy, an Australian based NGO.  This looks at the effect that coal mining and coal fired power stations have, with a particular focus on the Hunter Region, near Sydney in New South Wales (NWS).

Biloela coal mine, Queensland, Australia
Biloela coal mine, Queensland, Australia

Four questions are posed in the report:

  1. What specific diseases or other health problems are associated with coal mining in local communities?
  2. Are there clusters of these diseases or other health problems in the Hunter Region of NSW?
  3. Is social injustice associated with coal mining in local communities?
  4. Is there an association between coal mining and social injustice in the Hunter Region of NSW?

The findings in response to the first question are  not surprising, but are terrible nevertheless, particularly for children and infants.  The report looks at studies carried out in the US for their literature review, and there is likely to be an overlap between the sources sited in this study, and those used in the Coal Blooded report.

Health harms associated with coal mining

Adults in coal mining communities have been found to have:

  • Higher rates of mortality from lung cancer, chronic heart, respiratory and kidney diseases
  • Higher rates cardiopulmonary disease, chronic obstructive pulmonary disease (COPD) and other lung diseases, hypertension, kidney disease, heart attack and stroke, and asthma
  • Increased probability of a hospitalisation for COPD (by 1% for each 1,462 tons of coal mined), and for hypertension (by 1% for each 1,873 tons of coal mined).
  • Poorer self‐rated health and reduced quality of life

Children and infants in coal mining communities have been found to have:

  • Increased respiratory symptoms including wheeze, cough and absence from school with respiratory symptoms ‐ however, not all studies reported this effect
  • High blood levels of heavy metals such as lead and cadmium
  • Higher incidence of neural tube deficits, a high prevalence rate of any birth defect, and a greater chance of being of low birth weight (a risk factor for future obesity, diabetes and heart disease).

Health harms associated with coal combusting power stations

Adults (and whole population) in communities near coal‐fired power stations and coal combustion facilities have been found to have:

  • Increased risk of death from lung, laryngeal and bladder cancer ‐ particularly if living close to the plant
  • Increased risk of skin cancer (other than melanoma) possibly due to exposure to arsenic
  • Increased asthma rates and respiratory symptoms due to air pollutants and particulate matter

Children, infants, and foetal outcomes in communities near coal‐fired power stations and coal combustion facilities have been found to have:

  • Oxidative DNA damage possibly due to exposure to carcinogenic chromium and arsenic from coal combustion
  • Higher rates of preterm birth, low birth weight, miscarriages and stillbirths associated with products of coal combustion, specifically sulphur dioxide
  • Reduced foetal and child growth and neurological development associated with elevated levels of polycyclic aromatic hydrocarbons, of which power stations are a significant source
  • Increased asthma rates and respiratory symptoms due to air pollutants and particulate matter.

When looking at question 2, focusing on specific health issues in the Hunter Region, there were mixed results, with some studies indicating an added health burden on communities closer to coal related infrastructure, and another indicating that there was no real increase in health issues.

For question 3, looking at how the benefits and burdens of coal related works are distributed, the study found the following injustices were applicable around the world:

Environmental damage and perceptions of damage and health impacts

  • slurry (fly ash) spills
  • lack of community awareness of damage
  • distress resulting from concerns and uncertainties about the health impacts of mining related pollution

Water quality and human occupations (activities)

  • The impact of water pollution on securing safe water for drinking, producing food, swimming and fishing

Social and economic costs

  • the cost of environmental damage to communities and society
  • inability of the community to capture economic benefits
  • social changes inhibiting the generation of alternative means of economic capital to mining
  • socio‐demographic changes resulting in labour shortages in other industries; reduced access to and affordability of accommodation; increased road traffic accidents
  • increased pressure on local emergency services
  • increases in criminal and other anti‐social behaviours.

And lastly, the study found that the following social injustice concerns were present for the Hunter Region in particular:

  • Social distress and environmental injustice including concerns over the cumulative health impacts of mining, social divisions and inequalities, feelings of loss and disempowerment, pollution/poor air quality, environmental damage and the potential to impact negatively on future generations
  • Asymmetry of power and influence including access to information, contestation over natural resources, and political conflicts of interest
  • Water access and rights including changes to the NSW water grading system favouring the coal mining industry
  • Failure to protect ‐ specifically, the failure of government and the mining industry to exercise the precautionary principle and protect local communities from potential or actual harms.