Category: References

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.

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

Akon’s lighting initiative in Africa

There has been a lot in the press about Akon launching a programme to provide lighting solutions to countries in Africa – Akon Lighting Africa.  This is not new news, but it has, ashamedly, passed me by without giving it its due attention.

So, in summary: the main aims of the programme are to fast track the electrification of countries with dismal access to electricity.  The priority for the moment is on lighting, in order to:

  • help scholars and students study;
  • extend the productive hours during the day to reduce the burden of (primarily) women carrying out household chores;
  • promote economic development through the provision of electricity;
  • improve the safety of communities through the installation of neighbourhood lighting; and
  • to improve indoor air quality through reduced combustion of fuels to provide lighting.

In order to achieve the electrification targets, they will focus on the following: “100,000 street-lamps, 1,000 solar micro-generators and 200,000 household electric systems.”  The initiative also aims to develop skills through training on the installation and maintenance of the systems.

The map below shows where they’ve been focusing their attention.  I am quite surprised that South Africa is on the 2016 expansion plan, as, in comparison to other sub-saharan countries, the country has achieved considerable electrification of households.  This can be improved upon naturally, and a shift in the energy source can from Eskom (the national utility) to distributed and independent renewables would of course be of benefit.

 

 

AKON_Projects

Much is always said about how Africa can leapfrog energy technologies and avoid the carbon intensive energy sources causing so much trouble in the North and the widespread adoption of cellphones is referenced ad nauseum.  This programme represents the actual realisation of this goal, particularly if it can transition from a grant structure to a self sustaining market.

A reminder to all reading this: Africa is not a country.  It’s massive, expansive, diverse, multicultural, international and complex.  Programmes that aim for Africa need to recognise this.

Energy storage from submerged buoyant devices

The other day I read an article about how a Canadian utility was using balloons filled with compressed air to store energy.  Air in the balloons is pressurised when there is an abundance of electricity, and this air is released when there’s a shortage.  It’s similar and yet opposite to a pumped hydro system.  You can read about this here.  This got me thinking as you’d need balloons that can inflate and deflate and withstand various levels of pressure.  You’d need pipes that transmit the air to and from the balloons and you’d need pumps and turbines to fill the balloons and then harness the energy in compressed air.

What if the balloons stayed constantly buoyant but what changed was their level under water.  What this would mean was  that you’d need an anchor, a buoyant device, and something which could act as a winch and a dynamo.  Would this be easier?

Buoyancy_device

Clearly you’d need the equivalent of ‘head’ with pumped storage, so the depth of the water would be adequate to give the system a good amount of kinetic energy.  No point setting this up in one meter of water.  You’d also need to ensure that there’s nothing around the surface of the water that it would interact with; if you’re driving a boat with an outboard you wouldn’t want to go around popping people’s balloons.

The material used for the chain or rope would need to be able to withstand moving backwards and forwards, without deteriorating too quickly.

I’m naturally not the first to think about this.  Someone filed a patent in America.  Hopefully they’ve done something about it, because there’s nothing more useless than someone blocking technology development with a patent that they’re just sitting on.  Especially if it’s not rocket science.

Someone has also picked this up at the University of Sharjah, UAE, with a paper published in 2015 and that the efficiency of the system is just under 40% (not great, but also not terrible if it’s relatively cheap and can be scaled).  They say the compressed air system they tested (not under water) had a much higher efficiency of over 84%.

The thinking is that it could be particularly useful with offshore wind installations, as it could be set up right next to the turbines, storing energy when there’s an abundance of wind, and releasing energy when there’s an abundance of demand.

It’s an interesting concept, and I’d be keen to hear if there are any applications of it or if anyone’s seen any more studies on it.

As a last note, there are other buoyant technology that are being looked into, some of which are being researched by the University of Innsbruck.  Their research would make use of the empty space in offshore platform or wind turbine pillars/support structures.  In these applications water would be pumped in and out of the structures.  Interesting all around.