Legal Briefing: Guaranteeing the Future

Legal Briefing: Guaranteeing the Future

The industry is working hard to develop flexible warranties backed by credible testing that provide the certainty investors crave. But fast-changing technology and a paucity of real-world data mean they remain very much a work in progress.

The solar industry continues to change, with rapid advances in technology influencing the commercial market for solar power. Solar panel manufacturers and contractors responsible for installation, operation, and maintenance of solar facilities have offered increasingly strong warranty and performance guarantee terms in an attempt to establish market share and recruit potential customers. In large part, financiers of solar projects have driven these terms to broader guarantees for longer periods as one way to increase bankability of major solar projects worldwide.

Ultimately, whether solar panels hold up to these warranties (and whether plants perform to meet performance guarantees of up to 25 years) is a question only time can answer.

Beyond the terms of the warranty obligations, developers and financers are well advised to give preference to panel suppliers that have the financial strength and stability to stand behind those obligations over the long term.

EVOLUTION OF WARRANTIES: THE LARGE-SCALE SOLAR PROJECT AND PERFORMANCE GUARANTEES

The solar industry traditionally extends two warranties for individual solar panels: a workmanship warranty and a performance warranty. The workmanship warranty, currently up to 10 years, stands behind the packaging standards of the panel with a one-for-one panel replacement guarantee. The performance warranty, currently up to 25 years, guarantees power above a particular threshold (a measure of the reliable function of panels).

These warranties typically began as one-for-one panel replacement guarantees. But as solar projects have expanded, large arrays of panels make individual warranties cumbersome and difficult to evaluate due to the sheer number of panels. Developers – and their financiers – began to demand aggregate warranties assuring the energy output of an entire solar power plant. Providers answered with offers of performance guarantees based on industry standard output projections for panels: 90% output through year 10, then 80% through year 25. In order to simplify large project financing models, and more accurately reflect the output assumptions contained in such models, this step-down performance guarantee eventually became a linear curved guarantee, which is the guarantee that most providers currently extend.

Financiers and developers’ demands for longer and more consistent warranties for panels (as well as performance guarantees for plants) from providers have also led to secondary product markets for third-party testing firms and insurance. Independent third-party testing firms assist solar providers by evaluating panels and output guarantees of entire solar plants. Insurers are now exploring and offering products to solar providers that ensure output of particular solar panels based on extensive audits of the providers’ manufacturing facilities. These insurance products offer alternatives to smaller solar panel providers and EPC contractors, who are forced to compete with larger providers in a market without the financial profile to reassure financiers of the smaller providers’ long-term stability and availability to honour extended warranties. But they also result in additional costs that can be avoided by large providers with sufficient balance sheets to support their own warranties.

As the market continues to expand and mature, especially the market for large-scale solar projects, the warranties or performance guarantees and related products will surely continue to shift. In addition to industry competition, changes in technology and an ever-expanding universe of data to support reliability of solar panels will also affect the market.

BASES OF WARRANTIES: DISPARITIES BETWEEN TESTING AND FIELD CONDITIONS

The single largest limitation on warranties and performance guarantees in large-scale solar projects is the youth of the industry. Quite simply, the supporting data to establish reliable solar energy output, while estimated at this time as a result of significant testing, cannot be developed entirely until enough solar panels have demonstrated, through the passage of time in the exposed environment, output to confirm engineering calculations and estimates.
Warranties and performance guarantees often are based on ratings of solar panels under standard test conditions (STCs). In the solar industry, there are three STCs: temperature of the solar cell (set at 25 degrees Celsius), solar irradiance (set at 1000 Watts per square metre), and air mass (in simplified terms, a measure of the path of sunlight through the atmosphere).

Manufacturers project degradation rates over time using accelerated life testing in an attempt to simulate years of solar irradiance. These tests and corresponding results are increasingly more sophisticated and useful in predicting energy output of panels – but they cannot replicate field conditions over 25 years.

The true test of warranties in the solar energy market will be the data collected from real-time solar panels in the field over long periods of time. Few in the industry have long-term data on the performance of specific panels in utility-scale subject to actual conditions encountered in particular locations, and no one has 25 year data under such circumstances.
Any warranty or performance guarantee based on tests (while certainly better than no data, and acknowledging the increasingly stringent testing standards enacted by manufacturers) cannot truly be validated until the industry has actual historical data over the course of the entire warranty or guarantee.

While the contractual power to enforce the warranties and performance guarantees provides some assurance to developers and financiers of large solar projects, ultimately the satisfaction of these warranties and performance guarantees remains to be seen and will depend on who or what stands behind them in 10, 15 or 25 years.

WARRANTIES AND NEW TECHNOLOGY

Warranties and the development of new technology have a complicated relationship in the solar industry. On one hand, the almost-constant improvements in solar technology can become sufficiently bankable to be placed in the field on utility-scale projects because of the warranties standing behind those products. On the other hand, the same ever-improving technology means that by the time any long-term warranty data is confirmed by the actual performance over time, it is reasonable to assume (based on current trends) the technology to which such warranty applies will be multiple generations behind the current product, and possibly obsolete.

In a way, the bright future of solar technology represents a “catch-22” for the value of present day long-term warranties, i.e., taking advantage of the improvements in solar technology over the next 10, 15 or 25 years (including retrofitting existing plants) may outweigh the value of relying on the 25-year warranty that made the original and subsequent solar technologies sufficiently bankable to bring such technologies to the utility-scale market.

In the competition for solar providers to offer longer and more stringent warranties and performance guarantees, many familiar with the industry wonder whether the race is sustainable – and whether it will matter, given projected technology improvements.

Some believe the increased efficiency of solar panels will render 25-year warranties obsolete based on the sheer profitability of replacing old (current) panels with new (future) significantly more efficient panels.

Although the industry does not yet have an appreciable market for replacing outdated panels with more efficient panels, some speculate that this secondary market may emerge within the next decade (especially in markets with high capital expenditures where the benefit of increased output is significant in proportion to costs).

NEGOTIOTION OF WARRANTIES: COMPLEX AND UNCERTAIN TERMS

Solar providers, developers, and financiers of large projects spend significant resources negotiating detailed warranties and performance guarantees. Essential to the bankability of the project, the terms of warranties and performance guarantees often become highly complex and specialised. Solar providers not using insurance or a third-party guarantee must strategically plan to honour warranties 25 years into the future (a risk unique to the solar industry among energy providers). Developers and providers must anticipate significant and unknown risks in this negotiation, including method of determining conformance to warranty terms and conditions, and which party bears the burden of proving whether the solar panels perform consistent with the warranty.

This is further complicated by warranty terms based on STCs rather than field conditions; whether the parties can reconcile the performance of solar panels against drastically different conditions from a warranty remains an open question.

Still, and despite the lack of historical field data, solar providers continue to compete with increasing aggressiveness to deliver longer and more aggressive warranties as a way to differentiate themselves and gain market share. Each prominent increase in warranty or performance guarantee standards sets a new expectation across all providers to meet or exceed this higher standard, setting up a race for increasingly aggressive terms. Quality remains a long-term concern for financiers, but there is still little standardisation of solar panel compositions, sizes, processes and manufacturing methods (which remain highly confidential and proprietary among competing manufacturers).

THE FUTURE OF LARGE-SCALE SOLAR PROJECTS AND THEIR WARRANTIES

Warranties and performance guarantees offered by solar providers today present a number of risks that will unfold in the coming decade: Will solar panels perform to meet engineering and testing projections? How will developers determine whether to make a valid warranty claim, or whether different conditions caused different output? Will solar providers continue to expand warranty terms, and will they be able to honour those terms over the significant extended periods already standard in the industry? How will new technologies affect the need to enforce warranties or the value of long-term warranties?

In many ways, the issue of warranties and performance guarantees on large-scale solar projects provides more questions than answers – questions only time can address.

Bradley Arant Boult Cummings LLP attorneys David Bashford and Monica Wilson, both practicing in the Construction and Procurement Practice Group, co-authored this article, which explores how rapid technological advances are affecting the commercial market for solar power.

Republished with permission. This article first appeared in Solar Business Focus in April 2014.