Solar Investments: Reducing the Risk of Unfavorable Returns
Competitive prices, on-time delivery, quick installation–it’s all too easy to make assumptions about what utility-scale solar investors may want. However, what’s commonly overlooked or discounted by many outside the investment community is what’s most important and highly sought after from those within it: a low-risk investment with steady and predictable cash flows for 20 to 30 years.
Over the last decade the utility-scale market of the solar PV industry has greatly improved its competitiveness as an energy generation source. It has been exciting to watch the cost of electricity produced from PV power plants become competitive with a range of traditional energy sources.
Investing in utility-scale solar
For an investor to take interest in a solar project, risk must be reduced to an absolute minimum. A solar array must generate electricity at a predictable operational cost structure in order to deliver long-term, reliable returns.
The PV industry has made great strides in delivering certainty for the investment community. The ever-increasing number of institutional investors that are now backing PV projects is a fruit of these labors, but there is still a way to go.
Testing and due diligence
Many project developers turn to independent engineers and quality assurance providers to carry out the required due diligence when it comes to key PV power plant components. This is particularly true in regards to solar modules. Testing laboratories and regimes are quite sophisticated, with the ability to expose modules to extreme operating conditions and simulate their likely performance over their operating life.
Module failures are well documented and, in some cases, like with potential induced degradation (PID), documented in great detail. Unfortunately, this isn’t the case with the range of components often lumped together under the tag “balance of systems.” This includes components such as electrical cabling, connectors, and tracking systems, and it is a crucial oversight.
Taking a closer look at trackers
Tracker deployment is growing rapidly. GTM Research forecasts implementation as high as 80 to 90% in key PV markets including the United States, Latin America, Middle East, and Australia as soon as this year.
This makes it all the more worrying the risks posed by component failure in tracker systems are not well understood, analyzed or priced. What’s more concerning is the lack of understanding of the impact tracker failures or faulty operation on a project’s bottom line and Net Present Value (NPV). Given this, independent analyst TÜV Rheinland recently conducted the first-of-its kind investigation on tracker reliability. The resulting “Risk and Economic Analysis on Two Tracker Architectures” report looked at the most popular tracker architectures, centralized and decentralized, investigating each according to its individual component and system reliability.
Assessing risk and economic impact
The report found the centralized architecture had vastly lower scheduled and unscheduled O&M costs when compared to the decentralized architecture studied.
According to the study, the lower O&M costs of the centralized architecture translated into $6.4 million over 30 years for a 100-MW facility. Other findings showed the centralized tracking architecture loses 39% less energy due to component failures compared to the alternative architecture; has a 6.7% lower levelized cost of energy (LCOE); and nearly 4.6% higher net present value (NPV).
The bottom line
Breaking down the O&M costs in more detail, the report found unscheduled O&M costs to be the most damaging to a PV project’s bottom line. This should give cause for investors to take a close look at all components when investing in utility-scale solar. Notwithstanading the fundamental differences between tracker architectures, many solar plant financial models incorrectly assume identical O&M expenses. Financial returns on solar PV power plants can be significantly impacted by erroneous O&M modeling assumptions.
As the PV industry enters the next stage of its evolution, there is good reason to believe all the risks of a solar array will be assessed in greater detail. More scrutiny may uncover potentially underperforming components and high O&M costs before an investment is made. For investors, this can’t happen quick enough, after all, it’s what they really want: predictable cash flows with minimum risk.