Solar Construction: Too Hot to Handle?

By | June 17, 2013

The solar construction industry has been extremely hot in recent years. Perhaps, too hot.

The sector’s rapid growth has led to an oversupply of solar panels, which has turned up the heat on manufacturers to lower prices. Now some experts are questioning whether these manufacturers have compromised the quality in some of the millions of solar panels installed across the country and, if so, whether this will lead to a giant wave of defect litigation for this fledgling industry and its insurers.

The prospect of a solar defect litigation explosion is by no means certain but people are talking about the possibility.

That the industry is growing is certain. There are 7,700 megawatts (7.7 gigawatts) of solar in operation in the United States today – that’s enough energy to power 1.2 million households. Solar power usage has risen by 600 percent since the early years of mass production in 2008. And more than 40 percent of all solar power capacity in the United States came online in 2012 alone.

The concern is that factories are short cutting their work and quality to save costs.

Solar industry experts expect the growth to continue. The Solar Energy Industries Association (SEIA), an industry trade group that represents more than 1,000 member companies doing solar business in the United States, expects to see at least 5.2 gigawatts of new solar generation to come online in 2013.

And this growth is happening in what the industry calls a “solar downturn.”

“There’s mass amounts of oversupply in the solar market,” says Andy Klump, CEO of Shanghai, China-based Clean Energy Associates, an advisory firm that provides quality assurance and other services to manufacturers, project developers, EPC contractors (engineering, procurement and construction), and investors in the solar energy sector.

Klump says the photovoltaic (PV) solar panel market is still quite young, and while it is growing, insiders consider current conditions to be a solar economic downturn. “The solar industry is not mature yet. Growth less than historical average of 40 percent is seen as a downturn in solar.”

Klump says that growth has led to a huge oversupply.

“A number of manufacturers are losing money right now because they are massively oversupplied. They have far more capacity than what the threshold demands,” Klump says.

Quality Concerns

This growth in the industry has led to concerns over quality.

“The concern is that factories are shortcutting their work and quality to save costs and that they are actually producing a bad quality product,” Klump says.

A recent article in the New York Times reported that the $77 billion solar industry is “facing a quality crisis just as solar panels are on the verge of widespread adoption.” The article cited multiple reports of double-digit defect rates for installed components, mostly manufactured in China.

While all solar panels degrade over time, generating less electricity, the Times article said a review of some 30,000 installations in Europe by the German solar monitoring firm Meteocontrol found 80 percent were underperforming. “Testing of six manufacturers’ solar panels at two Spanish power plants by Enertis Solar in 2010 found defect rates as high as 34.5 percent,” the article said.

Dave Williams, CEO of the San Francisco-based solar developer Dissigno, told the Times that his company has experienced “significant solar panel failures at several of its plants.” He was quoted by the Times: “I don’t want to be alarmist, but I think quality poses a long-term threat.”

According to the article, some executives at companies that inspect Chinese factories on behalf of developers and financiers have said that over the last 18 months even reputable manufacturers are substituting cheaper, untested materials to save on costs.

But not everyone agrees with that assessment.

“The one thing that the article did not highlight sufficiently well, in my opinion, is that this is a problem and it’s true, but it’s not as pervasive as the article laid it out to be,” says Jenya Meydbray, CEO of PV Evolution Labs based in Berkeley, Calif., an advisory firm that specializes in technical due diligence for solar project sponsors, including banks, developers and EPC firms.

Meydbray says that only recently – in the last 12 to 24 months – has the solar industry matured enough to embark on technical due diligence testing in projects. That means outsourced testing by firms like PV Evolution Labs for the long-term reliability and quality assurance of solar modules.

However in a young industry, like solar, not everyone relies on technical due diligence. Adding to the challenge is a lack of well defined, industry wide criteria for panel rejections, he says.

“In some specific cases it (defects) could be 34 percent. But that does not mean the panels are nonfunctional,” Meydbray says. That could simply mean for a specific group of modules, based on the project owner’s criteria, 34 percent were failing. “Those modules were in all likelihood sent back to the manufacturer and were sold to somebody else. They were not land-filled, I can almost promise you that.”

Another consideration is that defects in solar panels can be classified differently from manufacturer to manufacturer, according to Klump. There’s no industry standard which can be misleading. What is a defect? he asks.

For example, there are different grades of PV cell color. “One may be medium blue, the other may be dark blue, and another may be black.” There are various texturization steps in the manufacturing process which causes those different discolorations, he explains. “Some may get mixed up and you don’t have a totally same coloration scheme but the overall performance of the module still works. If you call that a defect, that’s fine, you can do that. But do you reject that product entirely when it’s going in a huge utility field installation? It’s just not that straight forward.”

The opposite scenario could also be true, he says.

“A lot of manufacturers will claim that they only have a 0.2 or 0.3 percent defect rate but they are excluding the product that’s already been taken off the shelf by their quality control team,” Klump says. “That also is not exactly a fair metric,” he says.

In any event, no manufacturer could survive with a 34 percent defect rate, Klump says. “They would be out of business in a heartbeat,” he says. “The numbers in that article are not realistic. You have to have a more accurate description about what defect means before you can make that statement.”

Despite the discrepancy over what classifies a defective solar panel among industry players, the New York Times article hit a nerve.

“If the situation is as bad as the Times article implies, a wave of large lawsuits could be coming against solar panel manufacturers, the component manufacturers that supplied parts or materials used in the making of those panels, the panel distributors and dealers and the contractors who installed the panels,” says Scott Turner, a construction insurance attorney at Anderson Kill, who specializes in securing insurance recoveries for property losses and in securing defense and indemnification for liability resulting from construction disputes and defects.

“Given the pace at which solar panels have been installed worldwide in recent years, and the pressure on manufacturers to cut prices and hence corners, this litigation wave could make the battles over liability and insurance coverage for Chinese drywall seem like a small claims dispute,” Turner says.

The insurance industry is watching, says Michael Hamilton, partner at Nelson Levine de Luca and Hamilton based in Blue Bell, Pa. They are watching to see whether solar construction defect and product defect claims are likely to result in a significant amount of litigation around the country.

“Right now it seems this potential issue is in its infancy, and observers are unsure of how widespread it’s going to be in terms of litigation,” he says.

But if solar panel defect claims develop into significant litigation across the country, the insurance industry will take notice. “It’s just going to depend on how widespread the problem is,” Hamilton says.

Solar Warranties

The solar construction industry’s growth in the past few years appears to be at the heart of some of the concerns, the experts say.

“We are in a market where we have global overcapacity in the module production side, so significantly more modules are being manufactured than are being consumed,” says John Smirnow, vice president of SEIA. “Over the last six months or so we are right in the middle of some fairly significant industry consolidation on the module side.”

Meydbray says that just one or two years ago stakeholders found that project contracts, manufacturers’ warranties and the balance sheets of equipment suppliers were enough security to move projects forward. But that just doesn’t exist today, he says.

“Most of these equipment suppliers have very strained financials. It’s very uncertain if they are going to be around in a year let alone 20 years so investors really have to gain a higher degree of confidence in the actual cash flow generating engine of their investment – which is the solar panel itself.”

But with reports over the quality and effectiveness of solar panels hitting the headlines, industry partners are looking for added confidence in solar panel products. That confidence appears to be coming in the form of warranty insurance.

Meydbray says that solar panel manufacturer warranties backed solely by the manufacturer with no additional backing are “more or less discounted completely” in today’s strained market.

One provider that offers a specialized warranty insurance product for solar panel makers is PowerGuard Specialty Insurance Services based in Irvine, Calif.

While purchasing warranty insurance is voluntary, solar panel manufacturers have been getting pressured to buy the coverage by lenders and contractors, says Scott Gunnison of PowerGuard.

Without warranty coverage, solar projects often can’t get launched, says Steve Sawyer, executive vice president, at Woodruff-Sawyer & Co. based in San Francisco, Calif. “The insurance is often a key component particularly for developers, and maybe EPCs as well, to get a project financed.”

But securing warranty coverage in the solar market is difficult and often takes many months to write, Sawyer says.

Warranty coverage “needs to be customized to the needs of a particular buyer,” Sawyer says. The coverage can be written for a manufacturer, a developer, or an EPC, and is tailor-made for that buyer, he says. “There’s not a one-size-fits-all policy. Every one of these is unique. To the product, to the manufacturer, maybe it’s a developer, maybe it’s somebody trying to get financing, it’s the furthest thing from an off-the-shelf product,” Sawyer says.

There are limited markets willing to do business in the solar warranty market as well. Aside from PowerGuard, Munich Re also offers a performance warranty product for solar panels.

Some solar manufacturers provide warranties for solar panel systems of 25 years for power performance. If any product fails to meet the specifics of this warranty then the warranty insurance product will respond.

Gunnison says the PowerGuard warranty product doesn’t follow the manufacturer’s warranty exactly, but it’s pretty close. “If in fact there is a valid defect that makes the panel inoperable, or it’s not outputting the amount of electricity it’s supposed to, most of the manufacturers will replace the panel or negotiate some cash settlement,” he says.

What the warranties don’t provide is consequential damage liability, Gunnison says. “If there was a fire (because of the defective panel), and it burned a building down, the manufacturer’s warranty isn’t going to remedy that building burning down.”

Sawyer says while warranty markets are limited in solar, so are the customers. There are a limited number of buyers, he says. Coverage is expensive and often some buyers can’t get it.

“Some prospective buyers simply won’t make the time and invest what’s necessary to get a program completed,” he says. “Many companies or developers do not have the performance data to give underwriters confidence in the product that they are trying to insure.”

“Lots of people don’t buy the product,” Gunnison says. However, with the attention focused on solar panel defects that may very well change.

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