In-depth interview with David Fernandez, Terraform, and Hugh Kuhn, Macquarie Infrastructure Company

A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.
— Definition of a 'Secondary Market'

The secondary market for solar PV assets has grown rapidly, without any indication of slowing down. According to Mr. David Fernandez, VP Asset and Risk Management with Terraform Power, there are plenty of assets available within the market. “I believe that the Yieldco scheme is changing the dynamic of the market, and will remain strong for quite some time. In my experience, the market is smart enough to figure out new and innovative ways of developing that are the most cost efficient, so I do not expect there to be a stoppage in the development of assets anytime soon, even after the ITC steps down to 10% at the end of 2016.” 

Portfolio Evolution and Investments

Mr. Fernandez discusses how Terraform has developed over the last year, from starting with a fleet of solar only power plants, to then moving into other renewables, such as wind. “While we typically invest in projects in North America, Terraform also invests in power plants in the UK and Chile, as long as the assets have long-term contracted PPAs or FITs.

Mr. Hugh Kuhn,  Director of Technology at Macquarie Infrastructure Company (MIC), similarly discusses MIC’s investment position within renewables. “I came on board to help MIC with all things technical regarding their investments in renewable projects. I have watched first-hand the secondary market start to form, and have an untold number of excitement and fears about it.

Mr. Kuhn emphasizes that his enthusiasm for the secondary market stems from his background knowledge of module quality. “I worked with a number of module companies to develop a set of advanced tests to assist in the understanding of the long term durability and reliability of modules and projects called the Thresher Test. It was above and beyond the standard IEC certification test with the goal of allowing owners to really assess whether their modules are well built and should last for a long time.” The Thresher Test, which has been advanced considerably by NREL and the IEC, was established in response to the precipitously dropping price of modules, which resulted in the lack of quality of some modules.

Regarding Mr. Kuhn’s noted concerns about the secondary market, he mentions that “The real issue in the industry, which has existed since day one is that there remains a disconnect between developers, their designs and their selection of materials, as well as their construction materials specifications and workmanship standards vs. what long-term owners might assume was implemented.

Additionally, the solar industry has also not established any self-policing regulations regarding the materials of which modules are comprised, or even the manufacturing site of a specific module model number. As a result, projects may be built with modules with the same part number that end up acting very different in functionality over time due to subtle BOM differences or manufacturing process irregularities.

Technical Due Diligence

Technical due diligence is a key responsibility for both Mr. Fernandez and Mr. Kuhn. The reduction of the risk of cash flows is a vital part of their work. “What we look to understand are concepts such as the current status of the asset, and whether or not remediation needs to occur from the beginning. The more information we have about those assets, the easier it is for us to understand any type of probability factor that could play into the cash flow on a yearly basis,” reports Mr. Fernandez.

However, all of the information regarding the history of the assets is often not available, meaning the buyers are required to make assumptions. States Mr. Fernandez, “We do estimate the corrective maintenance costs and when they need to be implemented. We also estimate the future cash flows based on the weather forecast and the performance of the plant. The ideal seller is sophisticated, and has all the past performance information of the plant available for us to really verify what happened in the plant/s and project the production on a p50 p75 and p90 basis. But in some cases, when not all of the information available to us, we then need to fill the gaps on past production by looking at the variables and information that is available.

From a technical perspective, there are many components to examine in existing projects where ownership is going to change. The system’s performance is key, but also the number of inverter or tracking problems, and other things of this nature. One big question at the moment due to the recent news of various manufacture insolvencies is whether or not the components even still exist.

How do you mitigate against the fact that the manufacturer doesn’t exist anymore?” questions Mr. Kuhn. “This is not a bad thing per se, but you do need to have a plan intact for when this occurs. Also important is to analyse the construction of the plant during site visits. There are many ways to decide whether or not a site was put together properly or not, such as looking at combiner boxes to see where the conduit enters, or the wire management methods, for example.”

Challenges in Determining Asset Value

The driver is really how much electricity the system will produce over its remaining lifespan,” argues Mr. Kuhn. “The modules you possess have been in the field, so the systems have degraded somewhat. Reliable assumptions on degradation of the plant is most difficult. The starting point is crucial, and beginning by pulling a few modules from the field for revised testing is an ideal first step.

However, a large black hole remains in the system, which few are willing to openly discuss. The party line, so to speak, is that between 10-13 years, inverters will need to be replaced or retrofitted, though no one is certain what the number ought to be. “If you are just looking at the CAPEX of a new inverter,” continues Mr. Kuhn, “It is nothing in comparison to the headache of the actual installation and integration of the inverters. I worry about the electrical compatibility of future products with whatever the existing systems are doing at the time.

When complete project performance data is not available, it can prove difficult for buyers to move forward with their acquisitions. “Sometimes we do not have all the historical performance information on the project, so we have to adjust and make assumptions regarding what might happen in the future,” supports Mr. Fernandez.

There is not always an obvious explanation as to why inverters fail, leading buyers to speculate. More often than not, it is a result of a lack of O&M or a general lack of care, but there are many external factors impacting inverter damage, such as weather and overall plant performance that cannot generally be controlled. Mr. Fernandez asks, “The most difficult question is really, how does one figure out what one does not know about a specific project?

PV as an Asset Class

Both experts agree that solar PV still has a way to go before becoming an asset class. Mr. Fernandez admits, “There is a lot of movement in the market at present. And there are still a lot of ‘mom and pop’ shops that do not possess the technical background and it will take some time for there to get there.

Likewise, Mr. Kuhn agrees that there are too many variables to be worked out, such as off-taker contracts, before solar PV can be turned into an asset class. However he also believes that the PV market is so different from the other asset classes, in that half of the suppliers have gone bankrupt or do not support the product anymore. There is too much change that needs to occur before PV can transition to an asset class.