Lack of certainty holds back banks in solar project financing

Access to financing for the private sector is critical for government-led efforts in the UAE to foster the development of sources of clean energy.

Steve Perry, FGB’s global head of debt markets, right, at the Middle East Electricity show in Dubai. Antonie Robertson / The National
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Uncertainties over the creditworthiness of the solar manufacturing sector are holding back lenders from supporting investments in rooftop panel installation.

Access to financing for the private sector is critical for government-led efforts in the UAE to foster the development of sources of clean energy. Dubai aims to generate 25 per cent of its electricity from clean energy sources such as solar power and has launched the Shams initiative to install solar panels on every rooftop in the emirate by 2030.

Solar panel prices have fallen by 80 per cent since 2009, according to the Abu Dhabi-based International Renewable Energy Agency. And average electricity costs could decrease by 59 per cent for solar photovoltaics (PV) by 2025 compared with 2015.

However, concerns over the potential bankruptcy of panel manufacturers, particularly out of China, are deterring banks from lending to the sector.

Steve Perry, FGB’s global head of debt markets, said that bankruptcies are on the horizon because many solar equipment makers are selling products at a loss as they attempt to undercut competition. Before agreeing to lend, financiers will look at the product being sold and the associated warranties, which typically include a product guarantee for 10 years covering manufacturing defects and a performance warranty of 25 years.

“However, these warranties may be void after only two to three years if a manufacturer goes broke,” Mr Perry said at the Middle East Electricity show in Dubai. “Over the next three to four years, you’ll see acquisitions being done where the strong get stronger and the weak get weaker.”

Every manufacturer must maintain a cash reserve to cover warranty claims. However, when the majority of major solar PV module companies are in debt and allocate a significant amount of financial resources to service that debt, maintaining a warranty reserve is challenging, according to one solar manufacturer.

This results in manufacturers buying original equipment manufacturer (OEM) insurance to cover warranty obligations, which increases the costs of modules. “Buyer beware,” said Jenny Chase, a solar analyst for Bloomberg New Energy Finance (BNEF). “Most developers recommend spending extra on technical due diligence rather than backup insurance, which is available but expensive and hard to claim on.”

And this may not offer third-party rights, which allow affected asset owners to receive payments in case of the OEM’s bankruptcy.

“What’s more is that insurance-backed warranties effectively insert a third layer and additional fine print designed to limit payouts,” said a PV manufacturing executive who did not want to be named. This slows down the process, placing claims under more than if the manufacturer directly managed the claim.

Solar panels are made from silicon, and there is about 10 to 15 per cent more than needed in the market. Ms Chase said “there is capacity to make over 148 gigawatts of modules per year in a market of roughly 80GW, so module makers will suffer”.

BNEF said the price of the two main types of panels, mono and multi, has dropped between 10 and 12 per cent in only four months ending in December. However, Ms Chase said that it was not just the Asian manufacturers that were struggling. “Plenty of non-Chinese manufacturers have also gone bankrupt and failed to honour warranties. And the leading Chinese firms didn’t get ahead by letting their customers down more than the competition.”

In the UAE, Mr Perry said the pricing for electricity generated from solar and the cost of the equipment needed to do so should still remain at current levels or even slightly lower. However, if there are more smaller players, there is more risk, which needs to be priced into power tariffs.

Globally, there are more than 250 companies making solar modules and each put in expansion plans adding 18GW of crystalline silicon module capacity last year, according to BNEF.

lgraves@thenational.ae

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