Right Sizing Solar Risk

In Episode 16 of Power Players by Origis®, host Michael Eyman discusses the history and future trends of risk assessment and allocation for solar assets with Jason Kaminsky, co-founder and CEO of kWh Analytics. 

 

 

MEET THE PLAYERS

Jason Kaminsky is the co-founder and CEO of kWh Analytics, an MGA that offers specialty insurance products for renewable energy assets, including Property Insurance. Just prior to joining kWh Analytics, Jason spent more than three years as a Vice President of Environmental Finance at Wells Fargo Bank. As a senior member of the Wells Fargo deal team, Jason originated, underwrote, and financed tax-equity investments during a time when the bank added nearly $1bn of solar assets.

With twenty years of leadership and operations experience, Managing Director Michael Eyman ensures that Origis Energy Services’ rapidly growing solar and energy storage portfolio performs as projected for owners and communities.

Risk 

The solar industry continues to evolve as we see changes in federal legislation and gain learnings and data from the field. The primary goal of project finance is to distribute risk allocation appropriately, and insurance companies and other third parties are increasingly taking on a bigger role in underwriting risk from renewable energy facilities. 

Risk allocation in project finance was historically primarily negotiated between a banker and their developer, but today we are seeing more risk allocation among O&M firms and insurance companies. 

“Within a transaction, there’s obviously different players that could wear different risks,” explained Kaminsky. “You have the asset owner, I’ll call it the true equity, that, in theory, should see the upside when things go really well.  

“You have the lenders and the tax equity. I’ll sort of bunch them together as the downside risk participants. They have a capped upside, and they only see a problem if things go wrong.  

“You have third-party providers. You have an O&M provider, you have a service provider, you maybe have an insurance carrier. Someone’s getting paid to do a service. 

“And a lot of the art is how do you identify who can control that risk the best, who has the balance sheet to support that, and is willing to do it at a price that makes sense.” 

Mitigating Risk and Risk Allocation  

Kaminsky put the risk into two major categories on any asset: financial and physical.  

“On the tax structuring side, you always have tax equity in the mix,” said Kaminsky. “The other enabled feature of the IRA, the Inflation Reduction Act, is that you can transfer tax credits. So, now a solar product can take the PTC instead of the ITC. Historically, that was only available for wind. And you don’t even need tax equity. You could sell the tax credit, functionally, to a third-party buyer. 

“We’re seeing the tax insurance market really be robust, because if people are transferring tax credits, they want to make sure that any of that tax structure and risk is tailed off. If you’re a corporate buyer, and you’re taking this and solar is not your core business, you really don’t want to have a recapture event or a whammy on your balance sheet because you got something wrong.” 

That recapture event, or whammy, would happen if an asset is performing far below expectations.  

“You know, if you’re the CEO, saying, do I take a production tax credit for solar? Do I take the investment tax credit for solar? One is based off the amount of money I spend on the project. The other is based off the production of the asset. If I’m overestimating by 8% the amount of revenue or the amount of production tax credits that’ll be generated, I can make a grossly wrong decision that is going to have long-term impacts on the viability of that asset,” said Kaminsky. 

Moving from an investment tax credit model to a production tax credit model means that the accuracy of the models for the asset’s performance becomes critical.  

“There’s been some structural developments in the industry that have led the recipients of those production forecasts to insist upon more accuracy,” said Kaminsky. “But then also, those that are putting together the forecast have more tools, more data, maybe a little bit more freedom to say, you know, we’re trying to make them right-size for what we’re actually seeing happen in the field. So, I think it’s a positive development.” 

One of the biggest factors for determining forecast accuracy is modeling weather patterns accurately.  

Eyman gave context as to why this can be harder to quantify in a financial cycle, “We tend to look at these things, as humans, year to year, because we’re looking at financial returns, so we’re looking quarter by quarter, year by year.  

“But things like La Niña, El Niño, are four and five-year cycles. And so, you know, you’re looking at a weather model to play out over 20 or 30 years, you can easily see 2 or 3 years of deviations from the weather without there being anything wrong with your pyranometers or your model, simply because you’ve got long-cycle impacts. And that is true, particularly in the regions that we’re growing the most in solar today, right, in the south Texas through the Southeast.” 

Weather can also have a significant on the physical risk a site could sustain. For example, hail has the ability to take an asset offline or reduce production.  

However, Kaminsky said he thinks the industry in recent years has begun building and designing assets that are more likely to be able to withstand weather events. 

“I point to 2022 because that’s when some of the initial research came out about hail,” he said. “And I think RATC was at the front end of this, that if you tilt the module, you get a glancing blow, and glass doesn’t break as much. And that was the first of what has become a very robust set of research and industry practices about hail stow, and auto hail stow, and what tilt angle, and the well goes deep.  

“The modules we are installing today are very different than the modules we were installing 15 years ago. Like, they’re rectangles. Okay. And they have cells. But different glass, different frame thickness, different attachment methods, things that actually are important, and lead to different drivers of loss when they’re installed out in the field.” 

 Conclusion

Eyman concluded that insurance and the forces managing risk in the solar industry are “largely resulting in an overall industry move towards quality and reliability, transferability of the financial benefits, and being able to make sure that we really know what these assets are going to do over time. And I have to think that that’s good overall.”

Kaminsky agreed, “It’s a more sophisticated way, a more nuanced way of thinking about things than just dollar per watt. On the whole, better-quality assets should lead to better-quality financing, better-quality results for everyone involved.”

During their conversation, Kaminsky and Eyman discussed rightsizing risk assessment and allocation. Three key takeaways: 

  1. Risk for solar assets is being spread to more parties. It’s no longer just origination bankers and developers, but also insurance companies, O&M operators and tax equity buyers.
  2. Historically, solar projects have needed protection from physical damage and underperformance, leading to financial losses. New provisions in the IRA create a blending of these risks that have buyers demanding better models for production forecasts.
  3. More data on weather risk mitigation and asset production are improving those forecast models and creating an overall more reliable and resilient solar asset.

 

We’d like to thank our Power Players, expert guest Jason Kaminsky and host Michael Eyman, for their insightful conversation, giving context and perspective to the production models for risk assessment and allocation.

Resources

Solar Risk Assessment: https://www.kwhanalytics.com/solar-risk-assessment