When True Green Capital Management LLC chose a solar panel maker for a rooftop installation in New Jersey, the firm’s biggest concern was whether the manufacturer would survive long enough to guarantee the equipment.
The New York-based private equity fund made its Chinese manufacturer buy insurance to back the 25-year warranty on its panels to close the contract. If the supplier went bust, PowerGuard Specialty Insurance Services of California would ensure the panels installed performed as promised.
“Frankly, we see insurance as crucial,” said Bo Wiegand, principal at the fund, who declined to name the supplier of the installation near Carteret, citing a confidentiality agreement. “Many of these companies, even some of the more recognizable name brands, likely won’t be operating in 10 to 15 years. They may get acquired, they may go out of business. We just don’t know.”
In the past year, lenders and investors started demanding extra protection from suppliers after at least 11 U.S., German and French solar equipment-makers failed, including Solyndra, backed by a $535 million U.S. government loan. The solar industry is suffering its biggest shakeout yet, beset with 53 percent production overcapacity and collapsing profit margins.
The industry’s turmoil means Munich Re, the world’s biggest reinsurer, and two Southern California rivals are playing a hand determining which panel-makers survive as First Solar Inc., (FSLR) Suntech Power Holdings Co. and competitors fight for orders.
Munich Re’s Stance
Munich Re as well as PowerGuard of Irvine, California, and SolarInsure Inc. of Costa Mesa, California, say they are among the few to offer the niche product and have turned away more than a dozen panel makers seeking coverage in the last year. The three companies say the majority of panel sales still take place without outside warranty insurance as most manufacturers don’t carry coverage. They declined to name which manufacturers hold policies.
“The Solyndra situation changed a lot in the sector,” said Ara Agopian, president of SolarInsure, which declined to sell coverage to Solyndra about a year before it went bust in September. “Developers and their lenders are asking who is insured and who’s not. Insurance helps in winning an order.”
Solar Frontier KK, a Tokyo-based thin-film panel-maker owned by the Japanese refining arm of Royal Dutch Shell Plc (RDSA), said its coverage from Munich Re gives it an edge.
“This is a weapon we were able to acquire ahead of competitors,” Senior Vice President Atsuhiko Hirano said in an interview, contending that his company may be the only Japanese panel-maker that’s insured. “Especially during a shakeout period abroad like now when it’s tough for companies to keep going, customers are concerned if manufacturers can follow through.”
Silicon Valley Cues
Solar manufacturers took a cue from Silicon Valley, from where many of the industry’s executives hailed, when they began offering warranties on panel performance similar to those offered by early silicon chipmakers, said Mike McMullen, founding principal at PowerGuard.
The warranties were intended to reassure investors that a new, unfamiliar technology would perform as expected on projects requiring big, upfront investments with payback periods that span decades.
Solyndra’s customers, which include PepsiCo Inc. (PEP) and Coca-Cola Co., may be among the earliest in the solar industry to learn such warranties in some cases may offer little protection after the company went bankrupt.
Solyndra’s modules, based on a unique cylindrical design that differed from traditional flat panels, came with a 25-year warranty that guaranteed its equipment would generate at 90 percent or more of peak output for the first 10 years and at no less than 80 percent for the remainder.
“Every time we have a bankruptcy, it opens up people’s eyes,” McMullen said. “There’s no component you can change out for Solyndra.”
Under accounting rules, manufacturers are required to set aside cash to cover expected warranty claims. Munich Re began offering manufacturers insurance after calculating such reserves are probably inadequate because even one serial defect, which usually span several production years, could potentially bankrupt a company.
“In recent months, one or two solar manufacturers have had to disclose warranty claims,” said Christian Scharrer, Munich Re’s head of green technology solutions. “There’s a clear need to manage the warranty risks balance sheet-wise.”
First Solar of the U.S., the largest thin-film panel maker, has seen warranty costs escalate after manufacturing defects from 2008 to 2009 prompted more than 5,000 customer claims, according to Angelo Zino, New York-based analyst for Standard & Poor’s. In February, it set aside $37.8 million for increased warranty claims, saying its modules may suffer “increased failure rates in hot climates.”
First Solar’s warranties are backed by reserves and the company sees no reason to use a third-party insurer, spokesman Ted Meyers said.
“If they go out of business, who has to eat that? Their clients,” PowerGuard’s McMullen said. “It’s not acceptable to say we have all this cash on the side to meet warranties because that could all disappear in bankruptcy proceedings.”
Agopian estimates that no more than 25 percent of the top panel makers are covered. Chinese companies are more likely to be insured than their U.S. or European or Japanese rivals, according to PowerGuard’s McMullen and Agopian.
Bloomberg News identified through interviews, statements and press releases at least eight companies that have purchased some form of third-party insurance. They include LDK Solar Co., Canadian Solar Inc. (CSIQ), China Sunergy Co., (CSUN) Japan’s Solar Frontier, Solairedirect SA of France, Taiwan’s NexPower Technology Corp., Signet Solar Inc. and SolFocus Inc.
Some of the largest such as First Solar aren’t covered, with many saying it’s not necessary as they’re financially sound. The Bloomberg Large Solar index tracking 17 companies in the industry slumped 75 percent the past year through May 22.
Customers of Suntech, the world’s biggest crystalline panel maker, don’t see the value in third-party insurance, Chief Commercial Officer Andrew Beebe said. Sharp Corp., (6753) Japan’s largest thin-film module maker, also doesn’t “see the need to be insured because we don’t foresee shutting our solar business,” spokeswoman Miyuki Nakayama said May 7 by phone. Kyocera Corp., (6971) Japan’s biggest crystalline panel maker, is focused on quality and doesn’t plan to get insurance, spokeswoman Sanae Iwasaki said May 8.
Make or Break
SunPower Corp. (SPWR), the second-largest U.S. panel maker, declined to say whether it was covered in an April 14 e-mail. Norway’s Renewable Energy Corp. said in an April 13 e-mail that it’s exploring third-party insurance.
Third-party insurance could make or break a deal that East West Bancorp Inc. (EWBC) is working on in Florida, said Don Danh, senior vice president of emerging markets at East West Bank, which set up a $47 million fund in February with U.S. Bancorp to finance 14 solar projects.
“It’ll be contingent on whether it carries insurance,” Danh said by phone on May 3.
With growing demand for protection amid speculation of further consolidation in the industry, insurance offerings are expanding.
Assurant Inc. (AIZ), a Phoenix-based supplier of homeowner’s insurance, began offering coverage this month that eases investors’ concerns about warranties being upheld. Munich Re introduced a new policy in January so that lenders and investors can buy their own coverage against supplier insolvency. Previously, Munich Re only sold policies to manufacturers and bankruptcies weren’t covered.
To contact the reporter on this story: Natalie Obiko Pearson in Mumbai at firstname.lastname@example.org
To contact the editor responsible for this story: Reed Landberg at email@example.com