In the clamour to win business installers are eagerly offering performance guarantees that may put their businesses at risk, writes Jeremy Chunn.

Despite the start-stall-stop-start-again nature of energy policy settings the renewables industry is ripping ahead. There are more accredited installers and system designers than ever before, on Clean Energy Council numbers, and 2018 was a record year for installed capacity: 1.55GW spread over 218,000 sites.

For now, it looks like a boom. That doesn’t mean installers are getting rich, however, and it doesn’t mean companies and households that invest in solar should be complacent about the value they are getting.

As they claw the market for more business, installers are tempting customers to sign by offering to guarantee system performance to what some say are extravagant levels.

The question is whether or not smaller installers are aware of the danger in promising too much. As ambition directs them towards bidding for bigger and bigger jobs, some may be inclined to promise more than bigger and wiser competitors are willing to risk.

The bait

The commercial and industrial sector saw record growth in 2018, with installed capacity of medium-scale solar systems (between 100kW and 5MW) growing by 80% to 230MW, the Clean Energy Council reported in April. As new entrants scramble to win business they are far too eager to offer guarantees without understanding the risks associated with them.

GEM Energy’s Jack Hooper says the biggest problem is installers guaranteeing the output of a product they didn’t manufacture. “It’s commercially insane.”

“We’ve seen companies offering 10-year performance guarantees that have only been in business five or six years,” says GEM Energy CEO Jack Hooper. “And they expect you to match it. Other [installation] companies just say, yeah, we’ll match it – they don’t sit down and look at what that actually means. Nobody’s sitting down and calculating the risk associated with offering the performance guarantees.”

Small companies that take on bigger and bigger jobs might get into trouble when a performance guarantee promises too much, Hooper says. He gives an example of an installation company offering 90% of the output figure from a feasibility report, which many sources EcoGeneration spoke to agree is common.

“Let’s assume you get a 5% shortfall per year – just 5% – and you’re obligated to pay the difference between the 85% and 90%,” he says. Over a 10-year term that 5% difference may see the installer lose money on the project.

“The biggest problem is we’re guaranteeing the output of a product that we don’t manufacture and we have no idea of the quality control behind it; so we’re out there guaranteeing the output of solar panels and inverters that we don’t make – that we just buy off the shelf and install. It’s insane, quite frankly. It’s commercially insane,” he says.

“It’s especially alarming considering reliability issues from a lot of inverter manufacturers at the moment. We’re guaranteeing the output of a product that we know is failing. And you’re forced to do it because you either offer what your competitors are offering or you don’t get invited to tender.”

In the dark

Consultancy SunWiz is considered to be the chief data collector for rooftop solar in Australia, but managing director Warwick Johnston says it’s hard to get an overall picture of what the average installation company is offering as a performance guarantee – if anything at all.

“Generally there is no standard and most customers are not sophisticated enough to expect [a performance guarantee],” Johnston says.

For most rooftop systems there are no performance guarantees, he expects, but as buyers become more sophisticated they are looking for anything that outlines surety of supply – and some tenders are now requiring performance guarantees.

“As we are seeing more power purchase agreements enter the market we are seeing more focus on the performance of the solar power system as being of importance to both parties: the vendor and the customer,” he says.

Solar is a competitive patch, with door-knockers and cold-callers hustling for business alongside long-term players keen to keep their reputations intact. As margins for residential systems are squeezed ever tighter, installation companies have gone out in pursuit of bigger game.

At solar training institution Global Sustainable Energy Solutions (GSES), director of operations and engineering Chris Martell says it’s important his students are taught how to weigh up a performance guarantee as they move from residential up to larger systems.

Chris Martell at GSES says performance guarantees can have an undesirable impact “if you get them wrong”.

“They [performance guarantees] can be impactful if you get them wrong,” says Martell. “It depends on what the customer is asking for and how risky you need to be. But in order to get an accurate number [for system performance] you really need an onsite weather station, so more often than not companies are guaranteeing the yield – the kilowatt-hour generation.”

Installers will arrive at an estimate of system output using software such as HelioScope or PVsyst, which will return yield estimates at various intervals of confidence. An installer might quote a yield range a system is estimated to achieve 50% of the time when bidding for a job, and then guarantee it for a yield range it is expected to achieve 95% of the time – which of course is a wider range.

Currency is kWh

It’s an indictment on the industry that some solar PV systems do not deliver what the customers were promised, says Green Energy Technologies director Kon Flaherty.

“The currency is kilowatt-hours,” says Flaherty, and there’s little reason someone who has forked out for a solar system shouldn’t be offered a performance guarantee that promises a certain amount of kilowatt-hours over a certain period of time.

In Flaherty’s experience the industry standard is to promise a kilowatt-hour production, normally around 4-5kWh per day per installed kilowatt, he says, or an amount based on a calculation using solar-modelling software such as Swiss-based PVsyst.

Queensland-based Green Energy Technologies offers performance guarantees for a minimum of 10 years, he says, and terms vary between systems. The company mostly installs systems under 100kW.

“Some large sites might have a lot of issues regards grid protection, export limitations and things like that,” Flaherty says. “There are sites that are more complicated; for instance if there is shading. You’d do a performance analysis of the system over time and then you could give them that kilowatt-hour over the 10-year period, for instance; so there could be a one-off guarantee of ‘x’ megawatt-hours production over the 10 years.”

Flaherty also puts forward a back-of-the-envelope multiplier of 4.2 times system size per year reducing at a determined rate for declining system performance, say 2% a year, over 10 years.

Clauses in a guarantee will usually cover variance associated with weather, among other things, he says, and performance is generally checked monthly and reviewed annually. “A client might compare a monthly bill with monthly production and see they are 10-15% down on what was expected, but then they may have had 15 rainy days that month.”

The oldest guarantee Green Energy Technologies has issued was written about eight years ago, he says.

Stefan Jarnason of Solar Analytics has worked on performance guarantees “on both sides of the ledger”.

Generation X

Performance guarantees differ between system size. At ground-mounted utility scale they are very common, says Solar Analytics co-founder and CEO Stefan Jarnason, who has written and mandated performance agreements himself “on both sides of the ledger”.

Typically, he says, the agreement is between an equipment supplier and financier or some other party where a premium is decided in cents per watt in return for a guarantee that a system will produce ‘x’ kilowatt-hours per kilowatt peak over the year. “It basically mitigates their risk that there is a major catastrophe or underperformance of the equipment that causes less energy to be produced,” Jarnason says.

There are always caveats in performance guarantees around the amount of installation and who’s repairing the equipment, “but that’s the premise of how the guarantee works”. The typical home system is around 5kW, commercial about 100kW, industrial about 1MW and large scale about 30MW, he says.

Installers make money by selling kilowatt-hours, and an energy guarantee – or performance guarantee – is essentially an insurance product that says if something goes wrong with a system that is not due to the weather, someone else will make up the shortfall of what the system owner would have earned in revenue from those kilowatt-hours that they didn’t make because it wasn’t working properly.

For utility-scale plants this guarantee is normally provided by the developer or whoever is managing the site, Jarnason says, and it is then backed up with the equipment manufacturers, who may guarantee up times, response times, efficiency rates and so on.

“To my knowledge, no-one is offering this in the residential space and it’s only a very small number who offer it in the commercial and industrial space,” he says.

Do as I do, or don’t

In business, you often have to follow the competition – and sometimes it hurts.

Hooper cites a recent pitch where GEM Energy offered a three-year performance guarantee only to learn two competitors had each offered 10 years. “I said no way we’re matching it,” says Hooper, who sat down with the tender manager and explained the situation. Once the manager understood the risk a 10-year guarantee placed on the installer, he turned around and asked: how are these other guys offering 10 years? “Because they’re thinking about your business next month and not what it means to them in five years,” Hooper tells EcoGeneration. “They’re just absorbing all this risk for short-term gain.”

It’s a worry. “I would be surprised if anybody is sitting down to do a risk analysis of what that performance guarantee means, especially now when profit margins are half of what they were three or four years ago – yet people have gone from offering one-, two- or three-year performance guarantees to 10 years. That’s half the profit and five times the exposure,” he says.

“It’s outrageous. It’s a risk. It’s going to leave a lot of people hurting in the future.”

The risk of offering a 10-year performance guarantee on an inverter that’s been on the market for six months “is insane”, Hooper says, as is the notion of small businesses in Australia offering guarantees on products made by multibillion-dollar companies based on the other side of the world. “It’s us, as the installer, who is taking all of the risk. But it’s what customers want, and everyone is just so hungry for business and for revenue at the moment they’re just willing to offer anything they want to get builds over the line.”

Transient businesses have long been a problem in solar and that’s unlikely to change. As performance guarantees get longer, and solar companies change hands as owners sell up and move on in good times, buyers of solar PV may be left to negotiate reparations for system underperformance with disinterested new owners of installation companies. It’s not a great way to continue a relationship.

Is it even worth it?

At utility scale, nearly everyone offers performance guarantees, says Jarnason at Solar Analytics, but the banks that finance such projects often pass it up. “Even at utility scale it’s an insurance product that, once you get your head around it, it’s questionable whether you want to spend that money – because the reliability of PV is fairly high.”

The reason it’s not offered in smaller situations is it’s harder to determine exactly how much energy will be produced – and there is less money involved with which to negotiate specific terms. Jarnason says the vast majority of 100kW solar systems sold last year would have included a five-year whole-of-system warranty. “All that means, though, is if your inverter fails it will be replaced free of charge,” he says. “You will not be recompensed for the energy you lost during the time it took to replace the inverter.”

Every system sold in Australia must include an energy estimation, and some installers will offer “a lowball guarantee of some form”, he says, and agree to pay up to ‘x’ dollars if a system doesn’t produce, say, 90% of that estimated energy. “But in order to get [the guarantee] you also have to sign an annual or five-year O&M contract,” he says. “Some of the bigger installers are doing that, but it’s still a minority. Residentially, it’s basically non-existent.”

Larger commercial systems are not covered by Australian consumer law, but residential systems are. They are sold with 25-year panel warranties, 5-10-year inverter warranties and 5-year whole-of-system warranties.

Under Australian consumer law it explicitly says if a system fails within the warranty period – five years – the supplier of the system has to “make good”, which means replacing the hardware and also paying for any loss of energy generation. “And I know of a number of companies who have paid on that basis,” Jarnason says, “even though there was no performance guarantee attached to it.”

The big question is: do owners of residential systems know anything at all about how their systems are performing? Sadly not, in all likelihood, unless they have an energy management system piggybacking on their system. That’s where Jarnason comes in. Solar Analytics hardware and software will tip owners of systems big and small off as soon as there is a quiver of suboptimal performance anywhere between the panel and plugs.

“We saved our customers 10GWh last year and got a number of our resellers to refund them money for systems they didn’t repair fast enough,” Jarnason says. “We can reduce the time it takes to repair a defective site from over 90 days to under 30 days.”

Solar Analytics is monitoring more than half of new systems over 100kW, Jarnason says, and the average ratio of actual performance to expected performance in the monitored fleet is “very close to 100%”.

SunWiz research shows about 50% of residential sites in Australia are underperforming; and average performance is estimated at 80%.

No standard, yet

Unlike some commonly-used binding agreements – rental tenancy agreements, for example – there is no government agency-issued template for solar system performance guarantees, says Flaherty at Green Energy Technologies. “Most performance guarantees are a legally binding document but there is not really a forum or facility for people to get some traction on that, other than the courts,” he says.

There is also the possibility a system owner will confuse the obligations of an installer with those of a manufacturer. A faulty panel will be replaced under manufacturer warranty, for instance, but there is no similar recourse offered by a manufacturer for production lows that have lasted months or years.

Lots of installers may have found themselves in trouble over the years for overpromising on the delivery of systems, but most won’t have delivered written performance guarantees. It’s especially true in a market where some installers are here today, gone tomorrow.

“A lot of companies will sell from Melbourne into North Queensland, for example, and those types of companies rarely offer a performance guarantee because they have no means to service that down or outage going forward,” says Flaherty. “Some of them will pay to get the system back online again if there is a fault, but rarely will they hold themselves accountable for the day-to-day delivery of that system.”

Experience counts

Installers at the big end of town have been working on multi-megawatt projects for long enough to understand the risk written into performance guarantees.

“You’ve got to manage your client’s expectations,” says David Naismith, chief commercial officer of Solgen Energy Group. “If you’re going to underbid on the project and then provide a performance guarantee, it’s completely incongruent – it doesn’t work that way. You’ve got to bid the real cost of the project and put a decent system in that you’re comfortable to warrant over the period through a performance guarantee.”

Solgen provides guarantees for its customers through an O&M agreement that has a premium for the performance guarantee. Some installers, Naismith suggests, may go in to a bid offering a higher output in return for a higher cost. But when they’re asked to guarantee the higher output, “that’s when the backpedalling starts”.

It takes integrity, and Solgen CEO David Brown says there are no shortcuts when it comes to delivering results to customers who have been burning serious money on rising energy charges and are spending serious capital on rooftop solar solutions. “You’ve got to invest in the capabilities and skills of your staff and the investigation of what you are actually underwriting,” Brown says. “It’s something we’re comfortable with, but we’ve invested heavily in the ability to make ourselves comfortable with that. Eleven years is a long time in this industry. The internal collateral builds, the knowledge builds – and we continue to invest in that.”

Solgen arrives at performance guarantee output estimates using PVsyst, “and then we’re all on a level playing field,” Naismith says. “You can’t have performance guarantees anchored in Excel spreadsheets.”

The software used to estimate output for photovoltaic systems takes in all manner of input variables – site orientation, soiling, irradiance, etc – but it can’t be expected to be perfect. Forecasting generation is an imprecise science, so what are the hopes of guaranteeing it? It’s especially tough when the technology changes from one year to the next.

“We are seeing some technology getting performance guaranteed that is brand new, like bifacial [panels],” says Martell at GSES. “That’s interesting to me.”