NREL is a national laboratory of the U.S. Department of Energy, Office of Energy 

Efficiency & Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

Contract No. DE-AC36-08GO28308

Continuing Developments in PV 

Risk Management: Strategies, 

Solutions, and Implications

Travis Lowder, Michael Mendelsohn, and 

Bethany Speer

National Renewable Energy Laboratory

Roger Hill

Sandia National Laboratories

Technical Report

NREL/TP-6A20-57143

February 2013
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Contract No. DE-AC36-08GO28308

Continuing Developments in PV 

Risk Management: Strategies, 

Solutions, and Implications

Travis Lowder, Michael Mendelsohn, and 

Bethany Speer 

National Renewable Energy Laboratory

Roger Hill

Sandia National Laboratories

Prepared under Task No. SM12.3070

Technical Report

NREL/TP-6A20-57143

February 2013
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iii

Acknowledgments

The authors wish to thank Rachel Tronstein, Christina Nichols, and Joshua Huneycutt of the U.S. 

Department of Energy’s SunShot program and the Soft Cost Balance of System effort for making 

this analysis possible. Additionally, thanks go out to Karlynn Cory, Jason Coughlin, Jeffrey 

Logan, Robin Newmark, Sarah Kurtz, Dirk Jordan, and Keith Emery of the National Renewable 

Energy Laboratory (NREL) for their contributions and guidance. We would also like to thank 

our industry reviewers: Dr. Ulrich Bohnert of Munich Re, Catherine Grover of Luminate, Mike 

McMullen of PowerGuard, and David Williams, formerly of CleanPath and currently with 

Dissigno. 

This study was shaped by the invaluable insights of professionals from the photovoltaic (PV), 

risk management, and financial industries. The authors wish to express their sincere gratitude to 

these additional individuals: Teresa Chan and Bob Percopo of Chartis; Robert Courtney of 

Luminate; David Cox of D&M Insurance Solutions; Troy Dalbey of Upsolar; Allen Gelwick, 

Rose Calpine-Dewey, and Michael Davis of Lockton; Tom Hutton of New Energy Risk; Jason 

Kaminsky of Wells Fargo Environmental Finance; David Smith of PowerGuard; Christian 

Scharrer of Munich Re; Barney Schauble of Nephila Advisors; and Cindy Worthington and Eric 

Long of Wells Fargo Insurance Services. 

Finally, a special thank you to Mary Lukkonen from NREL’s Technical Communications Office 

for providing editorial support. 
iv

List of Acronyms

ASTM American Society of Testing Materials

BOS balance of system

CCIP contractor controlled insurance program

CGL commercial general liability

CIC captive insurance company

CIP controlled insurance policy

COPE construction, occupancy, protection, exposure 

DOE U.S. Department of Energy

ECD Energy Conversion Devices

EERE Office of Energy Efficiency and Renewable Energy

(DOE)

EPC engineering, procurement, and construction 

ESIF Electrical Systems Integration Facility

IEC International Electrotechnical Commission

ISO International Organization for Standardization

LCOE levelized cost of energy

M&C measurements and characterization

NCPV National Center for Photovoltaics (NREL)

NOTA Notice of Opportunity for Technical Assistance 

NREL National Renewable Energy Laboratory

O&M operations and maintenance 

OCIP owner controlled insurance program

OEM original equipment manufacturer

PPA power purchase agreement

PUC public utility commission

PV photovoltaic 

RAM reliability, availability, maintainability

RMS Risk Management Solutions 

RTC regional test center

SIT Solar Integrated Technologies

SNL Sandia National Laboratories

SPV special purpose vehicle

S&P Standard and Poor’s 

WACC weighted average cost of capital
v 

Executive Summary

Solar photovoltaics (PV), while not new technologies, have only recently begun to penetrate the 

U.S. energy mix at a substantial rate. The last three years have seen record growth for the PV 

industry, and, when accounting for the number of projects in the development pipeline, stated 

investor commitments, the inexpensive supply of panels on the market, and the renewable energy 

standard requirements of several states, it is likely that deployment will continue through the 

near-term.

As the PV industry matures, successful risk management practices will become increasingly 

important to ensure investor confidence, control costs, and facilitate further growth. This study 

discusses several key aspects of risk management during the commercial- and utility-scale 

project life cycle, from identification of risks, to the process of mitigating and allocating those 

risks among project parties, to transferring those risks through insurance. The study also explores 

novel techniques in PV risk management, options to offload risks onto the capital markets, and 

innovative insurance policies (namely warranty policies) that address risks unique to the 

PV sector.

One of the major justifications for robust risk management in the PV industry is the costreduction opportunities it affords. PV projects are currently subject to high financing costs, due 

in part to the market’s perception of the risks associated with: (1) investing in an industry that is 

still perceived to be in a relative stage of infancy; (2) arranging the complex financial structures 

often necessary to fund projects; and (3) the lingering uncertainty over PV asset performance 

over time, among other things. If the PV industry can demonstrate the capability to successfully 

manage its risks, thereby inspiring financier confidence, it may be able to obtain a lower cost of 

capital in future transactions. A lower cost of capital translates to a lower cost of energy, which 

will in turn enhance PV’s competitiveness at a time when it will have to rely less on subsidies1 to 

support its market penetration. Lower financing costs would also contribute to the achievement 

of the U.S. Department of Energy’s SunShot scenario, which envisions an installed system price 

for utility-scale PV facilities of $1 per watt by 2020 (DOE SunShot 2012a).

 

1 Both the 1603 Treasury grant program and the 1705 loan guarantee program expired at the end of 2011, though 

their effects are still influencing PV market dynamics as of this writing. Bonus depreciation of 50% in the first year 

of operation expires at the end of 2012 (though the modified accelerated schedule is available across industries 

indefinitely) and the 30% investment tax credit will revert to 10% at the end of 2016. The combined effect of 

expiring subsidies and uncertain renewals in 2017 has been a hindrance to long-term investment and corporate 

strategies for solar stakeholders.
vi

Table of Contents

1 Introduction........................................................................................................................................... 1

2 Analysis Objectives and Methodology............................................................................................... 3

2.1 DOE SunShot Initiative and the Interplay with Risk Management ................................................. 3

2.2 Methodology .................................................................................................................................... 3

3 PV Risk .................................................................................................................................................. 5

3.1 Technical Risks ................................................................................................................................ 6

3.1.1 Project Development Risks ............................................................................................... 6

3.1.2 Operational Project Risks .................................................................................................. 7

3.1.3 Non-Technical Development Risks .................................................................................. 8

3.1.4 Non-Technical Operational Risks ................................................................................... 10

4 Mitigation and Allocation................................................................................................................... 11

4.1 Technology and Vendor Selection ................................................................................................. 11

4.2 Site Selection ................................................................................................................................. 12

4.3 Selection of EPC Firm and Independent Engineer ........................................................................ 14

4.4 Surety Bonds .................................................................................................................................. 14

4.5 Project Financial Structure ............................................................................................................. 15

4.6 Cross-Collateralization of a Portfolio of Projects .......................................................................... 17

5 Insurance............................................................................................................................................. 19

5.1 Property .......................................................................................................................................... 20

5.2 Liability .......................................................................................................................................... 22

5.2.1 Umbrella Policies ............................................................................................................ 22

5.2.2 Controlled Insurance Programs ....................................................................................... 22

5.3 Warranties and Warranty Insurance ............................................................................................... 23

5.3.1 Manufacturer Coverage ................................................................................................... 24

5.3.2 System-Level Performance Warranty Policies ............................................................... 27

5.4 PV Insurance Costs ........................................................................................................................ 29

5.5 PV Insurance Market ..................................................................................................................... 30

6 Innovations and Opportunities in PV Risk Management ............................................................... 32

6.1 Weather Derivatives....................................................................................................................... 32

6.2 Catastrophe Bonds ......................................................................................................................... 33

6.3 Captive Insurance Companies ........................................................................................................ 33

6.4 Securitization as Risk Mitigation ................................................................................................... 34

7 The National Laboratories and PV Risk Management .................................................................... 37

7.1 Data Collection .............................................................................................................................. 37

7.2 Testing ........................................................................................................................................... 38

7.2.1 NREL Capabilities .......................................................................................................... 38

7.2.2 Regional Test Centers ..................................................................................................... 39

References................................................................................................................................................. 40
vii

List of Figures

Figure 1. General risk management strategy for the PV project cycle ............................................5

Figure 2. A surety bond arrangement ............................................................................................15

Figure 3. Typical PV project financial structure in the United States ...........................................16

Figure 4. The process of securitization ..........................................................................................35

List of Tables

Table 1. Technical Risks During Project Development and Potential Damages or Losses Arising 

From Those Risks ......................................................................................................................7

Table 2. Technical Risks During Project Operation and Potential Damages or Losses Arising 

From Those Risks ......................................................................................................................8

Table 3. Non-Technical Risks During Project Development and Potential Damages or Losses 

Arising From Those Risks .........................................................................................................9

Table 4. Non-Technical Risks During Project Operation Risks and Potential Damages or Losses 

Arising From Those Risks .......................................................................................................10

Table 5. Site Qualities, Considerations, Risks, and Possible Mitigants ........................................13

Table 6. Distribution of Risk to Project Finance Counterparties ...................................................17
1

1 Introduction

In 2010, the National Renewable Energy Laboratory (NREL) published an analysis on the 

challenges then inherent to insuring photovoltaic (PV) power projects. The analysis, titled 

Insuring Photovoltaics: Challenges and Possible Solutions,

2

 found that PV insurance costs may 

have been inflated largely because of the insurance industry’s unfamiliarity with PV technologies 

and the project development process, as well as the limited availability of historical operating 

data used to formulate underwriter models (Speer et al. 2010). 

It has been over three years since the research for that analysis was conducted, and in that time 

total grid-connected installed PV capacity in the United States more than quadrupled, topping 

5.1 GW in the second quarter of 2012. System prices across market segments have consistently 

fallen over the same period, with weighted average system costs plummeting over 45% since the 

beginning of 2010 (IREC 2010; SEIA/GTM 2012). 

As downstream investments in PV deployment continue to grow,3 and as PV comprises a larger 

portion of the energy mix, it is becoming increasingly important for stakeholders across the 

industry to understand the particular risks associated with PV and the most effective means of 

managing them. Anticipation and mitigation of PV risk is not only necessary from the standpoint 

of reliability and energy security; it could also play a significant role in reducing PV’s current 

high cost of capital. 

The risks of lending or investing in a PV project that influence its cost of capital include: 

• The PV market is still driven by temporary incentives that have expired or will expire at 

the end of 2016. This has created uncertainty about the long-term viability of the PV 

industry, which may limit investments going forward and prevent developers from 

project planning beyond the near-term. 

• Historical performance data for PV systems on which to base risk management strategies 

and investment decisions are difficult to access by market players, such as investors, 

insurance underwriters, and power purchasers. According to NREL interviews, reasons 

for this difficulty include the short time that most PV systems have been operational

(almost three-fourths of total PV capacity was installed in the last four years) and a 

tendency among system operators to guard performance data as proprietary. 

This study, produced in collaboration with Sandia National Laboratories (SNL), is an update and 

expansion of the 2010 NREL study (Speer et al. 2010). Instead of focusing directly on insurance 

in PV project development as did its forerunner, this study examines the more general field of 

risk management for commercial- and utility-scale PV.

4 The core of the study begins with an 

overview of the technical and non-technical risks inherent to the project development cycle 

 

2 See Insuring Solar Photovoltaics: Challenges and Possible Solutions, National Renewable Energy Laboratory 

report. Available at: http://www.nrel.gov/docs/fy10osti/46932.pdf. 3 It is likely that this growth will proceed at a somewhat reduced pace as the market effects of the expired 1603 

Treasury grant and the 1705 loan guarantee programs wear off (Mendelsohn et al. 2012) and as the expiration of the 

30% investment tax credit approaches.

4 Risk management for the residential sector is quite different from that at the commercial- and utility-scale. System 

owners in residential PV are usually either homeowners—which can cover their systems under a homeowner’s 

policy—or installation companies (if the system is leased), which often provide their own insurance.
2

(Section 3). Section 4 surveys several non-insurance risk management strategies common in PV 

project development, including due diligence practices, contract safeguards, and crosscollateralization. Section 5 examines the current state of insurance in the PV industry and 

includes discussions on the available coverage types, costs, and market size. Section 6 reviews

several innovative solutions for addressing PV’s unique risk profile, and Section 7 concludes 

with recommendations for the role of national laboratories in the PV risk management space.
3

2 Analysis Objectives and Methodology

2.1 DOE SunShot Initiative and the Interplay with Risk Management

The SunShot Initiative is a program of the U.S. Department of Energy (DOE) and is the locus at 

the federal level for supporting PV and concentrated solar power technology research, 

development, and demonstration. 

SunShot has identified several objectives for the U.S. solar industry, but its overarching goal is to 

aggressively drive the cost of solar energy down to a level where it is competitive—without 

support policies—with conventional forms of generation. To achieve this, the DOE is supporting 

private companies, academia, and national laboratories—including NREL and SNL—to lower 

the cost of PV-generated electricity by 75% between 2010 and 2020. SunShot estimates that, 

with such a steep decline in energy cost, solar power could fill 14% of U.S. electricity demand 

by 2030 and 27% by 2050 (DOE SunShot 2012a). 

Effective risk management practices in the PV project cycle can help to achieve this goal by 

driving a lower cost of capital and therefore contributing to soft cost reductions. Soft costs, the 

numerous project expenditures (including financing costs) additional to the module costs, can 

account for up to 30% of a PV project’s total price tag in the United States. Financing (i.e., the 

cost of capital) to develop a commercial- or utility-scale PV system represents a significant 

portion of this figure. One forthcoming NREL analysis calculated a weighted average cost of 

capital (WACC) for a PV project with a typical debt/equity split and yields at current market 

rates at 9% of total project costs. This analysis assumed a financial structure of 35% debt, 60% 

tax equity, and 5% sponsor (or developer) equity. The debt interest rate was set at 7.5%, the tax 

equity yield at 11%, and the return on sponsor equity at 15%. In the analysis results, tax equity 

accounted for almost 6.6% of the 9% WACC. Debt contributed about 1.8% (Mendelsohn et al. 

forthcoming). 

If developers can successfully demonstrate their abilities to manage the risks inherent to the 

planning, construction, and operational phases of their projects, PV investment may come to be 

regarded as less risky than current financing costs would suggest. Moreover, projects with robust 

risk management practices in place may be able to purchase insurance at lower risk premiums 

than current market rates. Decreasing both the financing and insurance costs for the PV asset 

class would put downward pressure on system soft costs, which will in turn drive down the 

levelized cost of energy (LCOE) of solar energy. A lower (and more competitive) LCOE may 

drive demand for PV installations in certain markets, thus contributing to the achievement of the 

SunShot Initiative’s deployment goals.

This study attempts to stimulate a dialogue between the PV, insurance, financial, and 

policymaking communities about the cost-reduction potential of PV risk management by 

highlighting current best practices and exploring potential solutions.

2.2 Methodology

The data and insights presented in this study were collected from a variety of sources. NREL and 

SNL have conducted a literature review on the subjects of PV, risk management, and insurance, 

which was used as a foundation for the analysis. This literature review was substantiated through 

a series of discussions with industry participants conducted from March until October of 2012. 
4

Interviewees included PV developers, module manufacturers, financiers, and insurance industry 

professionals (brokers, carriers, reinsurers, underwriters, and consultants) representing some of 

the major players in their respective industries. Some follow-up correspondences were also 

conducted, and all participants were given the opportunity to comment on a draft of the report. 

Because some of the information gathered is viewed as proprietary or sensitive, the identities of 

the companies and interviewees will not be tied to specific ideas presented in the here. 

Additionally, the authors have participated in several conferences related to this topic area, 

including: 

• Renewable Energy Insurance & Risk Management, November 8–9, 2011 Green Power; 

New York, New York

• Solar PV Asset Class Technical Working Group Q2 Update, June 25, 2012. SolarTech 

and CalCEF; San Francisco, California 

• SunShot Summit, June 13–14, 2012. Department of Energy; Denver, Colorado 

• Differentiating Quality PV, March 6, 2012. NREL SNL and Dissigno; San Francisco, 

California. 
5

3 PV Risk

There are a myriad of risks present in the PV project cycle. Some, such as construction risk, are 

confined to specific phases of development, while others persist throughout the entire cycle from 

planning through operation (such as default risk). Most project risks will be allocated to a 

number of the parties involved in the project’s development, and these parties will be responsible 

for a portion or all of the potential losses arising from these risks. A degree of uncertainty or the 

total maximum loss for an individual risk will not necessarily disqualify the whole project from 

acquiring investment as long as the other risks are demonstrated to be under effective 

management. For example, a project that uses a new technology or is sited in a location without a 

strong proven resource may be investment grade as long as other aspects of the project’s 

development are perceived as low risk. Tax equity investors may take on high-risk developments 

if they deem the expected return on capital to compensate for the level of risk. However, these

institutions are generally conservative and place greater value on project quality than on higher 

yields (Mendelsohn et al. 2012a). 

A typical risk management strategy during the PV project cycle can be segmented into three 

steps: (1) identify all project risks; (2) mitigate the risks and allocate them among the relevant 

project parties (allocation can itself be considered a risk mitigant); and (3) insure those risks that 

cannot be cost-effectively or efficiently absorbed by the project parties (see Figure 1). 

As shown in Figure 1, insurance is the smallest and bottom-most segment of the inverted 

triangle. Insurance is a transfer of risk away from the project and onto a carrier’s balance sheet5

 

5 In the case of PV warranty insurance, the carrier will actually underwrite the performance of a module 

manufacturer. This is a guarantee (much in the way that financial institutions can provide guarantees of payment by 

underwriting letters of credit, for example) and not a risk transfer.

Figure 1. General risk management strategy for the PV project cycle
6

in exchange for the payment of a premium that represents the probability and size of losses that 

could arise from that risk. This is an expensive method for managing project risks, and as such, it 

serves as a “last line of defense” for contingencies that have not been captured through the 

process of mitigation and allocation. Moreover, insurance coverage is typically available only in 

one- to two-year increments, after which time policyholders must renew. It is costly for project 

sponsors to continually renew policies, and they will typically try to minimize these payments by 

making sure that the policy covers only those risks that could not be absorbed by the project 

parties. Additionally, the sponsor will try to minimize the effects of future volatility in insurance 

costs on their project, as the lifetime of a PV system. In other words, the asset life of a PV 

project could extend 20 or more years, and if a sponsor must renew its policies every one to two 

years, it could be subject to price hikes that adversely affect project economics. 

This section focuses on the first step: identifying the risk. It provides an overview of PV project 

risks as divided into two categories: technical and non-technical. Both of these categories are

further subdivided into development stage risks and operational risks. The following tables are

not exhaustive but are instead meant to cover the major considerations. Ultimately, the risk 

profile for a given project will depend on the location, incentive regime, developer and/or 

sponsor, and capital structure, among other considerations, so a comprehensive assessment of PV 

project risks is something of a moving target.

3.1 Technical Risks

Technical risks are those that arise from the module, inverters, and other mechanical and 

electrical components, as well as system engineering, energy modeling, and installation.

3.1.1 Project Development Risks

The technical risks during the PV project development cycle (planning and construction) include 

various aspects of system design, resource estimation and validation, siting evaluations, and grid 

interconnection. Table 1 organizes major development risks by category and lists common 

techniques for mitigation. 
7

Table 1. Technical Risks During Project Development and Potential Damages or Losses Arising 

From Those Risks

Risk Considerations Potential Damages or 

Losses

Resource Estimation What level of confidence

should be applied to historical 

solar data? 

Resource-related 

production shortfalls

Debt service 

delinquency or default

Component Specifications

What is the performance 

history or specification of the 

selected product? 

Manufacturer 

insolvency

Serial defects

Infant mortality

System Design

How well is the system design 

integrated with the 

components? 

Does it ensure reliability, 

availability, and maintainability 

(RAM)?

Component failures

Production shortfalls

Forced downtime

Performance Estimates and 

Acceptance/Commissioning 

Testing

How well validated are the 

performance estimates?

What tests are done to confirm 

baseline performance?

Production shortfalls 

relative to estimates—

could stress debt 

service

Site Characterization

What is known and what might 

not be known about the site? 

What are the weather, water, 

geotechnical, and 

infrastructure conditions?

Environmental 

constraints/prohibitions

Infrastructure 

constraints

Transmission cost 

overruns

Transport/Installation Risks Are components shipped and 

installed according to best 

practices?

Equipment damage

delays

 

3.1.2 Operational Project Risks

The principal risk in the operational phase of a project is the uncertainty of energy production. If 

actual project performance does not meet the budgeted generation estimates, the project will 

generate less revenue from power sales, and the sponsor may experience difficulty in servicing 

its debts or earning its investors their returns. Production shortfalls can result from plant 

operation contingencies, such as component failures (serial and otherwise), latent defects, forced 

outages, module degradation, and resource variability. 
8

Table 2. Technical Risks During Project Operation and Potential Damages or Losses Arising From 

Those Risks

Risk Considerations Potential Damages or 

Losses

Operations and 

Maintenance (O&M) 

Risks

What are the component 

failure/reliability risks? 

Is there adequate availability of 

spare parts in inventory or rapidly 

available? 

What is the strength of the reliability 

assessment? 

What is the strength of the system 

design and production engineering? 

What is the production availability?

Are there equipment warranties? 

Are the manufacturers still able to 

service them?

How strong is the O&M provider?

Serial failures

Latent defects

High rates of 

degradation

Module delamination

Forced outages

Planned and 

unplanned 

maintenance 

downtime and costs

Manufacturer 

insolvency

Resource inadequacy

Off-Taker Infrastructure

Risks

Is the power purchaser adequately 

equipped to integrate solar power 

resources?

Curtailment

Inability of grid 

operator to handle 

variability

3.1.3 Non-Technical Development Risks

Two of the largest non-technical risks affecting PV projects are the (1) macroeconomic and (2) 

policy/regulatory environment that prevails in the market. The former determines capital 

availability, and the latter determines the facility with which financiers can commit that capital 

and the certainty that they can earn their returns. Both conditions can significantly influence the 

volume of development in a given year. Several of our interviewees from the insurance industry 

indicated that financiers are interested in risk transfer products that would protect against the 

financial risk of investing in an uncertain policy landscape. One broker said that he had worked 

with a lender who requested policy coverage for any shortfalls between the expected and the 

actual 1603 Treasury grant payout (in the end, however, no such policy was written). Our 

interviewees generally agreed that insurance against policy/regulatory risks is mostly unavailable 

in the U.S. market, though it is possible to write them on a manuscript basis (i.e., written 

specifically for the client), usually for a sizable premium. 

Almost all of the risks enumerated in both the development and operational tables below (Tables 

3 and 4) could affect the financier’s commitment to lend or invest and the hurdle rate they would 

require to do so. Financiers are depending on a project’s cash flows, and any risk to a project’s 
9

functionality or its revenues is relevant to their decision making.6 Both lenders and tax equity 

investors are known to be highly risk-averse.

Table 3. Non-Technical Risks During Project Development and Potential Damages or Losses 

Arising From Those Risks

Risk Considerations Potential Damages or Losses

Transmission/Distribution 

and Interconnection Are they available? At what cost? Cost overruns

Project delays

Developer Risk Experience with technology, project size, 

and type? Strength of balance sheet? 

Developer insolvency

Cost overruns

Project delays

Project abandonment

Power Purchase 

Agreement (PPA) and 

Pricing

Does the project have guaranteed 

revenues? Do project economics pencil 

out under-negotiated price?

Underbidding

Off-taker insolvency

Project does not secure PPA

Construction Risks

What are the possible losses/damages 

and their associated costs during the 

construction phase? What about damage 

to equipment during transport? Is the 

engineering, procurement, and 

construction (EPC) firm experienced and 

does it have a strong balance sheet? Will 

the project be completed on time and 

within budget? Are all the necessary 

permits in place? 

Injuries

Property/equipment damage

Fire

Weather and natural disasters

Cost overruns

Project delays

EPC solvency

Policy/Regulatory Risks

What is the public utility commission 

(PUC) ruling on the project and its utility 

contracts? How navigable is the 

permitting process? What type of 

government incentives are available and 

are they stable?

PUC rules against contracts

Incentives change/expire

Project delays

Cost overruns

Failure to access incentives

Failure to obtain permits

Insurability Can the developer access insurance? If 

so, at what cost?

Failure to obtain insurance

Insurance too expensive

Uncovered risks

Site Control Does the developer own the development 

location?

Failure to obtain site control and 

therefore financing, incentives, 

and other benefits

Project delays

Cost overruns

 

6 As an exception, construction risks are typically not borne by financiers but by the engineering, procurement, and 

construction (EPC) contractor, the developer, and the insurer. In the case of a loss from one of these risks, the 

project is compensated by payouts from the party that had responsibility for the risk. Therefore, the losses from 

construction risks—if the risks are properly covered or transferred—may not affect debt service or the paying of 

returns to investors. This would, however, not be the case if construction delays voided the effectiveness of the 

revenue agreements.
10

Multi-Contracting Risk Are risks clearly allocated to the various 

project parties through contracts?

Uncovered losses

Lawsuits

Commodities Risk

Are the commodities necessary for 

project construction (e.g., steel, silicon) 

available at sustainable cost and are their 

supply chains secure?

Price volatility

Unavailability of necessary 

materials

3.1.4 Non-Technical Operational Risks

While the technical operational risks listed above are mostly related to a project’s power 

production, the following non-technical operational risks are associated with a project ability to 

sell power and maintain its economics throughout its lifetime. 

Table 4. Non-Technical Risks During Project Operation Risks and Potential Damages or Losses 

Arising From Those Risks

Risk Considerations Project Losses or Damages

Credit/Default Risk

Do production shortfalls threaten the 

project’s debt service? Is the sponsor’s 

balance sheet strong enough to cover these 

shortfalls?

Developer/sponsor default

Developer/sponsor insolvency

Power Purchase Price 

Risk

Is PPA price high enough to address 

project costs? Are regional power prices 

going up or down, or are they stable? Are 

PV installed costs trending down?

Price makes completed project 

uneconomic

Market prices for PV systems 

decline, making project 

uneconomic in the future

Regional power prices decline, 

making PV project uneconomic

Off-Taker Risk

What is the creditworthiness of the power 

purchaser? Will they uphold their end of the 

contract?

Off-taker insolvency

Curtailment

Duration of Revenue 

Support

Debt duration (tenor) no longer than PPA 

minus 2 years, shorter based on risk 

perception

Remaining debt without revenues

Insurance

When insurance must be periodically 

renewed, how do cost uncertainty and 

future price increases affect project 

economics? Is the insurance required by 

the project documents commercially 

available? Does policyholder fully 

understand terms of coverage? Can they 

navigate the claims-making process and 

will insurance company pay out?

Uninsured losses or damages

Unsuccessful claim

Changes in policy costs make 

project uneconomic

Weather and Resource 

Risk

How does the weather and resource quality 

affect power generation? Is the project 

meeting its targets? What is the likelihood 

of a catastrophe? Is the property insured for 

capital replacement or business 

interruption? 

Resource-related production 

losses

Sponsor default

Catastrophes and force majeure

events

Unsuccessful claim
11

4 Mitigation and Allocation

After the various project parties identify the risks of their enterprise, they begin the process of 

mitigation and allocation (the second step in the inverted triangle). Many solar PV project 

structures are arranged to divide risks and assign them to the least-cost buyer (i.e., the party that 

can best address a given risk on behalf of a project). This section surveys some of the methods 

that project teams employ in mitigating and diversifying risk exposure among parties.

Because there are multiple parties and contracts in the project development process, developers 

must understand which parties hold what risks and to whom they can place a claim if losses are 

incurred. If the contracts are not clear and responsibilities remain ambiguous, the developer may 

not be able to recoup actual losses from other project parties. Moreover, extensive legal battles 

could ensue that could drain time and capital. Thus, multi-contracting can represent a risk unto 

itself and should be managed carefully so that all identified risks are assumed by the proper 

parties.

4.1 Technology and Vendor Selection

PV modules comprise the majority of a project’s hardware costs. This, in addition to the fact that 

the modules are the actual revenue-generating components of a PV system, makes manufacturer 

and module selection a paramount risk-mitigation strategy. 

The progressive contraction of the manufacturing base since 2011 has also prompted financiers 

and developers to consider the vendor’s strength of balance sheet in addition to the quality of 

product. An industry-wide compression of profit margins and an oversupply of panels (which has

seen little relief from the global pace of development) has led to some 24 PV manufacturer 

insolvencies or bankruptcies in the United States and Europe (at least 4 were U.S. companies) 

and over 50 in China (Goossens 2012; Wang 2012a). As a result of this shakeout, financiers and 

developers have fled to quality in the manufacturing base, choosing almost exclusively from a 

list of what one of our interviewees described as “Tier 1” or “bankable Tier 2” suppliers. These

tiers might be further described as:

• Tier 1: Large manufacturers with global reputations, several successful utility-scale 

projects operating within the United States, and strong balance sheets 

• Tier 2: Smaller manufacturers with global reputations and reasonably strong balance 

sheets; these projects are getting financed in the United States but most likely via foreign 

investors and lenders 

• Tier 3: Manufacturers without strong reputations or balance sheets; these manufacturers 

may have trouble being financed in the United States. 

According to several interviewees, Tier 2 and Tier 3 manufacturers may opt to purchase 

warranty insurance to improve their perceived ability to be financed. This type of coverage can 

serve as a stamp of approval from a trusted authority (the insurance carrier) or at least an 

indication that losses can be recouped in the event that the manufacturer cannot stay solvent long 

enough to honor its warranties. See Section 5.3 for more on warranty insurance policies. 
12

4.2 Site Selection 

Careful selection of the project site during the development process can serve as a powerful risk 

mitigant. The quality of the resource, the frequency of catastrophic events (e.g., earthquakes and

floods), and access to transmission are major risks that are largely dependent on location. 

Choosing a site with favorable conditions for project performance is a big step toward making a 

project financeable and insurable (at least at a reasonable cost). 

Table 5 lists the different qualities of a site that developers should review in making their 

selection, as well as the considerations and risks inherent to those qualities. 

Module Quality and Bankability

While bankability can have variable definitions in the solar industry depending on the 

stakeholder (e.g. lender, equity investor, or developer), generally the term is used to describe 

the extent of project’s financial risk (Hampl 2011; ABB 2012). While there are numerous 

project factors that comprise a bankability assessment, modules are perhaps the most 

significant material consideration—both because they represent the most expensive capital 

expenditure and because they are the sole revenue generating assets of the project (Hampl 

2011). It naturally follows then, that module quality is of paramount importance to financiers, 

whose principal interest in the project is to make their return on investment. 

According to several PV industry stakeholders, module quality has, however, been slipping 

recently (Wang 2012b; Williams 2012). As panel-makers compete for orders in a global 

market of depressed prices and cost-per-watt mandates, some companies have employed 

lower-cost, lower-quality manufacturing processes and materials in an effort to recapture 

some of their eroding margins (Wang 2012b). Resulting product defects—pronounced in 

some brands and present to some degree in many others—have damaged general confidence 

in module quality across the PV industry. Moreover, this is coming at a time when financiers 

are becoming increasingly reliant upon module quality to safeguard their investment, as 

recourse to product warrantees has become uncertain amidst a wave of manufacturer 

bankruptcies (see Section 5.3) (Williams 2012).

There has been some discussion in the PV industry about implementing quality assurance 

standards, which could help to reduce incidents of component failure and repair investor 

confidence. Currently, PV modules are only required to meet a set of standards from the 

International Electrotechnical Commission (IEC) and the Underwriters Laboratories (UL) 

before they can be sold, but these standards do not necessarily address the issue of quality 

(Speer 2011a). For this, additional quality tests are available and may become increasingly 

necessary for manufacturers looking to sell their products in a highly competitive marketplace 

that is becoming ever more focused on quality. 
13

Table 5. Site Qualities, Considerations, Risks, and Possible Mitigants

Aspect of Site 

Selection Considerations Associated Risks Examples of Mitigation Techniques

Solar resource

Global horizontal irradiation,

annual and inter-annual 

variation, impact of shading

Under-performance; overperformance7

Performance guarantee,

weather derivatives, 

sophisticated and sitespecific resource 

assessments

Local climate

Flooding, high winds, snow,

extreme temperatures Damage or destruction of 

plant

Catastrophic insurance,

performance guarantee (to 

protect against degradation)

Available area 

Area required for different 

module technologies, access 

requirements, pitch angle, 

minimizing inter-row shading

Difficulty accessing site, 

lower-than-expected 

production

Engineering assessment 

(conducted by EPC)

Land use

Land cost and

environmental sensitivities, 

impact of other land

users on the site, 

decommissioning

Increased construction costs

Legal and environmental 

assessment, liability 

insurance

Topography

Flat or slightly south-facing 

slopes are preferable for 

projects in the northern 

hemisphere

System performance,

system damage (e.g., are 

the panels positioned to bear 

more or less extreme 

weather or be subject to 

wind loading)

Engineering assessment 

Geotechnical

Including consideration of

groundwater, resistivity, 

load-bearing properties, soil

pH levels, seismic risk

Damage or destruction of 

plant

Engineering assessment, 

catastrophic insurance 

(earthquake)

Accessibility

Proximity to existing roads, 

extent of new roads required Difficulty or inability to 

access site Engineering assessment

Grid connection

Cost, timescales, capacity,

proximity, availability

Constrained operation,

infrastructure modification, 

costs

Legal assessment of market 

rules and constraints, 

engineering assessment

Module soiling

Including local weather,

environmental, human, 

wildlife factors

Under performance,

increased maintenance, 

potential increased 

degradation

Site evaluation, module 

maintenance

Water 

availability

Availability of reliable supply 

for module cleaning

 

System under performs, 

reduces revenue

Engineering assessment,

legal assessment, 

environmental assessment, 

O&M contract with original 

equipment manufacturer 

(OEM) or third party

Source: Miller et al. 2011

 

7 Over-performance is a risk to developers and investors as there is the potential for a less-than-optimal return if

actual performance had been better accounted for in, for example, the power purchase agreement. In such cases, 

revenues are considered as “left on the table” and are not efficiently captured.
14

4.3 Selection of EPC Firm and Independent Engineer 

Solar PV equipment manufacturers do not typically provide construction services; therefore, 

another party is needed to lead the construction of the plant. Often, the project investors turn to 

EPCs to provide turnkey services. Careful selection of the EPC can help to convince investors 

that the project will be completed on time, on budget, and according to all the specifications of 

the contract (i.e., that faulty materials or workmanship will not hinder the operation of the 

project). As with vendor selection, developers and investors will judiciously select EPCs, 

looking for firms with proven track records, strong balance sheets, and experience with the 

negotiations process. Many of the risks during the construction phase can be mitigated through 

clauses in the EPC contract that clearly allocate risks. EPCs and developers may also take out 

builder’s risk insurance policies to cover their operations during construction. When explaining 

their rating criteria for MidAmerican’s Topaz solar bond issue in March 2012, Standard & 

Poor’s cited the strength of the EPC contract (more than the credit quality of the contractor, First 

Solar) as one of the elements that warranted a BBB- rating8 (Standard & Poor’s 2012). 

The independent engineer is responsible for assessing the project’s various contracts, 

construction plans, technology, system design, and other aspects of the project. These entities 

serve to identify risks and assess the quality of the project’s construction plan in reports they 

compile for the financiers.9

 A strong independent engineering team will not only provide 

valuable insight on a project’s risk exposures and the possibilities for mitigation, but can also 

contribute to the project’s financeability by certifying its quality and attracting additional 

investors. Independent engineers typically do not take on any project risk. 

4.4 Surety Bonds

It is a common practice in the construction industry for the EPC firm to obtain a guarantor 

(known in this arrangement as a “surety”) that will back its performance on the project contract. 

This serves to protect the contract counterparty (known as the obligee—in this case the developer 

or sponsor) in the case that the EPC firm does not meet its obligations.10 When this happens, the 

obligee will receive compensation in the amount of the bond (the penalty) from the surety if the 

EPC firm (the principal) breaches its contract (see Figure 2). Alternatively, if the EPC fails to 

deliver on the terms of the contract, the surety may elect to fund another EPC firm if this cost is 

less than the penalty. 

While the principal is the purchaser of the bond, the obligee is the beneficiary. Sometimes the 

surety (which is typically an insurance carrier) will require the principal to set aside funds or 

collateral in the amount of the total maximum loss of the bond. In all cases, the surety has the 

 

8 This rating is the lowest tier of “investment grade.” Receiving a rating of BBB- or above (Moody’s Baa3 and 

above) allows bonds to transact at lower interest rates and also increases its value as a form of capital (which means 

that banks can use it as higher-tier reserves under their capital requirements). 9 Independent engineers are hired by banks to help assess a project’s financial risks, typically before the banks reach 

financial close with the developer. When hired before the financial close, the independent engineer is called the 

“lender’s engineer”—it is not until the project begins construction that the “lender’s engineer” becomes the 

“independent engineer.” Third-party assessors can also be hired by project sponsors, but in such cases they are 

referred to as the “owner’s engineer” and do not serve the same functions as the independent engineer. 

10 In lieu of a surety bond, project owners can hire a construction risk management firm to implement due diligence, 

system performance, and funds-control protocols that identify risks and off-load them to the appropriate party 

(Speer 2010).
15

right to seek recovery of its funds should it be required to payout to the obligee against the 

failures of the principal (Vaughan et al. 2003). 

One interviewee for this study said that sureties are generally reluctant to support project 

contracts that extend beyond three years (which can include construction and one to two years of 

EPC warranty coverage). While there are some five-year bonds in the market, these are almost 

exclusive to principals with strong financials. 

Surety bonds (also called performance bonds) differ from insurance in that they are constituted 

by a three-party contract (surety, principal, and obligee), whereas insurance contracts are only 

two-party (insurer and insured). Moreover, the surety generally does not expect losses from their 

bond and will only issue them to trusted principals with dependable track records (generally, a 

single bond claim could entirely prevent an EPC firm from obtaining surety bonds in the future). 

In contrast, when providing insurance to customers, carriers generally expect some degree of loss 

from their policies (Vaughan et al. 2003). 

4.5 Project Financial Structure

In a renewable energy financial structure, the stream of benefits and project risks is allocated to 

the different owners (equity investors) and lender(s) (if there is debt at the project level), often

via a complex and lengthy negotiation process. The total benefits can generally be distinguished 

as tax benefits and cash benefits, both of which are allocated based on the ability of each investor 

to utilize them. Solar project finance in the United States is designed to maximize the value of 

the tax benefits offered by the federal government and relevant state government, if applicable.

Figure 2. A surety bond arrangement
16

This is known as tax equity investment.11 Financial structures designed to induce tax equity 

include: 

• Partnership flips (either “all equity” or “leveraged” with debt)

• Lease structures (including “inverted” and “sale leaseback”) (Mendelsohn et al. 2012b). 

In addition to making efficient use of capital and incentives, another key purpose of these 

financial structures is to distribute project-level uncertainties to the party that is most willing and 

best suited to take the risk. See Figure 3 for a high-level representation of a project financial 

structure.

Beyond the direct financing of a project, other risks are allocated among various parties 

associated with project development, construction, and operation, including the power purchaser, 

EPC contractor, equipment supplier, facility operator, and insurance carrier(s). These parties are 

represented by the green blocks in Figure 3, and the contracts executed between them and the 

project entity (which serve to allocate risk) are represented by the two-way arrows. Table 6 has a 

more in-depth description of these risk allocations and the mitigation strategies available to 

each party.

Figure 3. Typical PV project financial structure in the United States

Adapted from Mintz 2012

 

11 Tax equity can be more accurately described as a mezzanine product as opposed to actual equity, more senior to a 

developer’s equity investment and thus first in line to receive a return on investment. However, project debt, if 

applicable, is more senior to the tax equity investment.
17

Table 6. Distribution of Risk to Project Finance Counterparties

4.6 Cross-Collateralization of a Portfolio of Projects

Cross-collateralization is a technique employed by large lenders to hedge against production 

shortfalls (and hence debt service defaults) from PV projects in their loan portfolio. This 

bundling of collateral makes sense for renewable energy projects, which commonly use nonrecourse financing structures, which precludes lenders from seeking recourse from other projects 

owned by the developer. Cross-collateralizations are arranged between lenders and developers 

and can include both construction debt and term debt within a portfolio of projects (Speer, 

forthcoming).

Not all project financiers benefit equally from this technique. Most renewable energy projects 

involve debt and equity. Cross-collateralization primarily benefits the debt provider (i.e., the 

commercial lender) who will have first recourse in the event one or more projects within a given 

portfolio go under. Providing collateral across projects may not bring down the cost of financing 

for the developer’s projects, though it can influence a lender’s decision to extend debt to that 

developer. That is, lenders may find additional comfort from increased value of the collateral, 

thereby lowering the overall risk profile of the loan (Speer, forthcoming). 

Equity investors are, however, at additional risk if their project is cross-collateralized, as the 

failing of one project could hinder their ability to earn the targeted return on an otherwise 

unrelated investment. Furthermore, if projects within a loan book have linked revenue streams, it 

may be difficult to securitize the cash flows in the future (see Section 6.4). 

Cross-collateralization may be best applied to a portfolio of projects with some variety of 

technologies and applications to further diversify risk. For example, the portfolio could include 

both rooftop and ground-mounted projects in diverse locales using various types of modules and 

other system hardware. One interviewee who works for a lender’s engineer said that ideally 

collateralized portfolios include projects in the 1-MW-or-less size, in a pool of up to 15 to 

Party Primary Risk Risk Mitigation

Utility/

Power Purchaser Power is not provided, grid reliability Resource planning, careful contracting with projects

EPC Contractor Project not built or completion delayed, late 

project completion

Construction best practices, surety 

bonds, insurance

Equipment 

Supplier

Takes risk of equipment failing or not 

performing to pre-agreed specifications per 

the warranty agreement

Manufacturing quality assurance 

standards, product testing, warranty 

insurance

Facility Operator Project repairs or replacements

If the module manufacturer is the 

O&M provider, quality assurance 

standards in manufacturing process

Lenders and 

Investors

Project default or developer/sponsor 

insolvency

Guarantees, contingency budgets,

careful developer selection

Developers and 

Sponsors Default or insolvency

Secure contracts with counterparties 

to insulate from risks and potentially 

terminal losses, reserve accounts to 

cover production shortfalls, insurance 

and financial hedges to cover 

performance
18

20 MW. This allows for a larger number of projects within the portfolio (e.g., 15 to 40), thereby 

reducing the risk of recourse from any one project to the others. Cross-collateralization could be 

used for either construction or term debt. 

There are several parties who must agree to the cross-collateralization, including the investors, 

off-takers, and perhaps other counter parties (e.g., REC purchasers). One interviewee related 

how a certain project on which the interviewee served as a lender’s engineer had a power 

purchase agreement (PPA) that required that the project stand alone. Thus, it was contractually 

ineligible for cross-collateralization with other projects within the developer’s portfolio. In cases 

where projects receive debt from a club of banks (a “club deal”), the difficulties of coordination 

across lenders could also prove a barrier to cross-collateralization
19

5 Insurance 

Insurance is the last line of defense in the risk management inverted triangle. At this stage, the 

remaining risks that cannot be efficiently and cost-effectively mitigated and allocated among the 

project parties are transferred, for a premium, to an insurance carrier. Because transferring risks 

away from the project is costly, insurance is reserved for only a select few risks.

Generally, PV project developers are required to have their projects insured with property and 

liability coverage. Property and liability are commoditized lines of insurance and are required of 

most commercial enterprises, especially ones that involve construction. Additionally, a PV 

project may be required to purchase specialized policies, such as commercial automobile, 

workers compensation and employer’s liability, crime, pollution liability, marine, and delay in 

start-up (note: not all of these policies will be required of every project). 

A project’s insurance requirements (including types of coverage, minimum level of coverage, 

and minimum rating of insurance carrier) will be specified in the PPA, the interconnection 

agreement, the lease, and other project contracts. Importantly, project financiers can require a 

project’s developer or sponsor to purchase additional coverage if they do not feel that the project 

risks have been adequately addressed. However, while they can compel a project to purchase 

additional coverage, financiers cannot relieve a project of any of its insurance obligations as 

specified in the project contracts. 

The above-named policies are designed to cover the general exposures of many commercial 

operations, but PV projects have unique risks that these policies may not address. Some industry 

participants anticipate that as PV risk management matures, and as the insurance industry 

underwrites more policies for PV customers, more tailored insurance coverage will become 

available (Economist Intelligence Unit 2011). This has already happened to a certain degree with 

the advent of warranty insurance coverage (see Section 5.3). 

Before proceeding into the following subsections, it is instructive to clarify the following terms, 

as they are applied in various contexts throughout the remainder of this study:

• Risk is a condition in which there is a possibility of an adverse deviation from a desired 

outcome that is expected or hoped for—in other words, the possibility of loss. 

Underwriters calculate the probability of a loss occurring for a given risk and price the 

premium accordingly. 

• Loss is the unintentional decline in—or disappearance of—value due to the occurrence of 

a peril. 

• Peril is the cause of a loss (i.e., the event insured against) (Vaughan et al. 2003). 

• Indemnity is the restoration paid to a victim of a loss up to the total cost of that loss 

(IRMIa).

• Replacement cost, when referring to the entire project, is the cost to replace all project 

assets with similar materials (also referred to as the total asset value of the project).
20

5.1 Property

Property insurance covers direct damage or loss to the property of the named insured by 

defraying the costs of repair or replacement. It is a “first-party” insurance, which means that it 

covers only the policyholder and his/her property. Liability insurance is, by contrast, a “thirdparty” insurance because it covers the wellbeing and property of people unnamed in the policy, 

provided they incurred damages or losses while working on or with the property of the 

policyholder (Head 2009). 

Typically, a property policy will sit at the project level and only cover losses or damages on the 

project that it insures. Conversely, liability insurance will usually sit with the parent company 

(i.e., the developer) as a master policy from which coverage flows out to individual projects 

under the parent’s umbrella. 

During the construction phase, project developers/sponsors have the choice to retain their own 

property insurance policy or to require the EPC to purchase property coverage. In some cases, 

developers/sponsors may choose to remain insured under their own property policy even if the 

EPC is required to purchase insurance. One interviewee stated that insurance professionals 

typically advise project owners to insure their projects’ property risks under their own insurance 

policy. This allows the owner greater control over the policy and claims-making process and can 

afford better understanding of policy terms.

Property insurance is referred to as “builder’s risk” insurance during the construction phase. If 

the developer/sponsor is the named insured on the project’s property policy—and if the 

insurance company allows them to do so—property policies may be convertible from the 

construction phase to the operational phase. In the operational phase, the property policy will 

primarily cover interruptions to business income (these policies are referred to either as business 

income or business interruption insurance).

Common perils insured against under a property policy include some natural disasters (e.g., 

hailstorms or lightening strikes), fire, mechanical failure (covered under a sub-policy called 

equipment breakdown insurance), construction mishaps, and other events that may damage the 

physical property of the project. Potentially high-loss catastrophes such as earthquakes and 

floods can be insured under property policies, but this is typically only done with high premiums 

and a limit that does not cover the full replacement value of the property. 

Due diligence in siting a PV project so that it is not built in an area that is historically flood or 

earthquake prone may save a developer a great deal in insurance costs, which, in some cases, 

could render a project uneconomic. However, it is sometimes the case that the regions with high 

catastrophe risk are also the most economic locations to construct commercial- and utility-scale 

PV projects (for example, California and Florida). One interviewee stressed that in such cases, it 

is important for the developer to model their catastrophe risk exposure12 and use the results to 

negotiate more favorable terms with their insurers and financiers. 

 

12 One of the industry standards for catastrophe risk modeling is the Risk Management Solutions (RMS) model, 

which is currently available in its 11th version.
21

Property policies can be written on a “named-perils” basis or on an “all-risks” basis. The former 

covers loss only from a set of perils that are specified in the terms of the policy; the latter will 

cover losses from all perils except any that are explicitly excluded in the policy documents. 

While some all-risks policies may come with an extensive list of exclusions, they are generally 

considered more comprehensive in their coverage and, importantly, they shift the burden of 

proof onto the insurance company in the case of a contestable loss (Head 2009). According to 

one interviewee, all-risks policies have become the standard in PV project insurance, as 

financiers are generally reluctant to accept named-perils structures.

Moreover, property policies can insure against direct losses (those incurred from direct and 

immediate damage to the insured’s property) and indirect losses (those resulting from the 

property damage and not from the perils themselves). Indirect losses are usually characterized by 

adverse effects to a business’s income stream as a result of: 

• Damages to functionality of the asset base

• Extra expenses accrued from continuing to conduct operations at an alternative facility

• Project completion delays on time because of damages incurred during construction. 

The three policies that cover these forms of indirect loss are, respectively:

• Business interruption insurance 

• Extra expense insurance

• Delay in start-up insurance (also called as delayed completion coverage). 

These are known as “time element” insurances because the amount of the loss depends on how 

much time it takes to repair or replace the property that is damaged. 

When purchasing property insurance, developers/sponsors must choose the basis upon which to 

value the policy. That is, should the policy be priced on—and the limits set by—the replacement 

cost or the actual cash value of the project? If the developer/sponsor chooses the cash value, 

depreciation is factored in and deductions can be taken against the policy cost. However, though 

it may cost more, the replacement cost basis is generally the preferred valuation (Head 2009).

Developers/sponsors may also consider probable maximum loss analyses of their project 

portfolios in determining what kinds of insurance they require and how they can save on 

insurance costs. For example, if a developer/sponsor sites two different projects on two different 

fault lines in two different areas of the United States, they may not need to purchase insurance 

coverage for both projects (opting instead for a master policy) because the likelihood of two 

earthquakes happening in these two geographically distinct areas is remote. A probable 

maximum loss analysis, usually conducted by a third party, determines these sorts of cost saving 

opportunities, allowing developers/sponsors to minimally but effectively insure their projects. 

Several of our interviewees described insurance as cyclical, meaning that when losses are at an 

industry-wide low and insurance carriers are profitable, the cost of premiums will gradually go 

down, and vice versa. One interview revealed that the market prices of property policies are 

trending higher to compensate for an uptick in disasters worldwide (2011 was the most costly 
22

year on record in terms of property losses, according to Munich Re13) and because investor 

incomes are down due to the low-interest environment prevailing in the global financial markets. 

5.2 Liability14

Liability insurance covers bodily injury incurred by persons other than the named insured and 

damage to property that is not owned by the named insured. These qualities make it a “thirdparty” insurance. This policy will defray the cost to defend the named insured in any lawsuits, 

and any costs resulting from judgment or settlement, provided that they are within the limits of 

the policy and the extent of the coverage (Head 2009). 

Developers/sponsors will generally purchase liability coverage at the parent level, and individual 

projects can be insured under this “master” policy. EPC firms may also purchase their own

liability coverage, as there may be difficulties in filing claims under the developer/sponsor’s 

master policy.

The standard form of liability insurance is the commercial general liability (CGL) policy.

CGL covers general liability exposures outside of those relating to the business’s employees and 

its automobile fleet. These include premises and operations, products and completed operations, 

independent contractor liabilities, and any liabilities that have been contractually assumed from 

third parties (Vaughan et al. 2003).

5.2.1 Umbrella Policies

The CGL is the primary policy, which means that its provisions and terms apply first in the case 

of a claim. Any costs incurred in excess of the primary limit may be insured by an umbrella 

policy, which functions as a sort of backstop to excessive damages that surpass policy limits. In 

some cases, umbrellas may also provide more comprehensive coverage (subject to a deductible) 

that applies to certain losses unaddressed in the CGL. Most PV projects carry umbrella policies. 

5.2.2 Controlled Insurance Programs

An EPC firm will typically price its estimated insurance obligations into its project bids so that 

they may pass the cost on to the sponsor. If, in reviewing the terms of the EPC’s coverage, a 

developer or sponsor wishes to adjust the policy (e.g., raise/lower the limits or extent of the 

coverage) or insure risks that are not named in the policy, it may opt for a controlled insurance 

program (CIP). In this case, it would be an owner-controlled insurance program (OCIP); the EPC 

may also be responsible for the policy under a contractor-controlled insurance program (CCIP). 

Under an OCIP, all parties, including the developer, sponsor (if different from developer), EPC 

contractor, and all subcontractors, are insured under the builder’s risk and CGL policies. While 

OCIPs may allow a developer/sponsor to dictate the desired level of coverage and therefore the 

cost of coverage, financiers are generally not favorable to this option, and it is consequently 

rarely used. One interviewee stated that OCIPs may leave the primary policyholder (i.e., the 

sponsor) uncovered if significant losses with any of the intermediary insureds hit policy limits 

 

13 See Munich Re’s Topics: Geo 2012 issue at http://www.munichre.com/publications/302-07225_en.pdf. 14 Liability insurance is sometimes referred to as “casualty” insurance depending on the provider. Casualty can also 

refer to some types of property damage, though this usage is not generally applied in the insurance industry.
23

before any claims for sponsor-related losses are made. However, he also said that OCIPs have 

been more common on utility-scale projects as a way to manage project costs. 

5.3 Warranties and Warranty Insurance

Typical PV manufacturer warranties include a 5–10-year workmanship and materials guarantee

(which warranties the physical product), and a 25-year performance guarantee (which warranties 

the energy produced). The performance guarantee usually stipulates that the modules will 

operate at 90% of their optimal output for the first 10 years and 80% for the remaining 15 years

(there are of course variations with different manufacturers) (Warranty Week 2011a). 

Almost all major manufacturers offer a long-dated performance guarantee in the warranty, but 

questions remain about its effectiveness. If the manufacturer goes out of business before the 

sunset of its warranties, then there is no entity left to backstop customer claims—the policy is 

essentially rendered null and void (see the text box on the San Diego Unified School District). 

Moreover, the majority of PV capacity in the United States (approximately 75% as of this 

writing) is less than five years old, and there is a great degree of uncertainty about how systems 

will function 10, 20, or 25 years from today. Manufacturers often do commission tests on their 

panels in addition to the IEC and UL tests to model the degradation, performance, and reliability; 

however, these tests are as yet unsubstantiated by robust field data (i.e., actual performance). 

Additionally, continued efficiency improvements, or even technology switching away from 

crystalline silicon as the primary PV technology at some future time may outdate current PV 

warranty policies and leave system owners without adequate coverage should they make any 

claims in the future. 

Warranty insurance is a novel, though growing, risk management solution for the shortcomings 

of PV warranties and can benefit both the upstream and downstream segments of the PV 

industry. Two market conditions have created emerging demand for these products: 

• The manufacturing base is currently shrinking as many panel-makers have not been able 

to remain solvent in an oversupplied market with compressed profit margins and an 

investor flight to quality (see Section 4.1). 

• Most of the U.S. PV capacity is relatively new, the financial, risk management, and 

power purchaser communities have voiced concerns about the long-term performance 

reliability of PV systems.

Manufacturers seeking a competitive edge in a market that is closed to all but the most 

creditworthy suppliers, and financiers who were looking for guarantees on their PV returns 

approached the insurance industry to devise products that would cover their risks. In response, 

underwriters and insurance carriers devised two forms of warranty insurance: manufacturer 

coverage and system-level performance coverage. 
24

5.3.1 Manufacturer Coverage 

Warranty reserve accounts set aside by manufacturers to cover claims against their products may, 

in some instances, prove insufficient to cover the extent of damages sought by the product 

customers. In such cases, the manufacturer will either have to allocate more capital to its 

warranty fund, or—if this is an unfeasible option given balance sheet limitations—seek 

bankruptcy protection. An insolvent or bankrupt manufacturer is not obligated (and is likely 

unable) to pay out to warranty claims, leaving its customers without recourse should the products 

prove defective in the field. If a manufacturer that is undergoing bankruptcy proceedings has 

customers seeking compensation for valid warranty claims, it can treat these customers as 

“unsecured creditors” and pay them little or none of the claim. Customers who have not made 

claims before the company is unwound have no recourse to their warranties should a product 

malfunction in the future (Warranty Week 2011b). 

Case Studies in Solar Warrantees and Warranty Insurance

First Solar 

Manufacturers that warranty their products will typically set aside reserve accounts to cover 

any claims against their products and other related expenses. One way to assess a company’s 

product integrity is to analyze the changes in these warranty funds’ accrual rates year-overyear. From December 2010 to December 2011, First Solar’s warranty reserves jumped from 

$28 million to $158 million, an increase of 464%. This was not necessarily from a higher 

volume of sales, as is the case for some manufacturers whose warranty reserves ramp to such 

levels—rather it was from a higher volume of claims against their modules (Warranty Week 

2012). In 2008–2009, a stated “process control” issue that has since been corrected produced 

premature power failures in 4%–8% of the modules manufactured in that time period. 

Customer redemptions involved module removal, testing, replacement, logistical services, and 

in some cases additional payouts (Trabish 2012a).

These warranty issues have been showing in First Solar’s financials since 2010, though a large 

volume of claims were processed in the fourth quarter of 2011 and have weighed on the firm’s 

2012 balance sheet (Trabish 2012a). In March of 2012, First Solar’s then-interim CEO Mike 

Ahearn forecasted that the total loss from this process control issue would amount to over 

$215 million. The company’s June 30, 2012, quarterly report states that accrued costs incurred 

as a result of the excursion and the remedial commitment to First Solar’s customers total 

$112.8 million—that is in excess of the $97.7 million that he firm has listed for its current 

warranty liabilities (First Solar 2012).

As of this writing, First Solar does not have any warranty insurance coverage or has made no 

indication of coverage. All payouts related to their warranty issues, including normal warranty 

expenses and those related to the process control issue have been made by the company. First 

Solar has, historically, had a sizeable balance sheet, which has allowed it to navigate these 

recent warranty challenges.
25

Manufacturer’s warranty insurance can guard against such a situation, providing some comfort 

for lenders and even some marketability for Tier 2 and Tier 3 manufacturers. This type of 

insurance policy is also sometimes referred to as a “wrap,” because it wraps some of the terms of

the module manufacturer’s warranty and passes the pooled risk onto the insurance carrier. In 

other words, the insurer takes on some portion of the manufacturer’s responsibilities as stipulated 

in the terms of the warranty, in exchange for a premium. In essence, the insurance carrier is

underwriting the performance of a certain amount (the quantity insured) of a supplier’s product. 

As the named insured, the manufacturer receives almost all of the payout in the event that 

insured modules perform at levels below the policy trigger. Third-party rights, which allow for 

the rerouting of payouts to entities other than the manufacturers (e.g., system owners or 

developers) should the manufacturer declare bankruptcy, are available through at least one policy 

on the market. There may, however, be legal complications with such redirections, so it is 

important for policyholders to understand the terms of their coverage. 

Warranty insurance for manufacturers can cover any combination of workmanship risks, 

performance risks, serial defects, and component failures (they are typically written as 

manuscript policies, which means that they can tailor specifically for the needs of the insured). 

The length, limits of coverage, deductibles, and cost of the policy are variable, depending on the 

needs and capabilities of the manufacturer and the carrier. Premiums for this type of policy are 

usually paid up front in full. 

In addition to the practical aspect of warranty coverage, manufacturers may benefit from a boost 

in market perception that this type of product bestows. A vendor of Tier 2 components, for 

example, can procure a product-cover policy to ease financiers’ reservations regarding long-term 

performance. Additionally, financiers also have the assurance that the vendor has been certified 

as insurable by an entity (the insurance carrier) that has conducted its own extensive due 

diligence process to arrive at that conclusion. Several of our interviewees indicated that even if 

the jury is still out on the effectiveness of these policies, the boost in bankability that they offer 

has been tangible.

Despite the enhancement effect that these policies offer, manufacturer’s product coverage has 

been greeted with some ambivalence on the part of the financiers, according to several 

interviewees. On the one hand, they afford financiers protection on their investment and can 

ensure project returns; on the other hand, financiers may view them as an admission that a 

product or system design is expected to fail and that the costs to benefit are unjustifiable. One 

interviewee for this paper commented that there was no need for warranty insurance if the 

developer is working with a “perfect product.” In other words, manufacturers that can 

demonstrate effective management of their product performance and solvency risks will have no 

need for warranty insurance. 

That said, our current research has indicated that the demand for these types of policies may be 

growing as financiers become uncomfortable with long-dated warranties from companies that 

may not survive the current turmoil in the manufacturing base or may not have adequate reserves 

to pay off claims. Indeed, some manufacturers have explicitly stated in company documents that 

there is a considerable degree of uncertainty in estimating the value of their warranty, 

considering that the cost of future payouts and the frequency of claims for 25 years out require a 

substantial amount of guesswork. In its 2011 annual report, SunTech, the current market leader 
26

in solar manufacturing, stated that “Because our products and workmanship have been in use for 

only a relatively short period, we cannot assure you that our assumptions regarding the durability 

and reliability of our products or workmanship are reasonable...Our warranty provisions may be 

inadequate, and we may have to incur substantial expenses to repair or replace defective products 

and provide repairs in the future” (Suntech 2011, p. 18). 

 

Case Studies in Solar Warrantees and Warranty Insurance

San Diego Unified School District

Owners of PV systems that have been built and supplied by now-bankrupt companies have 

little or no recourse to their warranty contracts should they experience defects over time.

Bankrupt companies may treat any customers seeking compensation for valid warranty claims 

as “unsecured creditors” during bankruptcy proceedings. This allows companies to pay a 

fraction of what they owe as specified in their warranty terms. Additionally, bankrupt 

companies are relieved of any future obligations to their warranties, leaving these contracts 

without a backstop for customers that make claims down the road (Warranty Week 2011b). 

This is what happened when the San Diego Unified School District sought to remove a 

number of PV systems on 24 of its buildings because of panel corrosion that posed a fire 

hazard. The systems were built and installed by Solar Integrated Technologies (SIT) and the 

panels were manufactured by Uni-Solar, a subsidiary of SIT’s parent company Energy 

Conversion Devices (ECD). GE Financial Services financed and owned the system, and the 

power was sold (via SIT subsidiary Solar Power & Electric) to San Diego Unified School 

District under a 20-year third-party lease (Font 2012; Trabish 2012b). 

The systems—comprised of Uni-Solar’s flexible amorphous silicon panels—were installed in 

2005. However, when the district sought to have them removed in 2012, both SIT and ECD 

(along with all subsidiaries) had already declared bankruptcy and could not honor their 

warrantee obligations for service, repair, replacement, or removal. GE Financial Services 

agreed to defray the entire cost of removal, though it bore no contractual responsibilities to do 

so (Font 2012; Trabish 2012b). 

This incident highlights a growing issue in the PV industry, where developers, sponsors, and 

financiers are becoming increasingly exposed to module and system defects because of a 

contracting manufacturing base. This has led to an intensive focus on module quality (see text 

box on page 12) as a revenue guarantee, and it is also the driving force behind the small but 

growing demand for warranty insurance. In fact, warranty insurance has even become a 

requirement of some financiers before they commit any capital, though it is likely that such 

requirements depend on other project specifics (such as credit profile) and are not necessarily 

hard rules for investors. 
27

Not only may financiers be warming up to manufacturer warranty insurance, but the 

manufacturers themselves also seem to be taking advantage of the benefits such policies offer. 

Many have become more open about their purchase of warranty coverage as a signal to the 

market, whereas less than a year ago only a couple firms publicly disclosed their coverage. 

According to NREL research and interviews, more than 20 solar manufacturers have insured the 

warranties on at least some portion of their inventory in the last three years; as many as five of

these companies are considered Tier 1 manufacturers. 

5.3.2 System-Level Performance Warranty Policies 

Warranty policies are also available to insure the entire PV system and its various components—

not just the modules. This type of insurance can cover repairs and replacements for

modules, racking hardware, inverters, tracking systems, and other BOS equipment. It can also 

cover workmanship and system design as well. Typically, the EPC will cover any flaws in 

workmanship and design for up to the first 10 years of operation; a system-level warranty cover 

would therefore relieve the EPC of some portion of the risk in guaranteeing its work. 

The named insured in a system-level policy is typically the system owner, who, in the case of a 

successful claim, would receive payouts to compensate for revenue lost from equipment failures. 

The risk management industry’s terminology for this kind of policy is “efficacy insurance.” 

One provider of this type of insurance who was interviewed for this study said that her company 

regarded the first 8,600 hours of a project’s run time (about one year of operation) as critical to 

establishing whether or not a project will work according to specifications. After this, her 

company will cover the total system performance for five years. Her company also fields a 

project analysis team of engineers who perform due diligence to inform the underwriting process 

and conduct routine equipment monitoring during the policy term. The cost of this team’s 

services is built into the premium. Project lenders and investors may take comfort from such a 

service as it can improve the detection of O&M risks and provide independent feedback on 

project performance.
28

Case Studies in Solar Warrantees and Warranty Insurance 

Canadian Solar and SunPower 

Canadian Solar and SunPower offer two examples of effective warranty programs devised at a 

time when warranty management is becoming integral to solar manufacturers’ corporate 

strategies (and financiers’ decisions to commit capital).

Canadian Solar, a Tier 1 Chinese manufacturer, offers a warranty that guarantees performance 

on a linear scale, as opposed to the typical flat 90%–80% protocol of many PV warranties. 

The warranty stipulates that panels will operate at 97% of optimal output at the end of the first 

year and will only decline by as much as 0.7% each year thereafter. This means that at year 

10, when most manufacturers reduce their products’ guaranteed output to 80% of the optimal, 

Canadian Solar guarantees 90%. Not until the 25th and last year of the warranty will Canadian 

Solar’s guarantee decrease to 80% (Canadian Solar 2011). 

The company backs its robust warranty with insurance coverage from the specialty insurer 

PowerGuard, which underwrites on behalf of several insurance carriers in the Lloyd’s market 

(see footnote 16) (Canadian Solar 2011). Canadian Solar has long been an advocate of quality 

assurance in PV manufacturing, and aside from being an early adopter of warranty insurance, 

they are known for their rigorous testing standards and the durability of their modules. 

California-based SunPower, which currently supplies one of the PV market’s most efficient 

and expensive modules, also has an industry-leading warranty policy with a 25-year 

performance and workmanship warranty (whereas other companies only provide 5–10 years 

of workmanship). However, unlike Canadian Solar, SunPower does not backstop this 

guarantee with insurance. 

SunPower also frequently serves as the supplier, developer, EPC, and operator on its projects, 

which allows it to offer guarantees on their entire systems (Trabish 2012c). Manufacturers 

that are not vertically integrated cannot back the integrity of the systems in which their panels 

are installed—such backing usually falls to the EPC. In short, SunPower has effectively 

created a sort of “one-stop-shop” for warranty claims against its products, and this simplicity 

of redemption can provide financiers some additional comfort. 

SunPower is one of the top 10 selling panel manufacturers because of its strong guarantee and 

its ability to see projects through from the manufacturing to the operation phase (eliminating 

the hazards of multi-contracting and complicating the pathways to making a claim). 

Moreover, having the French oil and gas multinational Total S.A. as a parent company has 

afforded SunPower access to a balance sheet, credit rating, and cost of capital that gives it a 

strong competitive edge in the market (Trabish 2012c).
29

5.4 PV Insurance Costs

PV project insurance costs are largely determined by the specific needs and risks of the project; 

the type, length, and limits of coverage; and the level of the deductible (higher deductibles can 

equate to lower insurance costs), as well as other considerations. According to one underwriter, 

pricing policies is “not an exact science” and can involve the weighing of several “hard” and 

“soft” factors. Hard factors are a project’s tangible qualities, such as: 

• The history of the technology and whether it is considered “proven” and bankable (i.e., 

Tier 1 or high Tier 2) 

• The appropriateness of the technology and system design for a given application and site 

• Location and soundness of the site (e.g., Is it in a flood zone or near a fault line?) 

• Experience of the developer, EPC, OEM (if providing O&M), and third-party O&M 

provider 

• Related contracts and whether clear allocations of risks are made. 

Soft factors are less quantifiable, such as: 

• The culture of the development team and the confidence they inspire 

• The perceived soundness of the development plan and its goals 

• The relationship between the development team and the contractors (i.e., have they 

worked together before and to what success).

Incorporating these considerations into an underwriting model can account for some of the 

variance in PV projects’ insurance costs. Some interviewees said that even the models 

themselves may be ill-suited to underwrite solar projects. For example, rooftop systems are 

sometimes assessed using COPE15 models, which are designed for buildings and do not 

adequately account for some of PV’s unique risks. 

Because insurance costs are so variable, it is difficult to provide a general cost assessment. 

However, several of our interviewees speculated that property and liability costs during the 

construction phase may currently fall somewhere in the range of $0.09–$0.13 for every $100 of a 

project’s replacement value. On a 10-MW project with a replacement value of $25 million, this 

would equate to $22,500–$32,500 in property and liability policy insurance in the construction 

stage or up to a 0.13% of total project costs. Insurance to cover catastrophes such as floods or 

earthquakes could cost significantly more, perhaps over $3 for every $100 of replacement costs 

(assuming that the coverage is for only one-half of the insured value of the project). 

In the operational phase, the cost of business interruption insurance may be similar to property 

and liability coverage during the construction phase, or roughly 0.1% of replacement costs (in

this case $25,000 annually). These figures are very general estimates; insurance costs, as 

mentioned, can vary dramatically in the marketplace and will depend on a range of factors not 

 

15 COPE stands for Construction, Occupancy, Protection, Exposure. These represent main risk characteristics that 

underwriters review when evaluating property (IRMIb).
30

considered in this analysis. Deductibles will vary depending on the needs of the insured and can 

vary these costs even more. 

We were unable to collect any cost estimates for either type of warranty insurance, though our 

interviewees generally agreed that these types of polices can be expensive. Premiums will 

depend on the amount of inventory covered and perceived risk of the technology (in a 

manufacturer’s policy), the quality of system design and its performance in the first year of 

operation (in a system-level cover), the level of deductible (in both), and other factors. In some 

warranty policies, the premium is required to be paid in one lump sum at the time of the policy’s 

activation. One interviewee explained that these policies require upfront payment for two 

reasons: (1) it is dictated in the terms of the policy, or (2) lenders may try to prevent a project 

from defaulting on future insurance payments. 

5.5 PV Insurance Market

There are generally three parties involved in the process of providing insurance to clients: 

underwriters, brokers, and carriers. Underwriters assess the probabilities associated with a 

particular set of risks (usually for areas in which they have expertise) and price policies 

accordingly; brokers, or retail agents, arrange for the sale of insurance to customers; and carriers 

accept the underwriting and terms of sale from the previous two, effectively holding the insured 

risks on their balance sheet in exchange for the payment of a premium or premiums. 

Additionally, insurance policies may be underwritten by a managing general agent, which is 

similar to a broker but has the authority to accept policy placements from brokers on behalf of an 

insurer (Jamison et al. 2011).

Carriers can expand the amount of insurance policies they can offer (i.e., their capacity) by 

purchasing their own insurance coverage on a portfolio basis. This is known as reinsurance, and 

the companies that take on this excess risk are reinsurers. Reinsurance is particularly common 

for catastrophe risks that can and have wiped out the funds of large insurance companies.

In addition to providing coverage to insurance carriers on their liabilities, some reinsurers have 

also been active in extending coverage options directly to PV projects (through brokerage 

networks), namely in the form of warranty insurance. Munich Re and Hannover Re are examples 

of such reinsurers. 

Insurers and reinsurers that are currently active in the PV space include, among others, the 

following firms:

• Ace

• Allianz

• Arch

• Axis

• Chubb 
31

• GCube16

• Lexington 

• Munich Re 

• PowerGuard17

• Swiss Re

• Travelers

• Zurich Re. 

One insurance industry professional interviewed for this study said that insurance firms will 

usually specialize in one form of coverage or another depending on their risk appetite and 

expertise.

Another insurance industry professional said that property and liability coverage lines for PV are 

not constrained by capacity limitations, as these are “commoditized” lines of commercial 

insurance and form part of the core business for some of the carriers in this space. Therefore, 

they will allocate as much capacity as is required to fill the orders in the marketplace (the 

exception to this would be the smaller, specialty insurers that may not be as well capitalized as 

the larger players). He did say, however, that warranty insurance capacity currently does have 

capacity limits in the market and estimated that to be “several hundred million,” perhaps half of 

which comes from Munich Re. 

There are many brokerages involved with the PV industry. One interviewee suggested that, when 

construction slowed down during the financial crisis and as the solar market started to take off, 

many insurance brokers explored this option as a possible source of revenue. Some brokerages 

offering PV services in the United States include: 

• Aon

• D&M Insurance Solutions. 

• Energi

• Lockton Companies 

• Marsh

• SolarInsure 

• Wells Fargo

• Willis. 

 

16 GCube insures through Lloyd’s of London, an insurance marketplace where independent underwriters will 

contract with clients (through brokers) to write policies for the client’s specific risk exposures (IRMIc). Client risks 

may be transferred to any number of buyers, creating a kind of stack of risk-holding counterparties, somewhat akin 

to a capital stack of several different financial entities in a project’s financial structure. 

17 PowerGuard is not a true insurance carrier—it functions as more of a brokerage/underwriter/managing general 

agent, in that it will write the policy but will not carry the risk of indemnifying the policyholder.
32

6 Innovations and Opportunities in PV Risk 

Management

In October 2011, the Economist Intelligence Unit, a research and analysis group within the larger 

Economist media conglomerate, published a report (sponsored by Swiss Re) titled Managing the 

Risk in Renewable Energy (Economist Intelligence Unit 2011). The report was based on a survey 

of 280 senior executives in the renewable energy industry about the state of affairs and outlook 

for risk management practices in an ever-growing fleet of renewable projects worldwide. 

Of the executives polled, 70% indicated that they were confident in their company’s abilities to 

identify risks, though less (61%) were confident in their company’s mitigation capabilities. An 

even smaller proportion (50%) said that they were successful in transferring risks to third parties. 

One of the barriers to successful risk management and transfer identified in the report is the 

currently limited availability of “suitable risk transfer mechanisms.” Insurance is currently the 

most common form of risk transfer used by the renewable energy industry, though as an 

expensive and limited form of risk transfer, there is interest in the market for products that can 

cost-effectively cover targeted risks that are difficult to insure (such as resource-related 

production risk). The survey indicates that industry leaders are anticipating the emergence of 

these types of solutions (including new types of insurance) (Economist Intelligence Unit 2011). 

This section will explore four prospective solutions: weather derivatives, catastrophe (or cat) 

bonds, captive insurance companies, and securitization. Each addresses a different risk or set of 

risks, and all but the captive insurance company solution have not yet been used in the PV 

industry. Their inclusion in this study is to illustrate the maturation of the PV market and its 

evolving capabilities to exploit sophisticated and targeted risk management tools. 

6.1 Weather Derivatives

Weather derivatives are financial instruments designed to hedge against variability in energy 

generation as a function of the weather (in PV’s case, the sunshine). Whereas system-level 

warranty coverage will cover the technical and mechanical aspects of project performance, 

weather derivatives could be used to address resource-related performance, thereby covering the 

spectrum of production risks.18

Weather derivatives are essentially bilateral or sometimes multilateral contracts between a risk 

holder and a risk off-taker (the company structuring the derivative), whereby the off-taker agrees 

to pay a certain amount in the event that a specified weather event adversely affects business 

operations. In a derivative contract written for a PV system, the off-taker will cover a portion or 

all of the revenue shortfall if the quantity of sun—as recorded by a nearby weather measurement 

device that is mutually agreed upon—dips below the “strike,” or the point at which coverage is 

triggered (Lowder 2012). This level may be indicated in the contract as a “P” value (e.g., P50, 

 

18 It is unclear what effect, if any, the Dodd-Frank regulations on swap dealing will have on the use of weather 

derivatives. While weather derivatives qualify for the types of instruments that fall under these regulations, the firms 

that are targeted may not encompass the kinds of entities that would deal in these types of instruments, particularly 

renewable energy weather derivatives. One interviewee who issued securities in the weather derivative and 

catastrophe bond markets suggests that the new regulations seem to be more relevant for traders (market participants 

that do not generally hold capital to all of their liabilities) and other leveraged buyers/issuers—not necessarily the 

entities who back their instruments with sufficient capital. 
33

P90, or P99), which denotes a particular system’s probability of exceeding a certain level of 

production (Lowder 2011).

Weather derivatives function like insurance, but they allow projects to offload risk onto the 

financial markets where it can be efficiently priced. In insurance, the underwriter and/or 

insurance carrier dictates the pricing of risk based on actuarial modeling.

The first weather derivative contracts were executed in the late 1990s by an independent power 

producer and a New York City utility. Today, these instruments are still largely used by the 

energy industry to hedge against weather-related price risks. Use of derivatives in the renewable 

energy industry is very limited, with most transactions occurring in the wind power sector 

(Lowder 2012). Products are available in the market for solar power providers, though it remains 

to be seen whether or not the PV industry will take advantage of these or if it in fact even needs 

to. More performance data and operational histories could help to determine that need (see 

Section 7.1).

6.2 Catastrophe Bonds 

Catastrophe, or cat, bonds are another type of security designed to offload risk into the financial 

markets. Insurance companies that cannot or do not want to hold their catastrophe exposure on 

their books can issue bonds through a sponsor in any amount up to their policy liabilities. To 

issue a bond, an insurance company or other risk holder contracts a sponsor—typically a 

reinsurance company, but it can be another type of financial services firm—to create a special 

purpose vehicle (SPV) that issues the individual cat bond notes to capital markets investors. Cat 

bonds are typically sold as private placements but can also be tradable on the secondary market. 

Unlike a corporate bond, the money contributed by investors is held by the SPV in low-risk 

securities, such as U.S. Treasuries and not on the sponsor’s balance sheet. The coupon that is 

paid to investors is made up of two parts: the return on these low-risk investments and the 

premiums paid to the SPV by the sponsor (Wiedmeyer 2012). 

Cat bonds mature in three to five years (some in one, most are two to three, and the longest ever 

was 10) and issue quarterly coupons with typical yields ranging from 500–1,500 basis points 

above benchmark interest rates. They are usually rated from single A to single B by traditional 

ratings agencies. Because cat bonds derive their value from the frequency of natural phenomena, 

they are relatively uncorrelated with fluctuations in the traditional bond and equity markets. This, 

in turn, makes them attractive fixed-income investments for institutional investors looking to 

diversify their portfolios and insulate themselves from market volatility.

Cat bonds have not yet been issued for any renewable projects, though it may be a consideration 

for developers of utility-scale projects with more than $100 million in assets that are siting their 

projects in catastrophe-prone areas and who do not want to pay the high premiums necessary to 

insure the project. Utilities with high concentrations of assets may also be interested in managing 

their catastrophe exposure in this way (Wiedmeyer 2012). 

6.3 Captive Insurance Companies 

A captive insurance company (CIC) is a subsidiary established explicitly as a risk mitigation arm 

within a larger parent company that wishes to exercise control over the insurance of its own 
34

risks. CICs are usually licensed under specialty purpose insurer laws and are not subject to the 

same regulations as commercial insurers (IRMId). However, like traditional insurance 

companies, the insured pays a premium in exchange for coverage as outlined in a given policy, 

and the CIC is managed so that it can absorb the losses of the insured and maintain solvency 

(Speer 2011b). 

CICs can be created to protect against a number of risks but are usually used for low-cost, 

frequent, and relatively predictable claims such as liability (e.g., worker’s compensation) and 

property (e.g., vehicle coverage). Captives can also be used for other risks, including those that 

are either expensive (e.g., earthquake coverage or warranties) or not found in the commercial 

market (Speer 2011b). 

CICs could be an attractive alternative to buying commercial lines from a traditional 

carrier. Some of the potential benefits to a developer or sponsor are as follows: 

• Tax advantages, including the possibility of the captive not having to pay income tax and 

claiming deductions on the reserve funds generated by premiums 

• The reserve fund, generated from premiums can be re-invested or loaned back to the 

parent so long as the captive remains solvent 

• A captive, covering some risks with additional coverage sought from the private market, 

possibly at a lower cost due to the company’s existing risk coverage (Speer 2011b). 

CICs can be expensive to create, considering the associated transaction costs (e.g., feasibility 

studies, legal fees, organizational expenses, and actuarial fees). Such costs range from about 

$50,000 to over $125,000 to establish a CIC, depending on the captive’s complexity (Speer 

2011b). Developers and sponsors would need to determine their project risk exposures and the 

potential cost of insuring them in order to justify establishing a CIC. In the end, the captive 

option may only be available to well-capitalized companies, ones that could not only cover the 

costs of setting up a CIC but could also fund it with enough capital to withstand a major loss. 

It is unclear how many renewable energy companies, if any, have used CICs, as this information 

is often not made public. In 2010, the insurance broker Beecher Carlson and solar power tower 

developer BrightSource Energy were considering establishing a captive to cover the developer’s 

Ivanpah project, but in the end BrightSource chose not to proceed with that option (Morris 

2010). Because many renewable energy companies may not be large enough to benefit from 

forming a captive, their use in this sector may be delayed until the industry sees additional 

growth, mergers, and acquisitions (Speer 2011b). 

6.4 Securitization as Risk Mitigation 

The U.S. PV industry is subject to a number of financial risks, including a short supply of tax 

equity capacity in the marketplace, the complexity of executing a financial structure that 

incorporates tax equity, access to debt, and the limited timelines of federal financial incentives.

Solar PV securitization (pooling solar asset-backed cash flows into financial instruments that can 

be traded in primary and secondary markets; see Figure 6) could help to alleviate some of these 

pressures and constraints by bringing more capital to the PV market. Securitization could be a 

tool to manage financial risk.
35

Figure 4. The process of securitization

Source: Jobst 2008

While securitization could be an effective way to manage risk, it may also be aided by effective 

risk management. The types of investors that are most interested in asset-backed securities 

include institutional investors, such as pension fund and mutual fund investors. These investors 

will look for a diversified portfolio of projects with strong cash flows and low risk of off-taker

default. Insurance can directly impact the cash flows of a project by enabling the project to 

maintain a level of electricity production that allows the project to meet any obligations and a 

targeted level of revenue. For example, if there is damage to a project or a project fails and 

coverage is provided via a policy, the project owner can file a claim to the insurance carrier. The 

insurance carrier is likely to either repair the plant, provide cash reimbursement, or both, 

depending on the coverage purchased. Although insurance does not directly impact the risk of 

off-taker default, the two are linked by an indirect relationship: If a project were to be 

underperforming for any reason, including due to an insurable event, the off-taker may default if 

the project is not meeting performance expectations and there is a better investment opportunity 

by purchasing electricity elsewhere.

Investors will carefully examine all aspects of the solar PV projects before making a decision to 

buy. The investors will look at the underlying project finance structures to determine the quality 

and experience of the counterparties as well as the strength of the contracts: Have all risks been 

accounted for and are they clearly delineated? Regarding insurance, investors will want to know 

what the insurance does and does not cover and how they will deal with uncovered risks. 

While securitization may be a powerful mechanism for bringing a larger quantity, and potentially 

lower cost, of capital, it is not likely to be a silver bullet for solar PV project development. It 

could take several years for solar PV securitization to ramp up, partly due to logistics as well as 

waiting for the market to mature and weather rapid technology and cost changes. Also, solar PV 

projects have historically utilized a number of innovative financing models and applications to 
36

provide energy to a variety of end-users. These projects may be (and have been) entirely viable 

without securitization and may not be sufficiently homogenous with other projects to be eligible 

for securitization.

At least two of the larger ratings agencies have begun looking into the risks of solar PV projects. 

Fitch issued a paper in 2011 titled Rating Criteria for Solar Power Projects: Utility-Scale 

Photovoltaic and Concentrating Solar Power (Fitch 2011). This study discusses how Fitch 

would rate solar PV projects and does not look at securitization specifically. However, many of 

the risks identified in the report may also be applicable to securitized projects. Fitch identified 

two groups of risks: those relating to financial analysis and those relating to the project. 

Financial analysis risks include: 

• “Financial strength and experience of sponsors, particularly with newer technologies 

• “Reliable and accurate third-party reports on scope and quality of a solar resource and 

project design

• “Experience and financial strength of construction contractor with similar projects

• “Terms of the construction contracts, and the complexity and time scale of the 

construction phase 

• “Strength of warranties and/or guarantees for project design, parts, and operations. 

• “Technology risk associated with the project 

• “Strength/weakness of the project cash flow stream” (Fitch 2011, p. 1).

Project risks were cited as:

• “Financial structure including amortizing debt characteristics, covenants, and reserve 

account mechanisms

• “Financial metrics, flexibility, and sensitivities” (Fitch 2011, p. 2).

In January 2012, Standard and Poor’s issued a white paper titled Will Securitization Help Fuel 

the U.S. Solar Power Industry? (S&P 2012b) that concludes that securitization is a viable option 

for solar developers. However, the report also notes there are several risks associated with solar 

projects, including “a lack of historical performance data, a limited number of potential servicers, 

and ongoing downward pressure on solar panel prices” (S&P 2012b, p. 2). 

A lack of historical data is both a risk to securitization and a challenge for the insurance industry. 

NREL is currently reaching out to industry for the purpose of developing a solar PV project 

database that would be of use both to the insurance and related industries and inform 

securitization of these projects.
37

7 The National Laboratories and PV Risk Management

7.1 Data Collection

The 2010 NREL white paper Insuring Photovoltaics (Speer et al. 2010) concluded with a section 

on solutions for, and the role of national laboratories in, improving PV insurance services and 

costs. The principal recommendation made in that section was for improving the quality and 

availability of PV performance data. Almost three years since that study was published, this 

remains a major area through which the PV industry can potentially mitigate risk, reduce soft 

costs (see Section 2.1), increase investment flows, and expand deployment. 

Almost all PV stakeholders stand to benefit from a greater availability of high-quality data:

• Insurance underwriters could calculate loss probabilities with more certainty, which may 

allow carriers to extend lower cost coverage. 

• Lenders could better understand risks, such as O&M costs, degradation rates, and yields 

over time, and this could help to lower their perception of risk that is reflected in the 

interest rate. 

• Certainty over PV asset cash flows could facilitate the process of securitization and 

attract investors that are looking for stable, high-yield returns (Mendelsohn et al. 

forthcoming). 

• Demand for solar assets, coupled with lower soft costs, could boost deployment and thus 

expand the market opportunity for developers. 

• Some manufacturers may be able to substantiate their marketing with validated track 

records, which could win them more orders and establish their brand. 

Data is critical to risk assessment and mitigation for both the financing and insuring of renewable 

energy projects. In recognition of this, NREL, Sandia National Laboratories, and the DOE have 

launched initiatives to build, analyze, and disseminate datasets for use by various PV 

stakeholders. NREL’s current efforts to collect and organize data include:

• The International PV Quality Assurance Task Force, a group of researchers from 

around the world that pools information about how to test PV modules in order to predict 

which models will last longest when deployed in various climates and applications. The 

group aims to influence the development of a single set of standardized tools that will 

allow PV manufacturers to demonstrate the robustness of their products and PV 

customers to compare products. Correlating test results with field performance will also 

inform the insurance underwriting process and could possibly help to lower premiums 

(http://www.nrel.gov/ce/ipvmqa_forum/). 

• Data collection and research within NREL and Sandia National Laboratories to quantify 

and communicate summaries of PV performance and reliability. Together, the labs have 

reviewed a collection of over 2,000 reports on degradation rates and reached the 

following conclusions: Median crystalline silicon degradation rates have remained 

relatively constant in the last two decades (at around 0.5% annually); the 3% annual 

degradation rates observed for thin-film modules fielded before 2000 have now dropped 

to around 1% annually. This research and these findings facilitate statistical predictions in 
38

the absence of product-specific data. An example summary can be downloaded 

at http://www.nrel.gov/docs/fy12osti/51664.pdf. 

• The Advanced Financing Mechanisms to Achieve SunShot project, which is designed 

to enable securitization of solar portfolios in order to access capital more widely and at 

lower cost. A primary task under this effort is to build datasets relevant to system 

performance and customer default that can be easily employed by the financial and 

insurance communities to assess and mitigate risk. This effort will also focus on 

document standardization as a means to enabling securitization. 

The NREL Performance and Reliability Team is also engaged in data collection for the purposes 

of internal analysis and the publication of technical reports and journal articles. 

See http://www.nrel.gov/pv/performance_reliability/research_staff.html for a list of publications. 

Sandia National Laboratories’ current efforts to collect and organize data include: 

• Performance modeling. Sandia’s PV Modeling and Analysis team develops methods and 

tools to simulate PV system and component performance while exposed to different 

weather and environmental conditions. The team also leverages field and laboratory 

capabilities to characterize performance of modules, inverters, and other BOS

components to develop calibrated system models. 

See http://energy.sandia.gov/?page_id=2493. 

• Reliability. Sandia uses field O&M data, degradation studies, failure rates from integrator 

and utility partners, and detailed statistical analysis to develop systems-level 

models. These models can be applied by researchers and industry to help determine ways 

to overcome reliability issues and accelerate high penetration of PV technologies. 

See http://energy.sandia.gov/?page_id=275.

• Basic and fundamental PV research. See http://energy.sandia.gov/?page_id=272. 

These various projects are largely funded by the DOE and DOE’s SunShot Initiative. 

7.2 Testing

7.2.1 NREL Capabilities

NREL supports performance testing for commercial and developmental PV devices through its 

Measurements and Characterization (M&C) division and the National Center for Photovoltaics 

(NCPV). M&C and NCPV provide technical solutions, collaborative research, testing support, 

and consulting services to private industry to support, among other things, the advancement of 

reliable and financeable PV products. NREL is one of only two laboratories in the world to hold 

an International Organization for Standardization (ISO) 17025 accreditation for primary 

reference cell and secondary module calibration, in addition to accreditation for secondary 

reference cell calibration under American Society for Testing Materials (ASTM) and IEC 

standards. It is one of only four laboratories in the world certified in accordance with the 

IEC standards.

The Device Performance Group within M&C serves as an independent facility for verifying 

device performance for the entire PV community and helps to reduce large discrepancies 
39

between module manufacturers, commercial testing groups, and national laboratories through the 

following activities: 

• Tracing reference cell and module calibration to standard test conditions for commercial 

test labs, partners, and the U.S. PV community 

• Providing independent cell and module efficiency measurements to contextualize 

industry claims

• Consulting on PV testing procedures and uncertainty analysis

• Supporting U.S. commercial calibration laboratories through primary reference cell 

calibrations. 

These testing activities provide decision makers in the PV and financial communities with the 

tools to effectively manage technology and performance risks. 

Additionally, NREL’s newest facility the Energy Systems Integration Facility (ESIF) provides 

testing as well as advanced modeling and simulation capabilities that can be applied to PV 

systems and components. ESIF resources will allow researchers and manufacturers to conduct 

integration tests at full power and at actual load levels in real-time simulations that can mimic 

location-specific operating and resource conditions. This will allow manufacturers to evaluate, at 

high granularity, component and system performance before going to the market. ESIF testing 

and data may help to increase financier confidence in the performance and reliability of PV 

systems and components, thereby potentially reducing overall investment risk, especially in the 

case of early adoption. 

7.2.2 Regional Test Centers

In March 2012, the DOE SunShot Initiative issued a Notice of Opportunity for Technical 

Assistance (NOTA) for regional test centers (RTC) to validate and monitor PV modules and 

systems (DOE SunShot July 2012b). The purpose of this program (for which the next 

applications were due on December 30, 2012) is to develop PV performance standards and 

establish a technical basis for bankability that can be applied in financial decision making. 

Recipients of the award will install their systems at all three of the DOE RTCs and receive 

independent validation of things, such as:

• System performance

• Consistency of module quality 

• Degradation rates

• Reliability. 

The RTCs will provide land, grid ties, and the testing/data monitoring components required to 

support these efforts and focus on using the test data to develop standards that will be useful to 

the community. Sandia will provide co-leadership through its technology validation efforts along 

with NREL, which will support the regional testing centers through its activities at the M&C and 

NCPV divisions. 
40

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