By Mike McMullen

In the ever changing solar energy market, the need for ‘Third Party’ warranty insurance has never been greater. The current over production of solar panels, the speed at which innovation is being driven, the sheer number of panel manufacturers, highly skilled purchasing professionals driving panel prices downward and the falling prices of raw materials─combined with probable trade tariffs─create a ‘perfect storm’ scenario for catastrophic ‘serial loss’ involving a massive number of solar panels.

While there are many systems in place to check for and catch manufacturing errors, it would not be unthinkable─given the above production and pricing pressures─for those manufactures operating on slim to no margins to begin cutting corners in their manufacturing and quality control processes. And the origin of the defect might not even be the solar panel manufacturer itself, but rather a supplier of a sub-component or those providing labor (‘Third Party’ workmanship).

If this were to happen, it would not be the first time. In fact, many property insurance companies who are knowledgeable in the wind energy industry closely follow the expiration of the Production Tax Credit (PTC) deadline date. They know from experience that those projects constructed and placed into service just prior to the PTC expiration, tend to have a higher rate of workmanship, mechanical breakdown and business income losses.

Simply put, suppliers that are rushing to complete and ship the equipment to meet aggressive delivery schedules and contractors receiving equipment that must then be installed to complete and commission facilities prior to the expiration date are prone to shortcuts, mistakes and errors. Sound at all similar to the Safe Harbor deadline?

Solar panel manufacturers typically sell their panels with a long-term warranty (25 years) that consists of two basic parts. The first part of the warranty is related to workmanship and product defect. This is the customer’s guaranty that the panels are designed correctly, fit for intended purposes and are free from defects. This part of the warranty is generally 5 to 10 years in length (with the trend being 10 years) and assures customers that the panel will work per specification.

The solar panel warranty also has a power generation or power output guaranty. This portion of the warranty generally states that for the first 10 years the panel will produce a minimum of 90% of the rated power output of the panel. It also states that in 11 through 25 years, the panel will produce a minimum of 80% of the rated power output of the panel.

In the last 18 months, we have seen a shift from this traditional warranty structure to what is called a ‘linier’ warranty. This linier warranty generally guarantees a small percentage decrease in production in equal proportion over the 25 year warranty period - thus increasing the confidence in the amount of power to be produced. This second part of the warranty assures customers that the panel will perform to a certain degree of power output under defined conditions - giving customers the baseline performance criteria in order to properly design a solar system. This portion also assures the investors in projects utilizing the solar panels that if the panel does not perform, there is a remedy available to them─if and only if the manufacturer is able financially able to respond or continues to be in business.

Limited Warranty Statement

A typical photovoltaic module warranty would read as follows:

Limited Warranty─0 Year Repair, Replacement or Refund

Subject to the exclusions contained below, PV OEM warrants to the buyer that the modules shall be free in all material respects from defects in materials and workmanship under normal application, installation, use and service conditions as specified in PV OEM’s standard product documentation. The duration of this limited warranty is 60 months from the date of delivery by PV OEM.

Claims under the warranty can only be accepted if the buyer can provide the proof that the malfunctioning or non-conformity of module results exclusively from material defects in materials and/or workmanship under normal application, installation, use and service conditions specified in PV OEM’s standard product documentation. If the product fails to conform to this warranty, PV OEM’s will, at its option, either repair or replace the product, or refund a reasonable, pro-rated portion of the purchase price as set forth below.

Limited Warranty─Limited Remedy

If, within 25 years from the date of delivery to the original purchaser, any module under normal application, installation, use and service conditions, as specified in PV OEM’s standard product documentation, has a power output less than 80% of the minimum power specified in writing in PV OEM’s applicable product documentation at time of delivery, as measured at PV OEM in both cases, then, provided that such loss in power is determined by PV OEM (at its sole discretion) to be due exclusively to defects in materials or workmanship, PV OEM will compensate for such loss in power by either providing to the buyer additional modules to make up the total wattage loss, at a cost pro-rated for the time in service of the faulty module, or by repairing or replacing the module, at the option of PV OEM, as set forth below.

If, within 10 years from the date of delivery to the original purchaser, any module under normal application, installation, use and service conditions, as specified in PV OEM’s standard product documentation, has a power output less than 90% of the minimum power specified in writing in PV OEM’s applicable product documentation at time of delivery, as measured at PV OEM in both cases, then, provided that such loss in power is determined by PV OEM (at its sole discretion) to be due exclusively to defects in materials or workmanship, PV OEM will compensate for such loss in power by either providing to the buyer additional modules to make up the total wattage loss, at a cost pro-rated for the time in service of the faulty module, or by repairing or replacing the module, at the option of PV OEM, as set forth below.

The linier warranty, as an example, would differ in that the terms as they relate to the power output would read as follows:

Limited Warranty Additionally Warrants for the Modules

For the first year from the Warranty Start Date, any PV module(s) under normal application, use, installation and service condition as specified in the installation manual, exhibits a power output no less than 97% of the peak power at STC, from the second year to 25 years from the date of sale to the customer, the power output will decline annually by no more than 0.68% of the peak power at STC. So by the end of 25 years, at least 80.68% of peak power at STC can be achieved.

Financial Institutions across the world are recognizing this increasing risk and have turned to the insurance community for a ‘Third Party’ warranty solution. Globally, manufacturers have recognized the need for increased ‘bankability’ of their panels, along with real risk transfer and customized solutions that meet their own specific business objectives. No two third party warranties are exactly alike but they should all cover the design of the panels, all components of the panel, any workmanship to the panel done by others; include serial defects; provide 3rd party rights to the policy form in the event of insolvency; and have no waiting period before coverage incepts.

Each of these items if not covered could prove to be financially devastating to the solar panel manufacturer, the project investors or the project operators. The question is not if you have had any warrant y losses in the past but rather if you can afford to have a future warranty loss.

A Third Party warranty can take many forms and provide many benefits to the policyholder depending upon whom the policy holder will be and their specific objectives. Warranty policies or programs can be written for the benefit of the solar panel manufacturer (OEM), the solar project owners and/or the financial institutions investing in the projects. Each of these programs could take several forms themselves depending upon whether the program is offering primary or contingent coverage.

The need for OEM warranty programs is typically driven by either the OEM seeking a sales and marketing advantage over OEM’s who do not have a third party warranty program in place, or by a financing source who wants to mitigate the long-term risk of OEMs failing to remain in business long enough to respond to and remedy any possible warranty claims.

When the first third party warranty programs where introduced to the market, sales and marketing differentiation was the driving factor. Over time, we have seen a distinct shift in need and motivation, with the global financial community now requiring some form of third party warranty to further mitigate the risks of solar projects.

The OEM warranty could either be primary which means that in the event of a loss, the OEM would settle the loss per the terms of their warranty and then the warranty policy would reimburse the OEM for the warranty losses per the terms and up to the limits of the warranty policy. The actual structure of the policy and the Self Insured Retentions (think the amount of the loss retained by the OEM) will differ depending upon the final policy agreed to by the Insurance Capacity and the OEM.

These warranty programs should be designed to meet both the needs of OEMs and the financial community. This is only possible through the collaborative efforts of experienced third party warranty program designers, the OEMs and those financing solar projects.

Over the last several years both the Banking and the Insurance Industries have taken a substantial amount of criticism─in some instances very rightly so. But today in the Solar Industry it is the lenders financing the projects and the Insurance Capacity responding with Innovative Risk Transfer Programs, that will ultimately enable the Solar Industry to grow, prosper and succeed.

Mike McMullen is Managing Principal and Co-Founder of PowerGuard Specialty Insurance Services (www.powerguardins.com)─a managing underwriter specializing in the design and underwriting of unique insurance and risk management solutions for the renewably energy industry. McMullen and his team have been recognized as ‘Risk Innovators’ and ‘Responsibility Leaders’ for their creativity and leadership in supporting the entire wind and solar energy value chain, including equipment manufacturers, project developers, maintenance and equipment contractors and those who finance renewable energy projects.