Fitch: US Solar Power Projects Start Solid, Face Long-Term Risks

These findings come at an important time as solar installations are proliferating.

NEW YORK--Fitch-rated solar power projects' favorable initial results will likely be stable in the near term. While the projects in our study are large (50MW to 579MW), we believe their completion risk, resource intermittency, and equipment performance results are applicable to smaller projects or portfolios. Among Fitch-monitored photovoltaic (PV) power projects, risks encountered during construction included delays (either due to local permitting or weather), counterparty risk including replacement of a bankrupt equipment supplier, and challenges in equipment performance. None of the project ratings were downgraded due to these completion risks based on the strength of their fixed-price construction contract structures, experienced and reputable contractors, and alternative available suppliers. These fundamental attributes are important whether the PV installation is large, small, ground-mounted, or rooftop.

These findings come at an important time as solar installations are proliferating. According to the U.S. Energy Information Administration, solar power output is on track to rise by 15% in 2015.

Operations are off to a good start. Of the projects we monitored, energy output was 9% higher than 50% probability of exceedance (P50) forecasts (average level production forecasts) in years one to four. The outcome for bondholders is positive as investment-grade projects demonstrate strong cash flow resilience to numerous performance stresses including resource intermittency, PV panel degradation, plant availability, and costs. The projects exceed breakeven debt service coverage levels by 32bps (on average) in an extreme one-year P99 energy production scenario. The projects' results benefited from better than expected solar irradiance and plant availability, higher online capacity, and lower than modeled losses for grid curtailment.

Longer term risks are still present in these projects. Most have debt tenors between 20 and 25 years while industry experience is insufficient and is much shorter. Extreme changes in weather patterns could benefit or adversely affect electric output. Long-term PV panel performance in varying environments remains unproven for panels made by current manufactures. Furthermore, many PV panel manufacturers do not have the financial capacity to back their warranty obligations. The frequency of inverter parts failure in various climates and associated costs are not fully known. Curtailment potential remains unknown as intermittent energy resources increase while grid management strategies and technologies mature. The positive short-term performance may mitigate some future performance uncertainty but is not a clear indication of expected long-term performance.

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