04 November 2022
Making hay while the sun shines?
Sustainability is now shaping the construction industry’s direction of travel
Solar PV demand is soaring, but a shortage of capacity and skills is challenging the construction industry
The energy crisis has left most of the world craving security of supply. As the northern hemisphere winter looms, “keeping the lights on” has become a perplexing priority and offers an undeniable opportunity for the solar energy sector. However, in their haste to increase homegrown supplies, many organisations risk overlooking the construction and insurance implications of this supply shift. Developers are struggling to source products, while insurers have concerns not only about physical exposures and lead time for replacing key equipment, but also on ESG grounds.
The massive boom in demand is evidenced by the increase in solar PV generation – by a record 179 TWh (up 22%) in 2021 to exceed 1 000 TWh, according to the International Energy Agency (IEA). Europe posted the strongest solar demand in the first half of 2022. The continent has imported 42.4 GW of Chinese modules, a 137% YoY increase, with the figure rising on a monthly basis. Demand is also soaring in the US; the new Inflation Reduction Act intends to help grow the solar market by some 40% over existing projections by 2027.
China’s squeeze on supply
China is the leading global supplier of solar panels, but its dominance has created a number of geopolitical challenges. The country also has massive net-zero ambitions in terms of megawatts which we can put into context with the following analogy:
- Saudi Arabia is generally regarded as having some of the biggest aspirations for green energy in the world, targeting 58.7GW of renewable energy capacity by 2030
- China is expecting to install solar PV capacity alone (excluding wind) of 85GW in 2022
As such, there is significant domestic demand for PV equipment, which has led to delays in the procurement process for international developers. This supply/demand crunch is naturally placing upwards pressure on the price of Chinese-manufactured components that are key to the majority of solar PV developments. These price hikes add to the challenges facing offtakers, sponsors and EPC contractors, all of whom are trying to agree commercial terms for major new projects.
Supply is being squeezed further by global concern over forced labour involving the Uyghur population. The US implemented the Uyghur Forced Labour Prevention Act on 21 June, which bans all imported goods from the Xinjiang Uyghur Autonomous Region of the People’s Republic of China unless suppliers can prove the products were not made with forced labour. “Hundreds of megawatts” of solar panels had already been detained due to the solar industry’s Withhold Release Order (WRO) on silicon-based products made by Hoshine Silicon Industry Co., located in Xinjiang, in force since June 2021. Trade bodies such as the US’ Solar Energy Industries Association (SEIA) have been campaigning for supply chain traceability, but the onus is still on manufacturers to implement this process.
If project developers can overcome the challenges above, they still face the issue of transporting the equipment from China to the construction site. Supply chains are yet to recover from the pandemic, and considerable freight backlogs exist at many major Chinese ports. There is a risk that further city-wide or regional lockdowns imposed by the Chinese government in its quest for “zero-COVID-19” could stop or severely delay movement of goods out of the country.
Aside from the equipment produced in large volumes i.e. panels, inverters, trackers etc., there can also be even greater delays and difficulties with transporting large high voltage (HV) transformers. The scale of solar PV projects is ever increasing; concurrently, so are the main HV step-up transformers, which typically require specialist gantry cranes and trucks during the transit from original manufacturer warehouse to the project site. Again the costs of this have risen substantially as there is both a demand surge and shortage of this specialist equipment.
Another simple example of reduced supply leading to higher project costs for developers is the circa 600% rise in the wholesale price of polysilicon over the past 24 months. This can be attributed to a number of factors, but a domestic energy shortage in China caused a significant spike not long ago. Silicon production and other heavy industries are very energy intensive, and to counteract the domestic shortage of electricity, local authorities imposed curbs on local industry, including silicon producers. On a brighter note, there is hope that polysilicon supply will increase significantly in 2023, which should see wholesale prices return to a more affordable level.
A skills shortage
While governments have talked expansively about net zero, the training required to achieve this goal tends to be overlooked in favour of other aspects of the energy transition, such as technology. In the EU, 660,000 people work in wind and solar energy, and this figure is set to double in the next eight years. In the US, it is anticipated that the Inflation Reduction Act will create nearly one million extra clean energy jobs each year in the coming decade. Yet last year, 89% of solar companies reported difficulties finding qualified applicants due to lack of training and fierce competition.
A reduced labour market on a global scale has been a well-publicised result of the pandemic. Since the post-COVID-19 reopening of the world, many construction projects have been trying to break ground, but there is now a real shortage of experienced and skilled workers available for recruiting.
Insurers have seen a number of instances of simple, repetitive tasks being performed incorrectly - ranging from incorrectly mixed concrete for panel and tracker foundations, to basic components not being bolted together properly.
Given the sheer scale of some solar PV mega-parks, a straightforward task performed incorrectly over a prolonged period will result in significant repair costs and lost time. Insurers have been looking to manage this risk over the past few years by narrowing the cover they are willing to offer, in particular via the Series Loss clause. For construction firms, it can be challenging to find the right sub-contractors, vet them, and establish proper quality assurance processes. This is where contractors with a proven record of sound QA/QC processes can be invaluable; but the challenge for developers is finding one.
Insurers are treading carefully
Most insurance companies have internal ESG targets and investment/underwriting strategies, and therefore there is plenty of appetite to commit capacity to solar PV projects. However, some of the issues noted above have prompted a more cautious approach and additional due diligence in the underwriting process. A large solar park can take 24 months to build and construction insurers commit to sums insured, limits and deductibles at the outset of the project. Predicting actual reinstatement cost in the event of loss or damage circa 18-24 months down the road in the current environment is more than challenging. Additionally, with OEM’s order books full and ongoing lockdowns in many Chinese provinces, anticipating what the actual lead-time will be to replace key equipment (in the event of damage) is fraught with uncertainty.
Contractors and developers should be prepared to demonstrate to insurers that they have robust logistic plans and transit routes. Procurement teams should, as far as commercially possible, aim to engage top tier manufacturers for key equipment, and supply agreements should provide for timely remanufacturing in the event replacements are required due to loss or damage.
Project sponsors and developers who can demonstrate awareness, management and mitigation of the above issues will stand to benefit from the best possible terms and premium rates in the international market. Gallagher has a wealth of experience in successfully delivering major project finance transactions, and can help clients develop their risk management strategies and then articulate them in the best possible light to underwriters.
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