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12-2012 HT-SAAE is getting process right

Audits in China

Bankability is no easy process and includes a thorough thorough technical audit of the company manufacturing the solar panels. Accelios Solar GmbH has perfected a point system to measure the quality of PV module production and its audit of HT-SAAE provides a textbook example of how this auditing process works.

As Christian Leers of Accelios Solar GmbH pointed out at the beginning of his presentation at the solarpraxis AG and TUV Rheinland "PV Module and PV Power Plant Workshop" in Shanghai on October 31, 2012. There are over two million entries when you search the internet for the term "bankability". Wikipedia is no help, since it has not yet covered the term. It's not easy to grasp the concept of "bankability". Some of the Chinese module manufacturers in the audience might have viewed it as a rather straight forward process based on building top-tier brand status and securing the necessary product certifications, for example from TUV Rheinland for the German market. Shouldn't the combination of top-tier(or near-the-top) module manufacturer and a comprehensive list of module certifications be sufficient to gain bankability?

Assuming the product certifications are in place, this conventional argument is based on the apparent solidity of top-tier manufacturers, who have established familiar brands, significant production scale and are typically listed on a reputable stock exchange in China or overseas. But on both counts, be it module certification or top-tier status, this argument is seriously flawed. What used to be a benefit has now boomeranged back to these top-tier manufacturers: being publicly listed has now exposed painfully low valuations after an extended period of over-supply and eroding margins in the industry. And their massive production scale has now revealed a negative side, namely bloated production facilities and personnel to operate them. Add to this problematic mix cases of pollution and improper business development activities overseas and the inherent bankability of these manufacturers starts to look a lot less certain.

In a way, this levels the playing field for Chinese panel manufacturers and for that matter, manufacturers form any corner of the world. You can't just buy bankability by investing in scale and stock listings and putting your logo on familiar sports teams. These days are over, if they ever existed. Solar panel certifications are also limited in their contribution to bankability. They are only good for a specific module type, a specific build of materials (BOM), as well as a specific production site. Tor banks considering a project and a panel manufacturer, how can they be certain that the BOM and production site still apply to the modules used in their project?

Accelios' definition of bankability

Leers tries to make sense of this minefield with the following definition of bankability: "One specific bank provides debt capital for the financing of a PV power plant which is equipped with specific components, such as PV modules and inverters, that are credible to be financed."

While coming up with a definition is certainly helpful in understanding the concept of bankability, Leers' definition also shows that bankability os no easy exercise. Just as it is not possible to buy bankability, bankability is not something you can secure for all our projets going forward. It is limited to "one specific bank" and at the end of the day "one specific project in a particular market." it is also time-specific, meaning that banks who become more risk areas due to their own situation or the overall development of the market (Whether financial markets or renewable energy market) might adjust their bankability requirements over time.

On the other hand, experts like Leers can provide manufacturers with a strong foundation they can build on. Leers refers to this foundation as the "comprehensive bankability booklet." armed with this bankability booklet, module manufacturers sill be taken seriously b European (and other) banks assessing whether or not to loan money to a PV generation venture. Since such financing is similar to venture capital investments - it is typically non-recourse, so the bank relies only on future cash flows generated by the venture it funding - all dey aspects of the project need to be checked by the bank. In this sense Leers' definition could even go one step further, since not only "specific components" of the power plant, but also key actors like the project developer, the equity investors and the EPC have to be "credible" to bring the bank on board.

The bankability booklet Accelios purs together covers a wide range of subjects, including company information, PV production processed, produce descriptions, bank and insurance relationships the company has in its home country, certifications and reports, tests, audits and reference projects in various markets. Leers' expertise is mainly in the PV product and production side, as well as product certifications, reports, tests and audits. Other Accelios specialists cover the remaining areas. What really matters to Leers it that his customers demonstrate top-notch processes in the area of PV production. The customers' product certifications are a basis on which Leers builds with his audits and recommendations for corrective action.

The scoring system

Leers has audited a total of 42 module manufacturers, mainly in China, and of these 42 only one dozen survived his scrutiny. These twelve scored above 85 points, which Leers considers the threshold for being bankable. This scoring is contained in the final production audit report, which in turn is based on an initial audit report and a subsequent corrective action report. The latter report is not something all PV auditors deliver, but it belongs to Leers' sense of professionalism that he tries to promote continuous quality improvements to his customers, rather than just attest (or not attest) conditions that are bankable.

A company that stands out

While most bankability candidates do not even meet these conditions, some manufactures stand out form the crowd. One of these is Shanghai Aerospace Automobile Electromechanical Co. Ltd. (HT-SAAE), a Chinese manufacturer who already scores very high on the non-technical aspects of bankability, such as the strength of its balance sheet and other aspects of its financial and commercial condition. HT-SAAE is a wholly-owned subsidiary of Shanghai Aerospace Science and Technology Corporation, which is owned by the Chinese state and has been active in solar since the 1960s, when it supplied PV technology to China's aerospace program. It now has three divisions, including PV, high tech auto parts and new material applications. Its 2011 revenues were RMB 2.3 billion (US$369 million). The company was listed on the Shanghai stock exchange in 1998, and in 2010 a solar division was established as a separate enterprise under the HT-SAAE Group. The company has concentrated its module production facilities in a brand new plant in Shenzhou close to the city of Lianyungang in Jingsu province. Module production began in April of last year and now includes a wide range of mono- and poly-crystalline modules. Production capacity is currently at 750 megawatts with plans to scale op to over one gigawatt by 2015.

The production audit report

Right before the Solarpraxis AG/TUV workshop, Leers was in Shenzhou again to mark the end of the "book building" process, to borrow a phrase from the investment banking community. After an initial audit and then te-audit, the bankability booklet was now ready to be pitched to solar developers, EPCs and bankers looking for a dependable module supplier to include in their projects. For Leers the centerpiece of this book is the 46 page production audit report and the executive summary which forms its core. Here is where Accelios summarizes its findings and declares the HT-SAAE production processes "bankable".

With 90 points HT-SAAE scores at the top of the Chinese module producers Leers has audited. In fact, already in his initial audit HT-SAAE received a score of 86, sufficient for bankability, but not enough for an organization that according to Leers "has a large motivation to improve."

Improvements at HT-SAAE

A case in point is how they handled the cooling of the modules after they exit the lamination process. Upon leaving the laminator module temperatures in the range of 80 degrees Celsius need to be cooled down to 45 to 50 degrees in a period of at least five minutes. As Leers points out: "Companies which do not have a proper cooling after lamination do not have a proper product." lamination is one of the most critical steps in the production of a solar panel. During his initial audit Leers noticed that the five minute rule was not being followed, leading to a higher risk of product defects. What happened then illustrates the attention to quality ingrained in the HT-SAAE workforce. The staff member responsible for the laminators to cool for at least five minutes. Since this corrective action was implemented right away, this initial problem with the lamination process did not impact HT-SAAE's score in the initial audit report.

Given the critical importance of the lamination process, visual inspection of the modules before and after lamination is a key quality control measure. In both cases Leers noticed insufficient lighting during his initial audit. This was not a corrective action HT-SAAE could do overnight, but by the time Leers returned for his re-audit, lighting conditions had dramatically improved, allowing for a thorough visual check of both the front and back sides of the modules. This is a key process step to detect cell defects, matrix misfits or problems on the back side of the module.

New concept

The Accelios scoring system is a proprietary one, which on the one hand attests to the creativity of the team, but on the other hand tenders more difficult the job of the banks, which have to deal with various auditing approaches. But this brings us back to a core feature of the bankability process: it can only be generalized to a very limited extent; it is essentially a case by-case process where individual projects and individual players at a specific time are scrutinized by a possible lender to the project. In HT-SAAE's case the fact that "HT-SAAE itself is like a bank" (to use a description coined by Leers) and has a track record of over five hundred projects, mainly in its home market, certainly colors the way a bank in an overseas market will perceive the company. But if HT-SAAE didn't get it right on the production floor, all of this would be rendered useless. Interestingly, China has yet to introduce a thorough bankability approach to its domestic PV market. Low module prices and cost per watt calculations are still driving that market, but to make sure that the PV power plants being built are op to the task of producing power for several decades, such a bankability approach is urgently needed to weed out the " 85or below" suppliers Leers has become so familiar with during his auditing trip in China. That would also create the proper level playing field at home, where not only price, but also quality throughout the production process should be a critical factor in selecting module suppliers.

HT-SAAE can expand to over one gigawatt of module production capacity at its new plant in Lianyungang