"Small businesses can be agents of change, and entrepreneurs are the classic ‘won’t take no for an answer’ activists, really. They just use business tools rather than community organizing."

#Solar100’s Danny Kennedy: The Most Interesting Man in Solar

Originally posted on pv magazine USA.

As the first interview in the #Solar100 Thought Leaders series, kWh Analytics Founder Richard Matsui speaks with Sungevity co-Founder and Managing Director of the California Clean Energy Fund Danny Kennedy.

It seems fitting for our inaugural monthly #Solar100 interview to be with activist turned entrepreneur turned fund director, but ever the solar advocate, Danny Kennedy.

Kennedy believes the different roles are not at odds, noting, “Entrepreneurs are the classic ‘won’t take no for an answer’ activists, really. They just use business tools rather than community organizing.”

Though the tools may change across roles, Kennedy’s means and ends—his theory of change and his ultimate vision—are decidedly centered on people. He believes people will drive the necessary changes towards clean energy, and that changes towards clean energy are necessary to protect Earth and its people.

It is striking how easily Kennedy uses a broad “we” and “us” in the place of “solar”; or how quickly he can name examples of off-the-radar startups and activist campaigns that are contributing to the revolution for clean energy; or outside of this interview, how often we hear Kennedy’s name cited among solar groups just getting their start.

Kennedy speaks like an activist, builds community buy-in like a grassroots organizer, can leverage financial tools like a capitalist, and at kWh Analytics, we think he’s the most interesting man in solar.

Solar’s Biggest Challenges

Richard Matsui: In Rooftop Revolution, you identified the challenge of building a movement for solar amidst the many marketing campaigns started by solar’s opponents—that it is expensive, inefficient, subsidy-driven, that it can’t be scaled, that it takes away jobs, etc. As you look at the landscape five years later, what are the top 3 challenges you see in solar now?

Danny Kennedy: There’s an irony in how things have progressed since 2012 when I wrote that book—then, we were “too small to be significant” for everyone—from Bill Gates to Donald Trump. And now, we’re becoming “too dominant.” It’s a complete turnaround that we’re now being depicted as a problem in the grid because we produce too much free electricity. I find it stunning that regardless of how many anti-solar marketing myths are refuted or how much progress is made, certain people will create excuses in attempts to stop solar.

I would say the three biggest obstacles are:

1) Fossil fuel interests trying to protect themselves. The only way coal survives is a political choice for it to survive. There is no economic or social rationale otherwise. But we’ve seen that political choice being made by governments from America to Australia: subsidies being crafted, policies being set up to literally overturn the outcome. Fossil fuel interests will obfuscate, make up crap, and create crazy stories to defend coal and gas. That’s the number one obstacle: political power of the vested interests.

2) Sustaining popular commitment to the cause against fatigue. We cannot relent. We have been driving fast to get from one to three to maybe ten percent of the electricity supply in some states, and we’ve done really well. But we’re still a fraction of the supply and have to continue doubling. That demands consumers and citizens and activists all carry on building the market—movements make markets as much as businesses do, and we cannot forget that.

3) Technical. I think getting to 50% renewables is relatively easy; getting from 50% to 100% will present some new technological challenges. And so as solar grows towards dominance in the grid, there will be some new technical challenges, which are not insurmountable, but which will still need to be addressed.

RM: When we have this conversation in five years’ time, what do you think will be solar’s top three challenges then?

DK: A lot does depend on what happens in the next four years. Politics can get uglier still. People ask me what can slow down the inevitable rise of renewables, and I think war could do that. The world could fall apart like a pig in a blender, go back to its corners, do what it knows and not be advanced, adventurous, or push the boundaries of technology and good things. And I think war is very possible. That’s the big one that risks all the progress we’ve made. Other than that, in 2022 the main obstacle and question will be: How fast can we make the change to solar?

RM: Can you talk about an off-the-radar startup that’s tackling one of these big issues?

DK: When it comes to building the buy-in and commitment of a community to solar, my favorite right now is called Solar Ear. They are working to make hearing aids available to the hundreds of millions of humans who can’t get them because batteries are expensive and hard to get into remote and emerging markets. Solar Ear’s solution: a solar-powered hearing aid, which effectively recharges the battery rather than disposes of it, making it more advanced than the current crop of hearing aid technologies, as well as much more affordable and available. And their business model is really cool—it’s driven by deaf people doing this work in these countries for deaf people.

And I love it because it doesn’t sound like a direct response to any of the obstacles I just listed, but the political will and cultural commitment to the transition we were talking about has to happen most in emerging markets. The billion plus people under 30 in Asia and Africa that are looking at the world and wondering what their future is need to be engaged by this to carry it forward. That’s where electrification is going to happen. America’s an interesting, small portion of the movement in terms of the Gigawatt capacity that will be built in America, so building movements worldwide and empowering people literally and figuratively with solar products is really important. In terms of demonstrating how solar can have a really meaningful impact in peoples’ lives, that’s one company that touches me.

Activism, Entrepreneurialism, & Building the Movement for Solar

RM: As a leader in solar, you have a particularly unique background as an activist in Greenpeace. In your 2013 TEDxSydney talk, you mentioned the profit motive as a driver for change, and this line made me chuckle: “Capitalists are coming for your rooftops. It means the solution will come.” I think it’s fair to say that you are now a capitalist, although perhaps a conscious capitalist. What sparked that change for you?

DK: First, a lot of Greenpeace’s successes over the years and strategies are capitalist. I don’t think the two are mutually exclusive. To give an example, I ran a lot of forestry campaigns trying to save forests in places like Papua New Guinea. It’s often the case that you can use market forces to make change as an activist, such as forcing good wood procurement practices as a way of protecting ancient forests. That’s been the strategy for the climate and clean energy case for a long time, as in adding cost to carbon. Small businesses can be agents of change, and entrepreneurs are the classic ‘won’t take no for an answer’ activists, really. They just use business tools rather than community organizing.

Second, that doesn’t mean that I’m not also a socialist. My personal thinking is that capitalism has its uses, but it’s pretty simplistic to just stick with one or other of the -isms. We have to find the blend that makes sense for the 21st century. Capitalism has had its use in unleashing the energy innovation that we’ve seen in the last decade, but there was also chronic market failure before it—capitalism had failed for most of the 20th century in creating any innovation. That’s the hundred years prior to the California Solar Initiative, which was kind of a socialist model, and certainly up to Germany’s Energiewiende, wherein the market was somewhat constrained by strong industrial policy. Prior to those the energy industry had been failed by monopoly capitalism. For me, market force is a means to an ends—market force works, but that doesn’t mean it excuses us from the bigger conversation of what capital is for and what market force should lead to. I believe in a guided market, at the very least.

RM: I like that point you’re making—this idea that market forces are very capable of doing certain tasks, but maybe not great at all tasks. The forestry example is new to me, but I think you were working with Jeremy Leggett on the divestment movement to put financial pressure on institutions to do more. Is there another big campaign that you’re working on?

DK: I think the focus on stranded assets is really important. There is a phenomenal amount of money that is being wasted by the fossil fuel and nuclear industry as they enter their dying days, with examples like Adani’s Carmichael coal mine in Australia or the gas pipelines from Texas to Mexico. In Australia, $1 billion tax dollars are being used to subsidize a coal mine that should not be opened in in a region that represents 2% of allowable carbon pollution left for the atmosphere. It’s just wrong. In Mexico, they’re spending billions this year on natural gas pipelines from Texas, which is going to lock them into debt payments on those pipes whether or not the gas price stays low, whether or not they decide to make the transition to wind and solar, which is much cheaper than gas already in Mexico’s reverse auctions, to electrify vehicles, etc.

The stranded assets campaign is really about avoiding “locking in” communities to uncompetitive infrastructure. Remember when Shell went up to the Arctic from Portland? The drilling rig was blockaded by canoeists and people like those I used to work with for a while, but the rig got out. And then they failed to find anything worth developing, which was predictable. It forced Shell to report a write-down of $7b dollars within about six months. The Arctic exploration effort of the oil majors generally has led to tens of billions of dollars of write-downs by those companies. There’s no accountability and instead there’s still support from government. There’s a huge contrast between the waste of money on the dirty side of the ledger versus the amounts we’re profitably deploying on the clean side of the ledger. There’s a capital market campaign I would love to run against the stranding of further assets in light of climate change. And maybe I will.

RM: Given that you’ve gone from activist to solar entrepreneur to clean energy investor, how are you liking this new role, and how is it different?

DK: It’s different in that I get to play with a lot of entrepreneurs instead of just a couple companies, like Sungevity, Mosaic, and others that I helped get going. The job is working more on the system than in the system, in the entrepreneurial ecosystem itself. It’s a different layer of responsibility. I really like our work, both because managing other peoples’ money effectively is important and challenging, but also because it’s about open-sourcing a lot of the lessons we’ve picked up over the last decade in California. The solar coaster, as we call it, has been tumultuous—plenty of lessons for future entrepreneurs that we hope to make transparent and share with the world. California’s like the lab for the world—we actually should get to 100% renewable energy by 2030 if we can. The main focus now for me is not California, as important as it is—it’s on continuing this work in Africa and Asia, otherwise we don’t turn the carbon dial.

RM: Fascinating. Given that you’re looking at this ecosystem more holistically now, are there gaps you perceive in the ecosystem that others can help supplement?

DK: Oh, god yeah. There’s this wrong belief that now that clean energy’s got some poster children that have been successful and have made it public and disrupted some categories like private vehicles that it’s inevitable that we will succeed in time. But that’s not true at all. We’re talking about a trillion dollar value creation story annually for the next 20 years. We need hundreds and thousands of highly successful companies, from entrepreneurs working in niche segments to entrepreneurs working on broad electrification. 100% renewable energy is not going to be done by a couple businesses out of California that expand their models to Africa. It’s going to be carried forward by African entrepreneurs. The future of the energy demand in the massive new urban realities in Asia—these mega-cities in India, China, Indonesia, and elsewhere—how will their needs be met in a uniquely local and specific way? Leveraging learnings and technologies from afar no doubt, but the distributed nature of renewable energy suggests that it’s going to be accomplished through a combination of ideas, and those are going to come not just from people in Palo Alto. We need to find and fund many more entrepreneurs.

There are big human capital gaps, as well as massive financial capital gaps. Emerging markets get no joy, even though that’s where the work is. Early stage gets very little investment these days, as you know, because investors prefer to do project finance now that they’ve kind of got their heads around wind and solar farms. We still need to do a lot more in different segments, whether that be community solar in America or off-grid in developing countries. Or diesel displacement, which can be very lucrative and great investments, but for other reasons people don’t want to make them, like presumptions or prejudices they have about those markets. There are also major policy gaps, which is why I’ve joined the board of Power For All, a campaign to bring distributed renewables to the 25 countries in the world with the least electricity by 2025.

Lessons Learned & Advice for Entrepreneurs

RM: What advice would you give to an entrepreneur? Given that you witnessed and helped drive the founding of the first generation of solar startups, at least in the states, what is the one thing that you take from that experience that you think is broadly applicable to other founders?

DK: The one thing? Oh, I’ve got lots of lessons. If just one, I would say pick your investors carefully so you can control your own destiny. That’s one of many, if I had to choose just one for other founders. Another is plan for the long haul. Beware this is going to go all kinds of crazy…

RM:  Has your time in CalCEF working more broadly on the clean energy ecosystem, instead of just residential solar, lent additional perspective on the solar industry? For instance, at kWh we look at CoreLogic and say, “Ah, that’s how mortgages are financed, therefore solar must eventually look more like this, and this is how we should think about the data infrastructure for our industry.”

DK: Yes, because so much of solar is about the financing of solar—which now involves a lot of your data and statistical insights—I think the microfinance experience is very relevant to the solar industry as it goes forward, again, in the emerging markets. It sounds obvious, but it has not happened yet.

RM: That’s surprising. What’s the gap there? I would assume if you’re doing microfinance, I would assume you could make the argument very easily for why solar-powered light allows someone in the BOP (“Bottom Of Pyramid”) to be more productive in the evening, which would enable loan repayment.

DK: I just don’t think we’ve gotten there yet. We’re talking about hundreds of millions of people who lack basic services like electric lighting. So, those entrepreneurs that are there are still using the most expensive type of money there is—equity, like we did for early establishment of US residential solar—to do solar as a service. Mainstream microfinance reaches hundreds of millions of people today, which required a system of controls to be built at the village-level. I think solar will follow this path, to create a de-centralized market of electricity of the future.

Call to Action

RM: Everything I’ve ever read or heard you say points to an underlying theme of people as entrepreneurs, as agents of change. You identified entrepreneurs as activists and talk of social movements that are leading the solar revolution. This hopeful picture stands in stark contrast to the brutal “solar coaster” we live on. I think the people in our industry are actually feeling quite depressed right now, even though our numbers on deployment and costs have never been better. What would you want to say to the people working in solar?

DK: I think you’re right on. Solar has been so wildly successful on important measures like $/kWh—but this is not the same as profitability. I would say my recommendation is people should take care of one another. And particularly, to bring up leaders to step into our shoes, follow in our footsteps. This is a long haul. And I think you’re right—at Sungevity, we were one of the vanguards to modernize solar, rode the wave as it crested. Kind of like Netscape for the internet. [Laughter] It was a necessary precedent to Google Chrome, Mozilla’s Firefox, and all sorts of newer and better ways of doing it. And those people doing that work needed to be supported by the people before them. Leadership development, mentoring, investing in young upstarts. And diversifying that leadership. Because if our movement is not inclusive of women and minorities locally and internationally, and if we just become tech bros, we don’t go global and we don’t achieve the climate justice that we’re meant to be about.


kWh Analytics Data Scientist Adam Shinn presenting, “Cross-Sector Opportunities to Improve Solar Data Analysis and Capabilities” at Bay Area Photovoltaic Consortium (BAPVC) Meeting & DuraMAT Workshop, hosted at Stanford University. May 23, 2017.

kWh Analytics Presents on Opportunities to Improve Solar Data Using DOE’s Orange Button

Originally posted on Solar Power World.

At a Stanford University solar conference focused on bringing together universities, industry, and the U.S. government, kWh Analytics Data Scientist Adam Shinn introduced upcoming industry-wide advances made possible through cross-sector collaborations.

“One of the biggest challenges facing our industry right now is the soft cost of solar,” said Shinn, pointing to a graph from the 2016 report by the Lawrence Berkeley National Laboratory. “The decreases in hardware costs over the years are represented in a significantly reduced cost of solar. Now soft costs—including installation, maintenance, overhead, and financing—comprise the majority of the total installed price of solar.” The problem of solar’s disproportionately high soft costs stems from an industry-wide problem: the absence of quality, standardized, aggregated data.

Enter Orange Button, a program of the U.S. Department of Energy SunShot Initiative. Orange Button supports the creation and adoption of industry-led open data standards for seamless data exchange across the solar value chain. The Orange Button project is an ideal example of collaboration across multiple segments: government agencies, the private sector, non-profits, and industry consortia.

Orange Button awardees and DuraMAT Workshop presenters SunSpec Alliance, kWh Analytics, and the National Renewable Energy Laboratory (NREL) are each contributing their particular strengths towards this shared goal of standardizing the way solar data is collected and exchanged.

SunSpec Alliance, a trade alliance of more than 100 solar and storage distributed energy industry participants, is taking the lead on formulating the data taxonomies. kWh Analytics, a solar data analytics company with the industry’s largest independent database on solar asset performance, is supporting the adoption of the data standards through development of a data format translation software tool. NREL, the only federal laboratory dedicated to renewable energy and energy efficiency research and development, is developing tools to establish a marketplace for standardized solar datasets.

Two major solar industry associations—the Solar Energy Industries Association and the Smart Electric Power Alliance—are also active Orange Button participants.

If the solar industry adopts a unified data standard, it would revolutionize the way solar is financed, reduce market inefficiencies, and lower soft costs and the overall cost of solar for consumers. As the industry matures and the problems become more complex, early examples of cross-sector collaboration will drive industry improvements and help establish the basis for future innovative partnerships.

YieldCos Playbill

YieldCos, A Modern Solar Shakespearean Play

Act V is still to come.

Originally posted on pv magazine. Re-posted in May 17, 2017 SolarWakeup.

Now even NRG may be looking to sell NRG Yield, a top five YieldCo. With NRG under pressure to cut costs, this news stokes growing concerns about the future of YieldCos. Last month solar industry analysts had a field day when First Solar announced it would explore a sale of its stake in 8point3 (CAFD), declaring YieldCos a “losing proposition,” “dividend trap,” and “dead structure.”

This open punditry reminded me of The Tempest, which I last read in middle school. The Tempest was my first introduction to Freytag’s Pyramid, a ‘data visualization’ of the classic Shakespearean narrative. Across comedies, tragedies, and historical plays, Freytag’s Pyramid identifies the structural similarity of plots and maps them into five acts: Exposition, Rise, Climax, Fall, and Dénouement.

The YieldCo story follows an identical plot line. With leading YieldCos 8point3, TerraForm Power, NRG Yield, and NextEra Energy Partners down over the past few years, many industry watchers seem to be (understandably) caught up in Act IV of the YieldCo story and have not yet considered Act V. First, here are my cliff notes on Acts I-IV:

Act I, Exposition: The year is 2012. Enter our protagonist, YieldCo, a young, independent power producing (IPP) company created to own and operate solar assets in order to generate a predictable cash flow. By separating the development activities (a risky activity) from the long-term asset ownership (a more stable risk) into two different companies, YieldCos democratized investor access to solar assets.

Act II, Rise: As hoped, YieldCos fulfill their initial promises and provide their investors reliable dividend checks. Sensing an opportunity, a YieldCo begins to promise both steady dividends and rapid growth. Thus begins a virtuous cycle: Investors expect YieldCo dividends to grow rapidly, causing investors to bid up the YieldCo stock price, which enables the YieldCo to buy more dividend-generating assets with its valuable stock, which then increases the expected dividend growth, and so on. Through 2013 and 2014, at least 15 YieldCos go public.

Act III, Climax: At their peak, market valuations of leading U.S. YieldCos include TerraForm Power at $5.5B, NextEra Energy Partners at $4.4B, NRG Yield at $4.1B, Abengoa Yield at $3.9B, TerraForm Global at $2.6B, Pattern Energy at $2B, and 8Point3 at $1.3B. By mid-2015, YieldCos are valued at $20B+, a princely sum worth much more than all publicly-listed solar panel manufacturers worldwide.

But stock prices of these sustainable energy companies had been bid to a point of unsustainability. Theories diverge on the exact cause, but no one disputes that during “the Summer Shock of 2015,” the self-reinforcing cycle of high growth and high yield collapses.

This brings us to what many believe is the end of the YieldCo story.

Act IV, Fall: The cycle changes from virtuous to vicious. Within months, share prices fall by as much as 60%, producing widespread investor concern over the function, transparency, and durability of YieldCos.

NASDAQ YieldCos Stock Chart

Market valuation of the seven listed U.S. yieldcos from mid-2015 to mid-2017. Source: NASDAQ stock charts

Two years later, the stocks still haven’t recovered. Just a few weeks ago, First Solar and Abengoa explored selling their respective YieldCo stakes in 8Point3 Energy Partners and Atlantica Yield. Amidst the headlines predicting doom, many industry observers are understandably mistaking this act as the end of the play.

But, as Freytag observed of plays, so too, can we observe of industries: this financial vehicle may be new to solar, but YieldCos are not a new financial vehicle. And neither is this story arc.

Act V, Dénouement: Traditionally, conflicts are resolved in the fifth act: the protagonist either dies or matures, having learned a few life-changing lessons.

YieldCos, as a structure, have not died—the decline of growth-focused YieldCos does not diminish the YieldCos’ original value proposition of separating risky development activities from less-risky, long-term asset ownership. Instead, we are witnessing the maturation of the YieldCo model, and along with it, the maturation of capital deployment into solar.

In the heyday of the growth-focused YieldCo, many investors believed that the YieldCo structure was the single ‘natural owner’ of all renewable assets, and all forms of investment risk. The YieldCo from Act II owned all risks of the operating asset, including the risk of offtaker default, O&M risk, weather risk, etc. Driven by their aggressive growth expectations, YieldCos even assumed a level of development risk, pushing past any cautious objections. These YieldCos were true generalists.

The “Summer Shock” left a vacuum of capital that sparked a Cambrian explosion of new, specialized sources of capital that are the true ‘natural owners’ of specific risks. Power traders, the intellectual descendants of Enron, are rapidly developing hedges that ‘own’ the risk of fluctuating wholesale power prices. Energy management firms like Altenex are developing new contract structures that enable large, investment-grade corporates to ‘own’ the credit risk. At kWh Analytics, we partnered with insurers that rely on our vast data repository of solar asset performance (fast approaching 200,000 operating solar projects) to create an insurance product that ‘owns’ solar production risk. This specialization allows each capital type to play to its unique strengths.

Similarly, we think YieldCos will specialize. YieldCos are modeled after REITs. Today, it is rare for a REIT to be a generalist. There are REITs that specialize in owning strip malls in the Midwest, and others that specialize in owning A-grade office buildings on the coasts. It doesn’t take much imagination to envision a YieldCo that will specialize in distributed solar while another specializes in utility-scale. And no YieldCo should take on development risk again. Put another way, YieldCos are to REITs as West Side Story is to Romeo and Juliet. Different names, same story.

This specialization is ultimately good for the industry. While the fall of growth-focused YieldCos left many investors shaken, managed and financed correctly, YieldCos still have the potential to provide investors with steady yields, project developers with access to capital, and consumers with cheaper solar.



Richard Matsui (CEO & Founder of kWh Analytics) and Philip Williams (Director of Operations at Ahana Renewables) at “Financial Optimization of Operational Assets - Refinancing” Panel, Solar Asset Management North America Conference. March 29, 2017.

Solar Refinancing: When Asset Management Steals the Show

Originally posted on Renewable Energy World.

We all know that asset management is in many respects the under-loved function within a solar company. Solar asset management involves the ongoing management of financial, commercial, and administrative tasks necessary to ensure the optimal financial performance of a solar PV plant or portfolio of plants. From an executive-level perspective, it’s easier to invest in developing a new solar project, buy an early-stage project, or invest in a project finance team to try to get better financing terms (as these functions are understood to drive value) than it is to invest in asset management.

In most businesses, revenue is the clearest driver of profitability. So, it’s an easy decision for executives to invest in their sales activities. Similarly, in solar, acquisitions and project finance are commonly prioritized, whereas asset management is oftentimes an afterthought.

However, there is at least one point (often multiple points) in every asset’s 25- to 30-year life when asset management steps into the limelight: the refinancing of a solar project.

What is refinancing? Refinancing is when you take an existing, operating asset and then get a new loan from your bank—ideally with better terms, since the project has been de-risked.

Taking a step back to understand financing: Banks have appetite for solar investments, but loans are carefully structured to avoid even the smallest risk of default. Consequently, banks size deals to the asset’s downside and assign conservative terms on loans. This conservatism results in an inefficient pricing of risk—banks apply about a 25 percent haircut for commercial and utility-scale solar projects, and a nearly 35 percent haircut for residential portfolios — known as debt service coverage ratios).

Today, the single-biggest cost of a solar project is actually an invisible one: the cost of capital. In this context, refinancing is particularly valuable because it presents an opportunity to reduce that single-biggest cost. What magnitude of savings can be gained from refinancing? According to Ahana Renewable’s Director of Asset Management Philip Williams, “savings could be up to a couple percentage points better than the original terms,” which translates to tens of millions of dollars of value on a large portfolio.

While the total installed price of solar has continued to decline, non-module costs now comprise the majority of the total installed price of solar. Since 2010, reductions in inverter and racking costs represent a smaller share, roughly 20 percent, of the decline in total non-module costs. The sizeable remainder can thus be attributed largely to declines in various soft costs. Credit: Lawrence Berkeley National Laboratory.

Asset management is critical for refinancing. Williams noted, “when refinancing solar assets, a lender is about to shine a light on every dark corner of your portfolio. So, from the very start, you actually need to think years ahead, to consider what software systems you need, what first-class preventative maintenance you want your O&M to perform, how this information will flow into your existing data infrastructure, etc.”

It’s true: To justify better terms, you need to prove to the bank why this is a better asset. You need to have strong documentation of your warrantees, the energy production data must be centrally managed, you have to make sure you have good O&M records of how you’ve taken care of this plant, and so forth. Assets can only be refinanced if they are proven to be higher-quality assets than they were last assessed several years ago.

Furthermore, new opportunities have recently emerged for assets with good asset management. For example, my company offers an insurance product that guarantees up to 95 percent of a project’s estimated energy production, which reduces the “haircut” that a lender would normally assign. But if an asset is falling apart, no lender or insurance carrier will be willing to touch it.




Opinion: Silicon Valley InsurTech

By Matthew Neill, originally posted on Insurance Insider.

The sun-kissed avenues of Northern California which house the technologists who have come to run the world are thousands of miles away from London.

And at first glance it appears that the cultures of its (re)insurance world is several multiples of that distance apart from the traditional strongholds of London, Europe and the US East Coast.

But with the rise of InsurTech in the last two years, Silicon Valley has become the epicentre of the biggest figurative earthquake to rock the industry for some time.

While other parts of financial services industry have been fundamentally changed by technology, (re)insurance has remained relatively unchanged, particularly in London.

Brokers still shuffle to and from Lloyd’s laden with stacks of papers, underwriters come to their box and approve policies with a stamp, and the pubs remain encouragingly full at lunchtime in spite of those who would see it otherwise.

But the winds of change have blown over the Atlantic now, and London is sitting up and taking notice.

The question is – what is going on in Silicon Valley that is going to make it to the other side of the pond?

From all my conversations with venture capitalists, start-ups and investors on the West Coast, one theme continued to rear its head: seriously technically savvy people with no prior experience of insurance are paying attention to the issues in the industry.

And they think they can do a better job than the incumbents.

There are many reasons why they claim to be able to do this: No legacy technology noose around their necks, the capability to change tack quickly and innovate as and when issues appear – offering the same product for a much lower expense level.

But the one thing that stood out above all was their ability to gather enormous clumps of data on specialist industries and, through technological alchemy, transform it into (re)insurance gold.

Take kWh Analytics as an example. Before entering the (re)insurance world, the start-up was a benchmarking tool for the global solar energy industry, aggregating data on the price and quality of solar panels all over the world for the use of investors.

Now it has shifted into insurance, using that data to not only underwrite more effectively, but to give its Lloyd’s backers access to a market they were previously unable to enter on the terms they want.

For the moment, these companies want partnership. They have no desire to take on the regulatory and capital requirements demanded of full balance sheet carriers.

But as these businesses begin to increase scale and gain momentum, there is a distinct possibility they will decide to strike out on their own.

Big data is no longer a buzzword – it is a daily reality that the industry must get to grips with.

kWh Analytics & NREL Collaboration Wins Award at 2017 PV Reliability Workshop

“Rate of Degradation Tools: Open-Source Degradation Analysis Toolbox,” a joint collaboration between kWh Analytics and NREL, was recognized as one of the Top 3 posters in its session at the 2017 PV Reliability Workshop. To download full poster, click on the image below.

Open invitations for people who are interested in using or contributing to this software are available in this public repository: https://github.com/kwhanalytics/rdtools.

Coverage of this poster can be found on Solar Power World.



My 2017 Solar Resolution — Inspiring Dialogue with Key Solar Influencers

Originally posted on Renewable Energy World.

A funny thing happened recently: We wrote an article suggesting that a lower cost of capital, driven by increased debt in project finance transactions, would help to mitigate some of the new risk the solar industry faces in 2017. We didn’t anticipate that this would be a particularly controversial viewpoint. After all, paying a lower cost of capital is like paying off old credit card debt. Who could disagree with that?

So we were surprised at some of the pushback. People from various functional backgrounds in solar argued that their area of expertise was the aspect of the market most in need of cost reductions. Marketers pushed for lower customer acquisition costs, operations managers pushed for more efficient fleet ops, and so on. None of these are wrong. Any opportunity to reduce solar’s costs should be explored. Our company is focused on the finance side of solar and so naturally, our view veers toward the costs associated with project finance.

The lower cost of capital argument reminds me a bit of the importance of sleep in our everyday lives. What do I mean by that?

Sleep impacts every aspect of our lives. Consistent, good sleep makes us more alert during the day. We are more productive in our jobs. It improves our memory, makes us more creative, and even helps us lose weight. In essence, sleep is a multiplier. We do not directly include it in our measurements of productivity, creativity, or health. But it is always there, impacting all of us in innumerable ways nevertheless.

Solar’s high cost of capital is similar. It will never be a specific line item in the installed cost per watt of a solar project. But it is always there, in the background, impacting every aspect of the solar value chain — from equipment to labor to marketing, and at every size — from utility-scale down to residential. For instance, consider a small installer in Vermont that uses a third-party financing service to offer a lease or PPA. That lease or PPA is more expensive because of the financing service’s higher cost of capital. Financing costs are hidden but significant.

Here’s a way to reduce this cost: Credit enhancements, such as insurance on the production of a solar asset, are increasingly available to project financiers today. These enhancements can improve the net present value of solar project finance transactions by 5-15 percent. Assuming an installed cost of $3/watt for a residential system, that’s as much as 15 to 45 cents of added value. With equipment prices plunging, this additional value is akin to completely eliminating the cost of a module.

As we have pointed out, replacing expensive equity with cheap debt changes solar’s equation for the better, for everyone in the industry. Because money is fungible, it ultimately doesn’t matter where cost is driven out of the price of an installed watt. Simply put: a dollar saved from lower acquisition costs is the same as a dollar saved from lower capital costs.

This is an important conversation for the industry to have, and it is particularly useful for solar professionals to get out of their silos and hear the views from other functional areas. I know this is an area where I can improve. I’ve been in solar for 10 years, yet I have blind spots that are obvious to an installer, a marketer, a technologist, or a policy maker.

So this is one of my professional resolutions for 2017—to get out of my solar finance comfort zone and learn more about other aspects of our industry. To make this easier, our team assembled a ‘Top 100’ list of Thought Leaders and is making the list publicly accessible at this link. By updating this list weekly, we hope to inspire dialogue across our industry. I look forward to learning more from all of you!

steph curry

The Danger of Solar’s ‘Hot-Hand Fallacy’

This article was originally posted at Greentech Media.

It’s late in the fourth quarter. The Golden State Warriors, pride of the Bay Area, are down by two. Draymond Green rebounds the ball and passes to three-point savant Steph Curry — arguably the greatest shooter on the planet. What could go wrong?

The shot hits the front iron, falling to the floor as time expires. The Warriors lose.

It’s a classic example of the “hot-hand fallacy,” which is the tendency to believe that past achievements increase the probability of success in future attempts. I worry that a potential hot-hand fallacy is taking shape among the solar intelligentsia: a misguided belief that the industry’s achievements in recent years point to unabated growth in the future regardless of actions by Donald Trump, Republicans in Congress, or even changing market dynamics.

That’s not to say that solar’s success in recent years was random — it took a lot of hard work and innovation. Nor does it necessarily mean that solar’s winning streak won’t continue. But assumptions being made today about future growth are based on historical trends that may no longer have predictive value. It is a trap of hubris that is dangerous for the solar industry.

For solar in the U.S., there are poorly understood risks everywhere. Obvious among them is the policy risk to the tax equity market, either through a reduction in the pool of available tax equity via lower corporate tax rates or simply an outright repeal of the solar Investment Tax Credit (ITC). Even staff changes at the Treasury Department have the potential to adversely impact the ITC’s value to asset owners.

There are macro-level issues beyond tax policy that could have even greater impact on solar. Though they may seem unlikely to come to fruition, if 2016 taught us anything, it is that seemingly improbable events can and do occur. For instance, what would be the impact on solar if Trump imposes a 45 percent tariff on Chinese imports, as he has proposed? Probably unlikely, but possible. The ramifications for not only solar, but the entire economy, are difficult to fathom.

 The most likely exogenous policy outcome may be the one that could have the biggest impact on solar: continued increases in the federal funds rate by the Federal Open Market Committee. The market is pricing in multiple Fed rate increases for 2017, possibly pushing rates above 1 percent for the first time since October 2008. It is not coincidental that this was the same month that Congress extended the ITC for eight years.

It is easy to overlook the degree to which low interest rates have been a boon for project developers. The ITC gets most of the credit for solar’s incredible growth. But if the ITC has been the primary mechanism by which equity flowed into project finance transactions, zero-bound interest rates facilitated the accompanying debt at cost-effective terms.

Indeed, virtually all of the solar installed in the United States was done so under a 30 percent uncapped ITC and near-zero percent interest rates. The impact of higher rates on solar’s growth trajectory are not exactly clear, but one thing is certain: Project developers will face higher-cost borrowing as lenders look to maintain their margin above the risk-free rate.

fed fund rate

Counterintuitively, the best way to respond to higher-priced debt is to find ways to deploy more of it in solar project finance transactions. That is because debt is invariably less expensive than equity, and loans typically only account for roughly 35 percent of solar project capital costs. Applying more debt would squeeze out higher-priced equity, resulting in a lower blended cost of capital.

In fact, our modeling shows that increasing debt in project finance transactions to cover half of capital costs could increase equity yields by 150 basis points.

However, the challenge of convincing banks to increase the size of loans reveals an inherent shortcoming of debt — it is a fundamentally blunt financial instrument. Lenders have appetite for solar investments, but loans are carefully structured to avoid even the smallest risk of default. Consequently, lenders size deals to the asset’s downside and assign overly conservative terms on loans. This results in ineffective pricing of risk. What financial tools are available to break this conservative lending paradigm and enable banks to extend more debt?

The most obvious answer is external credit enhancements, such as surety bonds or new insurance products. External credit enhancements typically involve transferring risk to a third-party offtaker with a balance sheet capable of absorbing said risk. As a nascent market with a limited track record to assess risk, these enhancements were previously cost-prohibitive or altogether unavailable for solar project financiers.

But the solar market has reached a level of maturity and sophistication that finally unlocks these instruments and can help open the door to new sources of capital. As project performance data continues to become more widely available through new risk management platforms and big-data analytics, the ability to accurately quantify risk engenders confidence in the financial markets that solar is a safe investment.

The global insurance market is a particularly prime venue for solar financiers to increase their creditworthiness. As a means to effectively price risk, insurance is a more preferable source of capital compared with debt. The key differentiator is the willingness of insurance firms to take some losses, which is why insurers are historically best positioned to accurately price low-probability risks. Solar’s variability risk is much more efficiently priced in hedging products than in loans.

To be sure, insurers have significant market challenges of their own. While a zero-bound interest rate environment helped facilitate solar’s growth, it has hindered the ability of insurance firms to meet target yields through investment of their cash balances. This dearth of investment opportunities has led to intense competition for customers in new risk categories, squeezing profits across the board. The insurance industry is hungry for new premium revenues, and solar assets represent a potentially massive market — the solar asset class today is valued at half a trillion dollars. Insuring the production of these assets would limit the bank’s exposure to repayment risk, thereby allowing lenders to safely increase debt levels in project capital stacks.

Not every industry can be a metaphorical Steph Curry. Solar, like many other sectors of the economy, seems to be underestimating the market risk that our new political reality presents. It would be a mistake to believe and act as if solar is above the fray. Taking action now can prepare solar firms for the market uncertainty ahead.

For solar to truly become unassailable, the industry will need to tap into larger and more cost-effective sources of capital. Exploring new opportunities for credit enhancements is one way to help ensure that project finance transactions receive debt terms consistent with the actual risk presented by solar assets. These new financial tools for de-risking projects are the best way to ensure solar’s “hot hand” continues.


New Product: Solar Revenue Puts

This article was originally published in Chadbourne & Parke’s October 2016 “Project Finance Newsire”

By Richard Matsui, Jason Kaminsky and Jared Blanton, with kWh Analytics in San Francisco


The solar market needs a revenue put like what is now used to finance merchant gas-fired power plants, except it would cover output rather than price risk.

Such a put would lead to higher advance rates for solar project debt and possibly also tax equity.

The insurance market is the natural venue in which to place this product.


While the multi-year extension of the federal investment tax credit has reduced market risk, solar companies nevertheless continue facing challenges in financing projects and securing cost-effective project debt.

The deterioration of the yield co model and the liquidation of industry giant SunEdison point to a need for a “back-to-basics” approach to securing capital. With these recent crises fresh in investors’ memories, corporate debt is increasingly difficult to raise. Firms are now focused on raising capital against the cash flows of their existing assets, highlighted recently by the $305 million sale of future cash flows SolarCity completed for a 230-megawatt portfolio of residential, commercial and industrial PV projects.

New financial instruments, such as energy hedges, that facilitate increased capital flows would be highly welcomed in this industry context. But new financial instruments require a new depth of understanding about solar risks.

At its most basic level, cash flows in the electricity generation business are a function of two factors: the price of electricity multiplied by the quantity of electricity. This basic equation applies across all electricity sectors. With gas-fired generators, the quantity of electricity produced is controlled by the plant operator. The unknown part of the equation — the risky part — is volatile prices for electricity sold on the wholesale markets.

For solar, the problem is reversed. With zero marginal cost to produce a unit of energy, there is no price risk with a photovoltaic system. Well-structured PPAs ensure that the electricity delivered will be sold at an agreed-upon price to an offtaker with a strong balance sheet such as utilities, big-box retailers, or residential customers with high credit scores. The unknown variable in the equation is the amount of energy produced. In other words, uncertainty in solar production is the real risk.

Uncertainty chiefly comes from two sources: weather and system quality. Cloud cover and other weather patterns are major contributors to inter-annual weather variability, in addition to inclement weather events such as snow and hurricanes. In addition to weather risk, the quality of the photovoltaic system itself is variable due to the choices between hundreds of module manufacturers, dozens of inverter brands, thousands of different contractors, and varying O&M programs. All of these variables create millions of permutations that add uncertainty to the expected energy output of a project.

This volatility, without widely available data to quantify it, is the reason lenders assign conservative coverage ratios for solar projects. Independent engineers provide lenders with projected energy output, but these are only opinions — estimates that are not guaranteed.

Volatility in cash flows is not a new problem. Other asset classes have faced similar financing challenges and have overcome them through independent, industry-wide databases of historical performance. There is an opportunity to combine data with strong balance sheets to create new financial products that transfer risk away from the solar projects and into the hands of well-capitalized specialists like insurance companies; it is not dissimilar to what happened with revenue puts for combined-cycle gas-fired power projects.

Natural Gas Hedges

An instructive example can be found in the experience of gas-fired generators. These generators smoothed out the volatility in the delta between electricity revenue and the cost of inputs through hedges called revenue puts.

An essential primer on the revenue put was covered in the article on page 38 of the November 2015 Project Finance NewsWire by Chadbourne attorneys Robert Eberhardt and Monika Szymanski. As described by the authors, a revenue put operates as insurance against volatile wholesale power prices for power project owners. A revenue put establishes a floor — a minimum revenue amount — for a merchant gas-fired generator. If the revenue from electricity delivered does not meet that floor in a given period of time (typically a year), then the hedge provider pays the difference.

The revenue put became prevalent in the immediate aftermath of electricity market deregulation in the late 1990s when merchant-based projects were being proposed and the price of natural gas subsequently increased. Revenue puts have become an essential component of most project finance deals involving combined-cycle gas-fired power assets.

Applying a similar hedge to solar, wrapping not the price of electricity but rather the expected power production of a project, would substantially lower the cost of capital by allowing lenders to increase project leverage.

Because this concept is not new, a project developer today can go to any number of financial institutions and negotiate a production hedge. But because that hedge provider does not possess a strong understanding of solar production risk, it will require prohibitively expensive premiums, if it agrees to take on the risk at all. What is needed in combination with a balance-sheet provider is quality industry-wide performance data that allows for actuarial analysis and deep understanding of the risk.

Increasing Leverage

The liquidity challenges facing the solar industry create fresh urgency for equity investors to raise greater amounts of cheaper debt. The uncertain outlook for corporate credit has forced developers to be more creative in securing project finance.

The challenge is to change the status quo of conservative underwriting to allow for more debt to be safely placed within a project finance transaction. For developers, leveraging project deals frees up equity that can be more optimally deployed toward other business objectives. The more leverage they can stack on project deals, the better.

Coverage ratios in today’s market are typically in the 1.3x to 1.4x range, providing debt for roughly 75% of the projected cash flow of a project. These coverage ratios fall in this range because that is what lenders are comfortable providing given their understanding of the risk presented by solar projects or portfolios of projects. At their core, coverage ratios address perceived volatility in cash flows.

Solar assets today have lower advance rates than aircraft leases, student and auto loans, mortgages, and even credit cards.

Part of the perceived risk is the long-term nature of solar assets. The most comparable of these asset classes might be mortgages: it is a long-term cash flow secured by an asset. Mortgage-backed securities, incidentally, have advance rates of 99%, largely because there is an independent third party with a vast depository of historical performance data on US mortgages that allows for data-driven predictive risk modeling.

The prevailing approach to underwriting loans in solar forces developers to commit pricey sponsor equity to fill the remaining project capital requirements. A floor on energy production, backed by a strong balance sheet provided by the global insurance market, would transfer production risk away from the project finance transaction and result in lower coverage ratios and increased project leverage.

The global insurance market has been used before to secure capital in the solar market. Lenders have reduced exposure to investment tax credit recapture with an insurance product specifically tailored to this market. Recapture insurance unlocked new value in solar project finance by enabling securitizations. Similarly, a production floor would increase leverage and lower equity contributions, reducing the overall cost of capital for solar projects.

The solar industry has seen that strong balance sheets can lead to better terms on debt. Transactions have been completed where diverse corporate balance sheets can wrap solar production risk to achieve a lower cost of capital. The challenge today is how to price the risk effectively for a disinterested third party in a way that creates value for both project sponsor and lender. Traditionally in the insurance market, historical data and actuarial analysis provide the means to correctly price risk.

Insurance Market

A credible production guarantee that captures the drivers of volatility — including weather, equipment performance, O&M practices, etc. — is an effective means of risk transfer that makes the cash-flow profile of solar projects much more predictable.

As has been demonstrated by recapture insurance, having specialty insurers in solar project finance can add value to these structured transactions. For solar, attracting this kind of balance sheet, likely in the form of the global reinsurance market, requires a missing ingredient: data. In order for a provider to feel confident that it understands the risk being transferred to its balance sheet, it needs an actuarial analysis informed by historical, industry-wide production data.

The benefits of such a financial transaction are clear for both asset owners and project lenders.

For lenders, the reduction in volatility takes away the need for conservatism in loan structuring. Having a credible third-party backstop would enable lenders to reduce their risk and extend more capital in each deal.

For asset owners, the benefit of increased leverage means a lower proportion of project capital from sponsor equity and subsequently a lower cost of capital. For the solar industry more broadly, simplified underwriting analysis would attract more investors into the space, potentially reducing the cost of capital even further as more lenders enter the market.

We have observed that as other asset-based markets have matured, they have been able to secure more debt because the variability of those assets was accurately quantified by robust data analysis. Solar is still seen as highly uncertain, thus the high cost of capital today. Simplifying the investment thesis by allocating risk to entities that understand it best is a necessary step in solar’s progression toward a more established asset class.

federal reserve facade 1

Fed Rate Increase: Tilting scale back to fossils? Maybe not.

Bloomberg New Energy Finance chief editor Angus McCrone had a sobering piece last week on the potential impact on renewable energy financial investments in the event of an increase in interest rates by central banks. And with news this morning that jobless claims hit a near 40-year low, the probability of a rate hike seems substantially higher than it did even yesterday.  Higher interest rates from central banks, especially the Fed, would necessarily lead to higher cost debt for solar and other renewable project financings. It is a stark reminder how market and political uncertainties, well beyond the scope of solar’s ability to influence them, can have serious implications for investors and asset owners alike.

McCrone demonstrates the point with an assumed 2% increase in the all-in cost of debt:

Let’s look at the impact higher interest rates would make, compared to the H1 2016 LCOE estimates. If all-in costs of debt were to rise by 200 basis points, this would raise the LCOE of a U.S. solar project by $7, to $94 per megawatt-hour, assuming it was financed pre-construction with a debt-equity ratio of 70:30 and a 20-year loan… And by the way, if you think a 200-basis-point rise in debt costs sounds extreme, and therefore very unlikely, I would point out that this would only return all-in borrowing costs in northern Europe to where they were in 2012.

These estimated increases in LCOE, of 9 percent or so, would not kill renewable energy stone dead –far from it. But they would tilt the balance back towards coal and gas (and biomass), where the upfront capex is a smaller fraction of lifetime costs and where operating-stage expenses, notably the purchase of the fossil fuel feedstock, are a far bigger part.

I don’t have any particular insight on whether or not a 200 basis point increase in the near future is a real possibility.  But given uncertainties in the market — particularly uncertainty surrounding the November U.S. presidential election — combined with an improving economic outlook, it doesn’t seem at all out of line.

What if there is an opportunity to shield against a 200 basis point increase?  In a rising interest rate environment, all investors (both debt and equity) will try to maintain their rate premium above the risk-free rate, and therefore all forms of capital get more expensive. The scenario above assumes that a 70:30 Debt-to-Equity (D/E) ratio is a fixed assumption — but what if we could raise the D/E ratio to something closer to 85:15 or even 90:10?   Although the cost of debt is higher, it would be offsetting substantially more expensive equity.  Increasingly leveraged projects, even under increased interest rates for lenders, would still be preferable.

By our calculations, the LCOE of a project can actually be reduced — even with more expensive debt — simply by challenging the leverage assumption.

But how do we get lenders to lever up projects?  The common view is that low advance rates are “just the way it is.” Lenders have appetite for solar risk, but they size to their downside and consequently assign very conservative coverage ratios for debt.

This is a challenge we’ve been working on at kWh Analytics. You may have heard last month that we raised a $5 million Series A. That part of the news got a lot of the headlines and we were obviously very excited about it. But also part of that announcement was the launch of a new production guarantee that we are now offering solar asset owner and lenders.

There are guarantees and warranties available to the average solar finance professional, usually offered by the EPC firm or the equipment manufacturers. What makes ours different, and more competitive than current offerings, is that it combines the industry’s most comprehensive database of historic project performance (that’s the kWh Analytics part) with the A-rated balance sheets of the global reinsurance market.  We contribute a hefty dose of actuarial analysis to underpin the underwriting to enable a lender to wrap all of the disparate risks of a solar project into a single energy output figure.

Our re-insurance partners are so confident in the actuarial analysis that our data allows, that they are able to competitively guarantee up to 95% of the output of a solar project or portfolio of projects. For a lender evaluating how to think about the risk of a solar project, the equation is now much simpler.  By transferring most of the production risk of projects to the global reinsurance market, lenders can confidently deploy more debt than the current 70:30 ratio up to as high as 95% and still be confident that their investment will be secure.

This would, assuming central banks do raise rates as posited by McCrone, mean that project developers are still paying a higher price for debt than under current conditions. But equity contributions would still be substantially more expensive. By replacing the equity contribution with more debt, the net result would still be positive for project financiers. And solar will remain more competitive than coal and gas.