kWh Analytics Awarded ‘Insurance Initiative of the Year’ at London Market Awards

Winners originally announced on Insurance Day.

kWh Analytics & JLT Re have been awarded ‘Insurance Initiative of the Year’ at the London Market Awards.

kWh Analytics has secured investment grade insurance to offer the Solar Revenue Put to guarantee up to $100 million of production risk, per transaction.

A client received a term sheet for 1.10x DSCR with the help of the kWh Analytics Solar Revenue Put. This ‘step change’ in debt sizing ushers in a dramatic reduction in the cost of capital for solar.

Bank Writes Term Sheet for 1.10x DSCR with Solar Production Hedge

Full post available on Power Finance & Risk.

A bank has laid out terms for a loan to finance a contracted solar project with a novel production hedge developed by kWh Analytics, offering a debt service coverage ratio of 1.1 times.

The term sheet is the first to be provided by a lender for a project with the hedge, called a solar revenue put, which the risk management and datafirm has been promoting for several months.

The 80 MW project is located in the southeastern U.S. and has a power purchase agreement with a utility company. The identity of the sponsor, the lender and the name and precise location of the project could not immediately be established.

The 1.1 times DSCR is “unprecedented” in solar project finance, says Richard Matsui, founder and ceo of kWh Analytics in San Francisco.

The average DSCR for solar debt in the first nine months of this year was 1.44 times, according to a survey conducted by the analytics shop (PFR, 9/11).

A lower DSCR translates into a higher leverage ratio, which boosts the levered return for the sponsor.

The solar revenue put—which is structured as an insurance policy and underwritten and distributed through kWh Analytics’ licensed insurancebrokerage subsidiary, Kudos Insurance Services—guarantees 95% of the P50 case energy production of the solar project for 10 years.”

It could allow you to finance something you wouldn’t be able to come up with your equity check for otherwise,” PJ Deschenes, a partner at boutiqueinvestment bank Greentech Capital Advisors told PFR in August. “The question is, what are you giving away to realize that?”

Matsui says the premiums are more than offset by the potential increase in returns as a result of the greater leverage.

The unidentified solar project is one of two supported by the Kudos put that were going through banks’ credit committees in August. kWh Analyticshas more than a dozen live deals at various stages.”Our intent is to keep these deals moving forward,” says Matsui. “We’re hoping to get one signed before the end of the year.”

Demystifying Solar Risk Management: A Primer for Sponsors and Financiers

Webinar recording available from SEIA.

Join us for a roundtable discussion focused on the newly released Best Practices in Solar Risk Management report, co-authored by SEIA and kWh Analytics.

Recognizing the unique needs of both sponsors and investors, a panel of industry experts will:

  • Discuss what happens within the bank environment to manage risk after an investment has been made
  • Outline the industry standard best practices of leading investors such as U.S. Bank
  • Demystify solar risk management and discuss how sponsors can become their bankers’ preferred clients

Financiers will learn best practices to guide the growth of their solar investment practice.

Sponsors will learn about the bank’s risk management perspective, why reporting obligations are so important, and gain insight into questions such as how U.S. Bank, a leading tax equity investor, underwrites and monitors the operational performance of their investments.

Building on the Best Practices in Solar Risk Management report, the goals of this webinar are to improve transparency for all stakeholders and ultimately create a more efficient industry.

Moderator

Keith Martin, Co-head of Projects, Norton Rose Fulbright

Panelists

Jason Kaminsky, Chief Operating Officer, kWh Analytics

Mike Mendelsohn, Senior Director of Project Finance and Capital Markets, SEIA

Ed Rossier, Director of Project Management, Renewable Energy Investments, U.S. Bank

JLT Re and kWh Analytics Announce Partnership

Originally posted on JLT Re. Additional coverage on Reinsurance News, Intelligent Insurer, and Insurance Day.

  • JLT Re continues to build leading reputation in Insurtech sector
  • Partnership will offer new product to the emerging solar industry

SAN FRANCISCO (September 20, 2017) – JLT Re, the global provider of reinsurance broking and consultancy, has partnered with kWh Analytics, the leading data repository and risk management provider in the solar industry, to create a risk transfer product insuring solar energy output.  Leveraging their industry-leading database, kWh reduces the overall cost of financing by providing a Solar Revenue Put that reduces the risk of loss for lenders, thereby enabling lenders to reduce debt service coverage ratios for asset owners.

San Francisco-based kWh Analytics worked with JLT Re to secure a preferential relationship with a global, investment grade insurance company to offer a product insuring $100 million of coverage. The relationship will bring liquidity to the growing solar energy industry, which is currently estimated at $500 billion with another $500 billion slated to be completed in the next few years – creating the next $1 trillion asset class.

“kWh Analytics is extremely pleased to bring this unique product to the market and to tie the financial strength of the global insurance industry into the solar asset class.  Kudos, our Solar Revenue Put, improves lender terms and reduces the cost of capital for asset owners by guaranteeing up to 95% of solar production with investment-grade balance sheets,” said Richard Matsui, CEO, kWh Analytics. “JLT Re was instrumental in bringing this solution to market, helping kWh Analytics from the beginning of the process through to completion.”

“We are delighted to represent the foremost company in the solar field, especially in an industry that benefits our broader society”, said Ed Hochberg, CEO of JLT Re (North America) Inc.

“kWh Analytics is at the forefront of a wide-ranging trend we see in Insurtech, wherein data companies apply best-in-class data repositories to transform unquantified uncertainty into quantified risk that the insurance industry can then efficiently price,” said Gregg Holtmeier, JLT Re Insurtech Leader.

JLT Re continues to build their leading reputation in Insurtech with this insightful solution. Read JLT Re’s Insurtech Report here.

 

ENQUIRIES:

Isabella Gaster
Tel: (+44) 20 7558 3387
Email: Isabella.Gaster@JLTRe.com

Elizabeth Miller
Tel: +1 215 309 4590
Email: Elizabeth.Miller@JLTRe.com

NOTES TO EDITORS:

About kWh Analytics

kWh Analytics is the market leader in solar risk management. Founded in 2012, kWh Analytics has built the industry’s largest data repository of solar asset performance, with over 100,000 operating systems, representing nearly 20% of the U.S. market.

HelioStats, kWh’s risk management software, helps solar investors deploy more capital more intelligently by providing data warehousing, analytics, and benchmarking for distributed solar portfolios. Kudos, kWh’s Revenue Put, improves lender terms and reduces the cost of capital for asset owners by guaranteeing up to 95% of the solar production.

Customers such as Google (the world’s largest non-utility investor in renewable energy) and PNC Bank (America’s 5th largest bank) rely on software and insurance solutions from kWh Analytics to enhance their investment returns.

kWh Analytics is backed by private venture capital and the US Department of Energy.

About JLT Re

JLT Re’s trusted team of 700 colleagues worldwide combines market leading expertise and proprietary analytical tools with the freedom to challenge conventions.

Deep specialist knowledge and extensive experience of both the reinsurance market and clients’ own industries and sectors enables JLT Re to ask smarter questions, innovate and deliver better results tailored to meet client needs.

JLT Re is a trading name and logo of various JLT reinsurance broking entities and divisions globally and any services provided to clients by JLT Re may be through one or more of JLT’s regulated businesses.

JLT Re is part of the Jardine Lloyd Thompson Group plc.

www.JLTRe.com

About Jardine Lloyd Thompson

Jardine Lloyd Thompson is one of the world’s leading providers of insurance, reinsurance and employee benefits related advice, brokerage and associated services. JLT’s client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.

JLT is quoted on the London Stock Exchange and owns offices in 40 territories with more than 10,600 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.

For further information about JLT, please visit our website www.jlt.com.

HelioStats 3.0 & ‘Best Practices for Solar Risk Management’ Released Today

solar risk management (sō-lər \ risk \ ma-nij-mənt ) noun 1. The practice of managing and measuring risk within a solar investment portfolio; a term of art directed at financial investors with exposure to operating solar projects in the form of structured investment vehicles, and in particular investors providing various forms of debt, tax equity, or cash equity.

Greetings,

Two big updates on the next era of solar risk management:

1) Today SEIA and kWh Analytics released ‘Best Practices for Solar Risk Management.’

SEIA_Logo_4c_TransparentDATA–Orange-Button-fb

 

 

 

 

 

In collaboration with SEIA and the US Department of Energy’s Orange Button program, we are proud to publish the first definitive guide to help solar financiers successfully navigate investment, compliance, and risk management.

“This guide will serve as a valuable tool to both experienced investors looking to grow their businesses, as well as newer investors unsure of how to review the relevant risk factors,” said Mike Mendelsohn, SEIA’s Senior Director of Project Finance and Capital Markets.

With over 10GW and 100,000 systems under management, more than five years of experience building the industry’s leading risk management tools, and the privilege of working with top solar investors, here’s what we’ve learned: Download the report.

Learn more by attending an upcoming webinar with KWH’s Jason Kaminsky and SEIA’s Mike Mendelsohn, facilitated by Keith Martin (Norton Rose Fulbright). E-mail us if you’d like to join.

2) HelioStats 3.0 is now live!

Your portfolio is growing, but so are your team’s questions about risk and compliance. Enter HelioStats, the only platform designed specifically for the needs of financial institutions. HelioStats provides:

  • Data Integration – Collection, cleaning, and transformation of financial and production data from over 100,000 systems to generate insights.
  • Portfolio Analysis – Simple analysis of production and financial risks.
  • Benchmarking – Easy comparison to industry performance and indices.
  • Reporting – Reports on the entire portfolio of multiple developers and funds.

Reach out for a preview of how SEIA’s Best Practices are being implemented by industry leaders like Google and PNC Bank. Schedule a demo by e-mailing us at contact@kwhanalytics.com.

Welcome to the next era of solar risk management.

 

Regards,
Richard Matsui
Founder & CEO

SEIA and kWh Analytics Release the Best Practices for Solar Risk Management

Originally posted on SEIA’s latest news. Additional coverage available on Solar Power World, pv magazine USA, AltEnergyMag, Solar Novus Today, Solar Industry.

WASHINGTON, D.C. – In an effort to simplify the complex world of tax equity and debt investment, the Solar Energy Industries Association (SEIA) and kWh Analytics released today the industry guide on the Best Practices for Solar Risk Management.

Informed by some of the largest financial institutions investing in U.S. solar assets, SEIA’s Solar Energy Finance Advisory Council (SEFAC), and the U.S. Department of Energy’s Orange Button program, this guide is designed to help financiers of solar projects and portfolios successfully navigate their solar investments from start to finish.

“Our goal is to facilitate new sources of investment capital for solar projects across America by communicating and leveraging the standards and practices the industry has already developed to measure and manage risk,” said Mike Mendelsohn, SEIA’s senior director of project finance and capital markets. “This guide will serve as a valuable tool to both experienced investors looking to grow their businesses, as well as newer investors unsure of how to review the relevant risk factors.”

Featuring a risk management checklist, the analysis outlines current industry standards and benchmarks, alongside the solar industry’s robust compliance infrastructure.

“From our experience serving multiple investors, we have a privileged vantage point to help our industry codify best practices and ensure healthy industry growth,” said Jason Kaminsky, COO of kWh Analytics. “We are pleased to have been invited by SEIA to co-author the industry guide that enables investors, large and small, to manage the unique risks posed by the solar asset class.”

SEIA will routinely update the document as needed as part of its ongoing industry coordination efforts to streamline project development, open new sectors for solar deployment, and open new sources of low-cost capital.

To download the complete guide, go to https://www.seia.org/research-resources/best-practices-solar-risk-management.

###

About SEIA®:

Celebrating its 43rd anniversary in 2017, the Solar Energy Industries Association® is the national trade association of the U.S. solar energy industry, which now employs more than 260,000 Americans. Through advocacy and education, SEIA® is building a strong solar industry to power America. SEIA works with its 1,000 member companies to build jobs and diversity, champion the use of cost-competitive solar in America, remove market barriers and educate the public on the benefits of solar energy. Visit SEIA online at www.seia.org.

About kWh Analytics:

kWh Analytics is the market leader in solar risk management. Founded in 2012, kWh Analytics has built the industry’s largest repository of solar asset performance data, with over 100,000 operating systems, representing between 10-20% of the U.S. market.

Customers such as Google (the world’s largest non-utility investor in renewable energy) and PNC Bank (America’s 5th largest bank) rely on software and insurance solutions from kWh Analytics to enhance their investment returns. kWh Analytics is backed by private venture capital and the US Department of Energy.

Media Contacts:

Alex Hobson, SEIA Senior Communications Manager, ahobson@seia.org (202) 556-2886
Sarah Matsui, kWh Analytics Senior Communications Manager, contact@kwhanalytics.com (415) 891-9601

Announcing DealFlow from kWh Analytics

Greetings,

We can talk about data all day long, though there’s another topic that solar financiers love even more: Deals.

Because we are in the business of helping sponsors to achieve greater leverage (and to help lenders safely deploy more capital) with our Revenue Put, we see a number of deals that seek debt financing.

We also collaborate with sponsors and lenders to compile an index of prevailing debt terms in the market.

We’ve formalized this knowledge into DealFlow. In this first newsletter, you’ll find:
– Two featured deals seeking debt financing
– The market summary of indexed deal terms that lenders offered in 2017
– An overview of recent transactions that have closed in the market

Please send us your deal info if you’d like your deal to be included next time (no, we don’t charge anything); we are at dealflow@kwhanalytics.com.

PDF Available Here: http://www.kwhanalytics.com/DealFlow-Fall2017

Deal Flow 2

Regards,

Richard Matsui
Founder & CEO kWh Analytics

Addressing Solar’s Growing Pains with Data Standards & Analytics

Originally posted on pv magazine USA. Written by Data Engineer Paul Young.

It is hard to fathom just how much solar has been installed in the last few years—over 1.3 million systems added 36GW of capacity to the grid.  As the industry catches up to this rapid growth, it is important to take stock of some of the challenges that lie ahead.  While solar has been around for over forty years, 90% of solar systems are less than five years old.  Only a handful of industry players have experience managing, monitoring, and maintaining large distributed fleets, and fewer still have done so with fleets of any significant vintage.

At kWh Analytics, we have aggregated the solar asset performance data of nearly 20% of the U.S. market, allowing us to study the challenges that these organizations face as they grow and mature.

Challenge No. 1: Scaling data management practices.

Processes that worked while managing hundreds of systems start to break down when managing thousands of systems.  Building out databases and servers, handling multiple monitoring systems, and setting up robust quality control processes and pipelines require good planning and timely execution.  Fast growth can wreak havoc on these processes, as teams will often find themselves continuously struggling to scale up their data management tools in order to keep up with the company’s growth.  In the software engineering world, we refer to this problem as ‘technical debt.’

While there are no precise definitions of technical debt, here is the general concept: A debt is created when engineering teams sacrifice quality for speed.  This concept originated in the software engineering world, but it is very applicable to data management and warehousing projects.  While some technical debt is normal, if teams let it build up too much, it can create problems.  Quality control issues, software bugs, and long execution times are all symptoms of excessive technical debt.  Good software teams will plan regular cycles of code refactoring and maintenance in order to ‘pay’ down their debt, but this is difficult in a fast-growing environment.  As new solar systems come online and more data sources get added to the pipeline, data teams find themselves overwhelmed. Carving out the time to step back and properly build out the necessary infrastructure becomes increasingly difficult, if not impossible.

Challenge No. 2: Finding cost-effective ways to diagnose O&M issues across large fleets.

This challenge will become more pronounced over the next few years. The vast majority of installed capacity is relatively new, so there is limited data available on how well current modeling techniques predict the performance of aging fleets.  Revenue models usually account for module degradation, defaults, and O&M costs.  But residential O&M presents unique challenges due to the distributed nature of the systems.  Smaller O&M issues (I like to call them micro O&M), like moderate soiling and gradual increases in shading, can be hard to detect because the signal-to-noise ratio can be too small.  And even if we could reliably detect these micro O&M issues, sending maintenance crews out to fix these problems would be cost prohibitive.  But spread across a large fleet, these micro O&M issues could add up to real revenue loss.

Data analytics can be a valuable tool to assist fleet managers in distributed O&M efforts by allowing them to remotely diagnose problems and prioritize their O&M efforts in order to maximize ROI.  Analytics allow us to accurately identify underperforming PV systems and to diagnose the specific problems associated with those systems.

However, in order to implement these tools, you need good data.  And one of the lessons that we have learned at kWh Analytics is that data availability and data quality varies greatly across the industry. Data rarely lives in a single silo.  Equipment manufacturers, installers, monitoring companies, developers, and financial institutions are all generating, sharing, and consuming data.  This has resulted in a byzantine landscape of nomenclature, data quality, and data formats.

Where do we go from here?

As solar scales, data standards and analytics become more important than ever before. Making smart investments in data infrastructure can pay dividends on many fronts:

On an organizational level, investing in data enables teams to better prepare for growth and allows for smoother scaling of operations.  And as the organization grows, data becomes increasingly useful for business intelligence and analytics driving further efficiencies.

On an industry level, creating unified data standards can help the solar industry reduce market inefficiencies and lower costs for consumers. To move our industry forward, Orange Button, a program of the U.S. Department of Energy SunShot Initiative, has organized the creation and adoption of industry-led open data standards.  As a part of Orange Button, kWh Analytics is creating a new data translation tool that will ease the solar industry’s transition to a unified solar dataset by translating original data formats to consistent data standards. This technology is currently being developed with lessons learned from the development of our HelioStats platform, which is capable of synthesizing thousands of data points on project payment and performance. Leading solar companies now implementing Orange Button include Wells Fargo, Sunnova, and Sunrun.

If you would like get involved with the Orange Button initiative, visit the Orange Button website or come meet with Orange Button participants at SPI.

Solar Hedge Opens Door to Greater Leverage, Says Analytics Firm

By Richard Metcalf, originally posted on Power Finance & Risk.

A solar analytics firm called kWh Analytics is marketing a production hedge product that it claims will allow sponsors to raise more debt on contracted solar projects in the U.S.

The product, called a solar revenue put, could allow sponsors to reduce the debt service coverage ratio for their projects from the existing market standard, which is between 1.3 times and 1.35 times, to 1.1 times, according to Richard Matsui, CEO and Co-founder of kWh Analytics.

“The value of that debt is greater than the cost of the insurance product,” he told PFR on Tuesday in New York, where he was meeting bankers to discuss the application of the hedge.

The San Francisco-based firm has so far provided quotes for $450 million of projects, and has discussed the solar revenue put with about 30 lenders.

Two project finance deals involving the hedge are under scrutiny by commercial banks’ credit committees, says Matsui.

“Getting this through credit committees is going to be really hard,” he concedes. “But something we’re seeing in the market is that there is just a ton of capital out there, and there’s a lot of lenders chasing few deals, so this is a way lenders can differentiate themselves.”

Bankers say the solar revenue put has the potential to be a useful innovation, so long as it is priced appropriately, but add that it will be up to sponsors to take the lead.

“It’s certainly a product that needs to be initiated by the borrower-sponsor,” says a project finance banker in New York who has discussed the hedge with Matsui. “In theory it could bring them more debt… then it comes down to a cost-benefit analysis.”

“Like any insurance product, it’s useful to the degree it’s priced efficiently,” says PJ Deschenes, a partner at boutique investment bank Greentech Capital Advisors in New York. “It could allow you to finance something you wouldn’t be able to come up with your equity check for otherwise, but the question is what are you giving away to realize that?”

While kWh Analytics underwrites and distributes the solar revenue put through its own licensed insurance brokerage subsidiary, Kudos Insurance Services, investment grade insurance carriers provide the necessary balance sheet support.

The solar revenue put is not a replacement for title insurance and does not cover curtailment risk or loss of revenue due to operations and maintenance contractors failing to carry out their duties.

While traditional insurance companies have made attempts to provide solar production guarantees in the past, their policies were either too expensive or worded in such a way that the coverage was not comprehensive, says Matsui.

Unlike the conventional insurers, kWh Analytics is able to leverage a large database of U.S. solar projects, which it has obtained as a result of selling its risk management software to tax equity investors.

The firm works with more than half of the tax equity investors in the market, including PNC Bank and Google, says Matsui. “What that means is we have data on 10% to 20% of all operating solar plants in the U.S.”

“That’s huge, to have that quality and quantity of data and that vote of confidence from these players,” says Richard Dovere, CEO of solar project sponsor C2 Energy in New York. “There’s definitely going to be a place in the market for this.”

“It’ll be another tool within the market,” says Conor McKenna, M.D. at CohnReznick Capital in New York. “Whenever you gain data in a market where there is a lack of clarity or the lack of an aggregation set there is value.”

#Solar100’s Varun Sivaram: The Hamilton of the Solar Industry

Originally posted on pv magazine USA.

As the second interview in the #Solar100 Thought Leaders series, Richard Matsui, Founder of kWh Analytics, speaks with Varun Sivaram, the Philip D. Reed Fellow for Science and Technology at the Council on Foreign Relations and a professor at Georgetown University.

Even before his meteoric jump within weeks, starting at #40 and peaking at #3 on the #Solar100, we knew we wanted to catch up with Varun Sivaram.

Varun reminds us of the solar industry’s very own early Alexander Hamilton. Bold claim, we know. But hear us out:

  • Both are polymaths. Hamilton studied math, medicine, and law at King’s College (now Columbia University). Varun studied international relations in college, and finished a PhD in condensed matter physics in two years on a Rhodes Scholarship to Oxford University.
  • Both started careers as advisors: Hamilton held his first important public office as a colonel on George Washington’s staff when he was only twenty years old. Within the first decade of his career, Varun’s managed to hold a position as a Georgetown professor, as a senior advisor to the Mayor of Los Angeles and the Governor of New York, and as a McKinsey consultant advising C-level executives.
  • Both have big ideas and are compellingly articulate about those big ideas: Hamilton for the American Revolution, and Varun for the ‘Solar Revolution.’
  • Both are prolific writers. Hamilton is credited with most of the Federalist Papers. Varun publishes regular op-eds on clean energy, and he also has a forthcoming book with MIT University Press.
  • Both are not afraid of going against the grain, and maybe even enjoy it. Hamilton was based in New York, the hub of loyalists, and still regularly and loudly challenged conventional thinking. Varun was recently cited in a NYT article titled, “Fisticuffs Over the Route to a Clean-Energy Future.”
  • Both are influential spokespeople for their groups. Hamilton became the leading spokesperson for the Federalist Party. It is not difficult to imagine that Varun will represent a set of thoughts and people in the future of the solar industry.

While Varun is early in his career, having only finished his Oxford PhD from 2011-2013, he is undeniably scrappy and hungry, and he is already establishing himself as a thought leader in our industry.

A Happenstance Beginning

Richard Matsui: Your educational background is in International Relations and Condensed Matter Physics. What drew you to working specifically in solar?

Varun Sivaram: You know, it was initially a little bit of happenstance. Right out of high school I got a job working for Nanosolar, a CIGS company that went on to raise half a billion dollars. Nanosolar was the first company I had ever worked for, and it was infectiously optimistic. I learned everything I knew about solar power from Nanosolar—which was a very skewed way to learn about solar. I learned that today’s solar panels are obsolete, that the future will look flexible and lightweight, that silicon will be replaced by necessarily superior materials, and that the Silicon Valley model of disruption is going to work great for this entire industry. It turned out many of those things would be wrong, at least for the next decade. But I stuck with solar.

At Stanford, I studied Physics because I was interested in solar, as well as International Relations because I had always been interested in policy. And at Oxford, I applied to study under a scientist, Henry Snaith, who just so happened to be on the cusp of discovering perovskite photovoltaics, a technology that has rocketed to over 22 percent efficiency in just five years. I was so lucky—it felt like the most exciting place to be in all of academia. And I was the only person in the lab who had startup experience. It was an interesting perspective, having been at Nanosolar, and while I was doing my PhD I was watching Nanosolar explode.

And it hit me that even though everybody in academia thinks that perovskite’s going to be the next big thing, it probably is not going to work in this environment, because there are various external factors that make it really hard for innovative solar companies to go to market. And I thought, “You know, even though I’m likely in the best position possible from a science perspective, I need to go out and solve this problem another way,” and that’s why I eventually made my way into policy.

Controversial Bylines & Technology Lock-In

RM: Speaking of policy, of the thought pieces you’ve written for local papers, journals, or CFR, which, if any, do you think have been the most controversial?

VS: I think there are two pieces in particular that have been controversial. The first piece is a report I co-authored through the MIT Energy Initiative called, “Venture Capital and Cleantech: The Wrong Model of Clean Energy Innovation.” The Greentech Media guys just skewered us for that one because they basically asked, “How can this be true? We see cleantech is having all kinds of successes—look at all these software companies.” And we should have been more careful in choosing the title. Our title should have specified hard Cleantech—materials, chemicals and processes—those are the wrong kinds of companies for VCs to invest in.

The other controversial piece was an article I wrote for Issues in Science and Technology titled, “Unlocking Clean Energy.” It’s about technology lock-in, and here’s the situation: There are first generation clean technologies—silicon for solar PV, compact fluorescent lights for efficient lighting, light water reactors for nuclear, and corn ethanol for biofuels. And many of these first generation technologies make it really hard for the next generation to take their place. When that happens, I argue we get stuck in what’s called technology lock-in.

Some fields have managed to beat technology lock-in. For example, LEDs have beaten CFLs, and so efficient lighting is not a victim of technology lock-in. But other fields—nuclear is the best known example—have gotten stuck in technology lock-in because people were not forward-looking enough to invest in innovation. And as a result, nuclear’s share of world electricity peaked in the 1990s and has declined ever since.

I fear that we in solar are approaching technology lock-in. I also suspect that technology lock-in could take hold for lithium ion batteries. These incumbent technologies are getting so entrenched, and their costs are declining as a function of scale, that new technologies just won’t be able to break in.

The conclusion is that it is really difficult to get around lock-in. Some public policies can worsen the situation by entrenching the incumbent, such as the renewable fuels standard or indiscriminate tax credits. But other public policies on support for R&D and public procurement of emerging technologies can also help; for example, by procuring emerging flexible PV technologies for use in battlefield, the military could encourage technological succession.

That’s the article. People hate it, obviously, because it basically takes everybody to task. It says existing policies are often ineffective at countering lock-in, and that today’s solar industry—though it’s come a remarkably long way—is in need of disruption and technological change.

Why Write a Book?

RM: You’re the author of the forthcoming book, Taming the Sun. The back story for you personally is fascinating, and I’m curious— why did you write a book and what  are you looking to add to the discourse?

VS: I wrote the book because I feel like I’ve been very fortunate to see solar from different perspectives: from science, from startups, from the McKinsey experience of analyzing utilities, and from making and assessing public policy at the state, national, and international levels.

Each of these different perspectives has an incomplete view of what solar will need. The scientists think that obviously the next theoretically superior material is going to win. The business people understand the business constraints best and so are understandably biased toward minimizing risk. For example, I’ve heard utility executives caution that, “Changing the grid’s clean energy make-up is like switching out the engine of a 747 in flight, so why would you go and add technology risk?”

These different perspectives mean that everybody comes to solar with their own siloed views. And there are also a lot of unbalanced headlines that pose an additional challenge for folks interested in learning about the field. Some argue that we already have all the tools we need for a 100 percent renewable energy future; others slam subsidies for solar as wasteful handouts. Folks don’t have a single one-stop place to go to get an even-handed story. That’s what I was trying to create. The book aims to present an authoritative, even-handed view of solar’s coming of age, including both the terrific progress that’s been made and the innovation that’s still needed to harness the full potential of solar energy: creative financing, revolutionary technologies, and flexible energy systems.

Solar’s Biggest Challenges

RM: On the topic of what needs to change, what do you think are the top three challenges coming up for the solar industry?

VS: When I think about the rise of solar over the next few decades, without three kinds of innovation—financial, technological, and systemic—solar could hit a wall. That would be catastrophic, because we need solar to anchor the transition to a nearly completely decarbonized power sector. Fundamentally, solar’s rise could stall because the cost of solar power, although it’s declining, could get undercut by its sharply falling value.

The three kinds of innovation collectively work together to ensure that solar’s value stays above its cost, so that it stays economically competitive:

First, financial innovation is needed to massively increase capital flows into the sector, continue solar’s near-term growth, and continue to drive down costs as the industry gains experience with producing and deploying solar PV. I know I’m preaching to the choir here, but the world’s biggest investors have overlooked solar so far, and for solar to continue its growth will require trillions of dollars in capital that existing sources are not going to be able to supply.

The industry faces the challenge of attracting institutional investors with appetites for long-dated, yield-oriented investment opportunities—solar lines up with this perfectly, but they just need a way to invest in it. In the developing world, however, oftentimes solar’s great advantages are overshadowed by country-specific challenges: political risk, currency risk, offtaker risk, credit risk, etc. Policymakers need to improve the investment environment to make solar’s inherently low risk and stable cash flows shine for large investors.

In summary, I think that solar needs financial innovation to help the industry access public capital markets, for example through securitization and maybe even the next generation of YieldCos. Data will be crucial to drive down the cost of capital, and firms such as kWh Analytics can enable investors to prudently invest in solar.

Second, technological innovation is also needed to bring down the cost of solar even faster. Let me use a figure from my upcoming book to explain why [figure appears below]:

Panel 1, on the left, plots the global average cost and value of the next unit of electricity from solar panels as the total installed solar capacity increases. Thanks to financial innovation, more and more solar panels get produced and installed, and the red curve shows costs declining steadily as a result (both axes are logarithmic).

But the blue curve shows how much a marginal kWh is actually worth, and that figure declines steeply as more solar power comes online in each region of the world. That effect, known as value deflation, occurs because solar starts to oversupply the grid in the middle of the day. We’ve already seen value deflation in a place like Chile. We had a bunch of solar on merchant contracts and then suddenly solar, in the middle of the day, started to get a price of zero dollars per megawatt-hour. And this is a problem that afflicts solar more than, say, a natural gas generator, because natural gas is dispatchable, whereas all the solar kilowatt-hours come at the same time. So, supply and demand tell you that with an oversupply of solar kilowatt-hours, you’ll have a mismatch in low prices with demand. A lot of people say, “Hey, solar won’t have this problem because it’s contracted on long term PPAs.” Those PPAs are basically masking the fundamental issue, which is value deflation. It doesn’t matter how you’ve done the contracting; if solar’s economic value is falling, you’ve got a problem.

Pretty soon, when solar produces 10 or 20 percent of the total electricity (kWhs) on the system, the value plunges below the cost. But with technological innovation, you can delay that point. Panel 2 shows the red curve falling more steeply, as new PV technologies, such as perovskites, enable dirt-cheap solar that falls in cost way faster than waiting for silicon PV to ride down the experience curve. New materials enable these cost reductions not just because they use cheap materials, but because they can be highly efficient, slashing balance-of-system costs. Still, I said that technological innovation only delays the point where solar value dips below cost. To prevent that from happening, we’ll need a third kind of innovation.

Third, systemic innovation is needed to prevent solar’s value from dropping so quickly, enabling it to remain above solar’s cost and making solar economically attractive. Systemic innovation entails reimagining energy systems, starting with the power system. A power system that can better match up solar supply with customer demand will mitigate value deflation by using every marginal kilowatt-hour of solar more effectively when demand is high. So in Panel 3, you can see that by adding systemic innovation, the blue curve becomes less steep—i.e., the value of solar drops less rapidly as more solar is installed. As a result, the blue curve always stays above the red curve, driving ever more solar deployment.

Systemic innovation encompasses modernizing the electricity grid, to make it bigger and also smarter. Connecting a diverse range of resources—from load-following nuclear plants to concentrated solar power plants with thermal storage to batteries to demand-side management tools—also helps to accommodate a high penetration of volatile solar PV on the grid. Another example of systemic innovation will be via sectoral linkage. For example, if you link the transportation sector by intelligently charging electric vehicles whenever there’s a surfeit of solar energy on the grid, or the heat sector by using electric heat pumps to track solar output, or even the water sector by modulating the operation of desalination plants, you’re basically making new ways to store intermittent solar power. This sectoral linkage reduces value deflation, because we will have many more valuable uses of solar power, no matter when it’s generated. And by keeping solar’s cost below its value, it can break through the ceiling that its penetration would otherwise hit.

RM: I hear you. My favorite iteration of that idea is that at some point, someone is going to realize that solar’s so cheap that you should hook up a Bitcoin mining machine to a solar panel. That could be a great way to make money from solar. Some day.

VS: Wait, hang on, that’s so interesting—Bitcoin is acting as a battery.

RM: Right. The same way that you’re describing desalination, it’s the idea of storing the value of energy not as energy but as something else that’s valuable.

VS: I love that idea. Has anybody written anything on this?

RM: No, it was my idea, but you should feel free to take it. You had already come up with the broad idea, I just said that specific iteration of it.

Data & Resource Based Financing

RM: As a data company, we think about data a lot. Are there areas for which you think data is uniquely positioned to cause systemic change?

VS: There’s a paper out from David Sandalow and colleagues from Columbia University called, “Financing Solar and Wind Power: Insights from Oil and Gas.” It’s interesting. They basically pick three different financing options from the oil and gas industry and ask, “Could we use this for solar and wind?” Data would help enable these options.

For example, in resource based financing, oil and gas companies get to basically take out loans in advance based on the value of the proven reserves, and they also get financing based on promising a cut of every barrel of oil they sell.

You can imagine a solar company could do the same with good data. Right now, banks think solar is too uncertain, and as a result it is hard for solar to get debt. A solar company with a parcel of land, plus good data on how much their projects produce in this particular area, plus an analytic model on how much money it will make—it would be a game changer if investors would look at that land that’s prime for solar development and value it for its solar potential, the same way that investors look at land with oil under it, and value the land for its oil reserves.

Call to Action

RM: It’s August 2017, and in the past few months, Trump announced that he’s pulling the U.S. out of the Paris Climate Agreement, some leading solar companies, such as Sungevity, have declared bankruptcy—my perception is that people in the industry are feeling quite down right now, even though our numbers on solar deployment and cost have actually never looked better. What would be your call to action or your parting thought for the people and the policy makers in the solar industry?

VS: I am infuriated with the Trump administration’s policy because first, I think the Paris Agreement is important for political and diplomatic reasons. And second, I think funding energy innovation through Trump’s budget proposal and supporting it through initiatives like Mission Innovation are really important, but he’s stepping away from both. He wants to slash energy innovation funding by half and cut support within the Department of Energy. I think that’s terrible.

Also, I think that profit compression in the solar industry, which we’re seeing both upstream and downstream, is an inevitable byproduct of a lack of innovation. If you’re making commodity profits and everybody’s trying to do the same, obviously you’ll have profit compression. The lack of innovation is what’s causing this compression. Given a commodity with no differentiation, no one makes any money. The fact that the value of solar is falling faster than the cost of solar—value deflation—is a critical problem for our industry’s future.

What is my call to action? Innovation funding in this country has stagnated for two decades. We certainly can’t afford for it to fall now. We instead need to strengthen it. We are not paying enough attention to this problem. Innovation is important both because it brings down the cost of solar to outrun value deflation, and also because it makes some producers more competitive than others, thereby enabling there to be profits in the industry. Innovation enables American companies to make money, as long as we’re the ones investing in innovation.

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