#Solar100’s Ray Shem: Solar’s Cassandra

Originally posted on pv Magazine USA.

In this #Solar100 interview, Richard Matsui, Founder and CEO of kWh Analytics, speaks with Ray Shem, CFO at Pine Gate Renewables.

In Greek mythology, Cassandra was gifted by the god Apollo the ability to see the future. She was also cursed to utter prophesies that were true but no one believed—until it was too late.

Today, Ray Shem’s understanding of real estate finance cycle and the solar industry lends itself to sharp analysis of solar’s evolution. In this interview, Shem provides a clear framework for understanding the sponsor equity market and describes a future solar market in which new entrants displace or acquire many of the current incumbents, reshaping the competitive dynamic of the entire industry.

Ray Shem is a solar soothsayer and this month’s featured #Solar100 thought leader.

FROM HISTORY TO REAL ESTATE TO RENEWABLES

Richard Matsui: I saw that you have your BA in history from Yale and your MBA from University of North Carolina. What drew you to renewable energy and how did you begin working at Pine Gate Renewables?

Ray Shem: When I graduated from college, I originally thought I wanted to be an attorney. I was randomly assigned to the real estate practice group, and after a year, decided I wanted to work on the principal side of things. Real estate was booming around that time, so I left the law firm to work for a startup real estate developer in D.C. flipping houses in the revitalizing parts of DC. Then I went to Chapel Hill for their real estate program.

After I graduated from UNC in 2008, I took a job working for a medium-sized regional developer based in Charlotte. Two months later, Wachovia was basically bought for a dollar, Lehman failed, and I ended up selling condos for two years—fun. It was actually terrible, but it was formative in terms of gaining experience failing and needing to be creative to move units. After a few years, I ended up running capital markets and acquisitions, raising project debt and equity.

Zoe Hanes, who worked at FLS Energy at the time, was my neighbor and recruited me to go into solar.  I started off doing project finance at FLS, including tax credit equity and project debt, underwriting new investment opportunities, and developing the corporate finance strategy. That’s how I got into this industry.

Richard Matsui: Having witnessed firsthand a full economic cycle in real estate, what lessons do you apply in solar?

Ray Shem: It makes me pretty risk-averse. My biggest lesson was the importance of asset quality. Quality is especially important when things get rough. In 2009, if you had great real estate, you could always move it. Yes, it would sell at a discount, but you could sell it. Bad real estate didn’t move at all. It was just frozen out.

Solar is a little different because of the secular trend of cost reduction. Construction costs are down and the cost of capital is falling. It’s a big tailwind that mitigates some of the volatility. People have made aggressive bets on the cost curve continuing to fall, and to date they’ve been right. Even under the burden of the module tariffs, we’re seeing modules trading at pre-tariff levels. So, there’s still some room there. A development asset that looks bad today may look good in a year.

A FRAMEWORK FOR THE SPONSOR EQUITY MARKET

Richard Matsui: You have an interesting framework you use to describe the sponsor equity market. Can you outline it here?

Ray Shem: I see the world bifurcated into three different types of sponsors: early stage developers, aggregators, and long-term owners.

Early stage developers tend to be hyper-local and in the right place at the right time. You see it in Minnesota, in Massachusetts, South Carolina, and other states. Legislation changes, policies move, and all of a sudden, a bunch of homegrown developers pop into place.

You then have aggregators, folks that have some degree of development experience and can crawl into a deal and understand the risks associated with it. Aggregators have access to larger pools of capital, including tax equity, debt, and some form of sponsor equity. These developers aggregate projects, typically in the “distributed utility” segment, though we’ve also seen this with some C&I as well. These developers create value by aggregating portfolios to a scale that can successfully attract capital from large tax equity and debt providers in the market.

And then you have long-term capital: the infrastructure funds, pension funds, and insurers that want to be long-term owners of these relatively low-risk infrastructure assets.

Aggregators play a role in market-making. In our work, we see a lot of small projects that make sense from an economic perspective. But the scale of those individual projects is too small and requires someone to aggregate them into a portfolio to fit an investor who wants to write a $50 million check.

However, a secular shift is underway. As the mystique around tax equity financing continues to fall away and the tax credit itself steps down, I think you will start to see pressure on the aggregator as a business model. Early stage developers, by deploying high-risk dollars and pushing policy that creates markets, will continue to create and capture value. In the aggregate, they will be fine. But the pie shared by aggregators and long-term owners will increasingly see the value migrate towards longer-term owners.

WHAT HAPPENS TO THE ‘FOR SALE’ SIGNS

Richard Matsui: It feels like half of the aggregators in the industry today have a “For Sale” sign in the window. Where do these firms end up?

Ray Shem: It’s a big question. Ultimately, I see two directions:

Some aggregators will begin to increasingly pivot to in-house greenfield development and become early stage developers.

Some aggregators will go in the other direction and sell themselves to long-term owners. The sale of sPower to AES and Aimco a few years back is a classic example of this.  As a result, some of the aggregators are likely trying to position themselves for this kind of exit. The key question is, “How well are they trading?” I know there are a couple out in the market, but I don’t know how those processes are going.

Richard Matsui: I think we, as an industry, are all holding our breath to see the results. Valuation will be the key question. When the purchase price is ultimately paid, that sum will represent the value of the assets on book plus the platform itself.

Ray Shem: Yes, and “platform value” can be an elusive thing. When we were at FLS, we thought we could clearly articulate the case for an acquirer to value the platform itself, and it proved to be somewhat illusory. A lot of value ended up being driven by assets on book.

Richard Matsui: Are you hearing that “platform value” is getting more value than what is has historically?

Ray Shem: I think it is an opaque, illiquid market. Without hard data points or trades that I’m thinking about in particular, my bet is that some platforms are getting value. I think those are probably platforms that had big pipelines, and that is probably where the value ultimately gets attributed. If I were managing low-cost money looking for a home in infrastructure assets, I would also be focused on pipelines, and then making sure that the team was in place that could translate that pipeline into investment opportunities. What I would expect to see is buyers first look at the pipeline, and then they lean into the bid, based on their confidence in the team.

THE COMING SHAKEOUT

Richard Matsui: Let’s talk about the long-term owners. It seems the category can perhaps be divided into two different groups: strategic and financial. From the strategic side, you have companies like BP and Shell buying Lightsource and Silicon Ranch. One of our own investors is ENGIE, which has acquired SoCore and Infinity Renewables. There are several other active strategics. They generally seem to follow a consistent logic—they want to own the businesses that will build the future energy system. From my perspective, strategic acquisitions appear to be motivated by a desire to internalize the talent and institutional capability, even as assets drive the valuation. But what about the financial long-term owners, like Capital Dynamics or New Energy Solar? Will they be using a different playbook?

Ray Shem: That’s a good distinction to draw. It probably depends on the source of money. Strategics are far more likely to look at a platform transaction. If you’re New Energy Solar, you’re not going to go back to your shareholders and say, “Hey, guess what? I just bought a company.” That’s probably not in the mandate.

I can see the aggregator firms bifurcating. Some aggregators will be acquired by strategics. Other aggregators will likely develop deep relationships with cheap, passive capital—the third group.

Richard Matsui: This introduces an interesting dynamic. If aggregators continue to get acquired, or start to develop exclusive relationships, or become early stage developers, then it could suddenly become difficult for a long-term owner to source projects. Even if they do have a competitive cost of capital.

Ray Shem: Yes. All of this boils back down to the scarcity of projects. It’s the linchpin. In a world where aggregators fade away, an important question becomes, “Can the small early-stage developers and the large pension funds find a way to do deals, even without the middleman?” As corporate PPAs continue to grow, we are already seeing a need for higher capital requirements for developers to strike those deals, which favors larger players.

I don’t have a background in conventional energy, so I am going out on a limb here, but I see two structural features about solar that dis-favor the strategics. Historically, conventional energy assets required a high degree of sophistication in energy markets. While some larger solar assets are management intensive, solar assets in general are a lot more of a pure-play financial investment: You have a long-term contract, you have merchant curves, and other factors that end up informing the value. The advantage of being a strategic is somewhat blunted vis-à-vis solar.

The second factor is the highly local nature of solar development. Small utility-scale projects continue to proliferate, nationwide. Community solar uniquely enables a near-retail compensation for near-utility scale cost structure. Succeeding in that market is a hyper-local question—Who can get the zoning? Is the policy regime in place? Who can sign on this offtake? Who can get their foot in the door before the local program closes? Those scenarios don’t necessarily play to the benefit of large, national strategics. It will be interesting to see ultimately where that lands. 

PREDICTIONS

Richard Matsui: You are very familiar with the aggregator business model, so it’s fascinating to hear you describe the secular headwinds there. Does the decline of aggregators and the rise of strategics and financial long-term owners represent the natural “end state” for our industry? I’m reminded of that Francis Fukuyama title—is this “The End of History”? 

Ray Shem: [Laughs]. Not necessarily. There’s still a fundamental gap here. If you have 4% equity capital, you need to deploy it in increments of hundreds of millions of dollars. There is an inherent mismatch between cheapest source of capital and what projects are available. From what I’ve seen, average project size in utility-scale is actually decreasing, even as these large long-term owners require bigger deals. Here’s the challenge: if I’m a local developer, I need to find someone with a few million dollars to finance my project. If I go out and raise that from friends and family, I’m not doing it at four percent. The aggregator has historically done that work. The question is, “Is this model the future of solar development?” If so, you could argue that there’s a permanent role for working capital to aggregate portfolios to a scale that can attract cheap capital.

Richard Matsui: I see. Is your hypothesis that that the aggregator role will still be needed, but it will be fulfilled by strategics that have vertically integrated down into the aggregator function? And that large, standalone aggregators will be increasingly rare, or even cease to exist in the future?

Ray Shem: Overall, I do see increasing pressure on the aggregator business model. At the end of the day, it comes down to competitiveness. Who will be more competitive: The strategic that has a reasonably cheap source of capital and has the operating businesses that can operate a distributed fleet of small utility-scale farms? Or the financial investors that may have the cheapest capital, but does require an aggregator intermediary? You could argue that the most efficient market will be the latter, where aggregators and financial investors are competing vigorously for every project. And vertical integration doesn’t benefit a strategic that much because the requirements to operate a solar farm isn’t high.

Richard Matsui: That makes sense. But sometimes, the market does not reach an efficient end-state. If I’m a strategic with an aggressive growth target in solar that I need to hit, I have to get my capital moving and start acquiring. Especially if I start seeing bigger aggregators getting snapped up, I’m going to start feeling very anxious that I might be the only one left without a date for the prom.

Ray Shem: Exactly. I think that will definitely happen. In fact, we’re seeing it now—for example, Orsted with Deepwater Wind. We are starting to see strategics insist, “I need to have a renewable energy platform.”

Richard Matsui: Yes. And if those strategics lock up dealflow by acquiring many of the bigger aggregators, it would seem to put the financial investors in a tight spot. Or perhaps new aggregators would simply emerge. We are in interesting times.

To wrap up, can you give me a non-consensus bet that you think is going to play out over the next couple of years?

Ray Shem: I live in Asheville, North Carolina, so I think every perspective I have is probably a non-consensus perspective.

If you’re a carpenter, every problem is a nail and every solution needs a hammer. So, my background is real estate. I think ultimately what you’re going to see in the marketplace is a lot of diversity—because of the diversity of the underlying assets. You’ve got everything from residential, small C&I, small utility scale, all the way up to massive 500 MW plants. I think you could make an argument that there will permanently be a diversity of players in the marketplace. I don’t necessarily think that this market will run to a singular end state, where all projects are fiercely competed for equally by all players. I do think there will be a lot of heterogeneity in terms of the marketplace and in terms of small, nimble developers taking advantage. I think you will continue to see some aggregators, though I do see added pressure on that business model. But if you build relationships and you can add value to those development relationships, there’s probably a niche for that. I think the strategics are just getting started here. The diversity of business models that we see today will reduce, but you’re still going to see a lot of diversity.

We haven’t hit the end of history yet.

#Solar100’s Lidija Sekaric: Solar’s Jack of All Trades

Originally posted on pv Magazine USA.

The saying goes, “A jack of all trades is a master of none,” positing a distinction between a generalist and a specialist.

Bucking convention that someone could only be a generalist or a specialist, Dr. Lidija Sekaric is solar’s jack of all trades.

Previously as Director at the Department of Energy’s Solar Energy Technologies Office, Sekaric effectively served as a cleantech investor. Before that, she worked as a research scientist, earned her PhD in applied physics, holds thirty U.S. patents, and has over forty scientific publications. Now shifting from government to business, she works in strategy and marketing.

In this interview, Sekaric talks about the future of distributed energy and what she’s learned about successful teams after hearing $1B of solar funding pitches.

STARTING IN RENEWABLE ENERGY

Richard Matsui: From a PhD in applied physics to research at IBM to policy work at the Department of Energy, you have a unique career in renewable energy. How did you get started?

Lidija Sekaric: I started my career working as a Research Scientist in Nanostuctures and Exploratory Devices group at IBM. Although it was fascinating work, and I was working alongside very smart people, I decided to shift my focus to renewable energy. I felt that I needed to do something about climate change, using whatever brain power I have.

So in 2009, I joined the US Department of Energy (DOE) as an American Association for the Advancement of Science (AAAS) Science Policy Fellow, a two year program that encourages participants to engage in policy work where they can contribute with their critical thinking and analytical skills. Before us were the big problems in policy and technology, especially with the new administration in place, and we asked questions such as, “Is there a new material we may need for solar to become the default energy source?” or “Is there a new device we need to invest in?”, towards, ultimately: “How can solar be made more affordable all around?” Afterwards, I was recruited for the newly-founded SunShot Initiative at the US DOE Solar Energies Technologies Office (SETO).

After seven years with DOE and five with SETO, the renewables landscape had changed quite a bit. There was so much more activity in the private sector in renewables and distributed energy that was not there when I first got into the field. An opportunity with Siemens came up and a company that has an incredibly wide array of technologies and business engagements was very attractive. It, too, followed the expansion of my personal universe when it came to technology and business activities.

Richard Matsui: How does having a physics and research background influence or inform the way you think about these very different roles?

Lidija Sekaric: In my current role in Strategy and Marketing, I do not spend much of my time thinking about the next greatest material or device. We build projects that are bankable, and so we don’t integrate solutions right out of a lab on customer sites—there is no need for that, with an array of proven solutions. But I have found that my research background is helpful when communicating with colleagues across executive, R&D, and sales departments. Whether it’s thinking about fluid dynamics or grid operations, or talking about product offerings in the context of market needs, it is useful to be able to quickly grasp and communicate technical concepts, without needing to learn them from scratch.

DISTRIBUTED ENERGY

Richard Matsui: What do your customers value, when you pitch them on distributed energy solutions?

Lidija Sekaric: Cost savings, reliability, and sustainability—and the order of importance changes for a different customer class. If we look at the U.S. military as an example, the mandate has previously been sustainability and minimizing cost to the government. Reliability was always absolutely needed,  but now I think that reliability is certainly first and foremost. Similarly, hospitals and aid shelters think about reliability first.

And then, there are customers who want to save money in the short-term, or have a customer-driven path to reducing the carbon footprint.

However, even if the customer’s stated motivation is sustainability or reliability, all of them want to see savings from the project. Because these projects can and do save money. Because now we don’t have to assume that you always have to spend more to have cleaner, on-site power.

Richard Matsui: Fascinating. I’m reminded of an interview we did with Jigar last year, and this was the point he was making, too. He was saying that sophisticated C&I developers have moved beyond simply pitching customer savings, because the customer values a lot of things beyond dollars. He provided an example of solar projects for schools, and how if batteries were attached to those solar projects, then all those schools could also serve as shelters in case of emergency. In this case, yes, there are savings, but the resiliency benefit is also critical.

From your experience, do you find this is true, or is the priority still cost savings first?

Lidija Sekaric: First, assume that everybody wants to save money, and assume that you have to build a project where you will save them money. But in terms of other priorities, I think it really depends on the customer. You have to understand their priorities, and it’s best when you can address multiple motivators.

Richard Matsui: In the past 24 months, there has been a flurry of acquisitions in this C&I distributed energy space, including ENGIE buying Opterra and SoCore. If you fast-forward 10 years, what does this market look like? Does it end up being fairly fragmented or are there just a couple of large national players?

Lidija Sekaric: That’s a really good question. Is the market going to consolidate, with only one entity that is servicing everything from top to bottom, including a building’s service, power generation, trading into the wholesale market, and advice on energy purchasing? It would be like replacing your utility with another entity that is functionally equivalent to your utility, and then some. Of course, in some markets, the major difference is choice and competition. The switching costs to this model could be high in some cases, or low, with a number of innovations in financing these services, but if done right, the rewards should always be worth it.

The critical question here is: How are customers going to react? I think it will ultimately depend on how the customer feels about signing up with one entity for a long time. It’s still an evolving landscape.

Richard Matsui: Everyone’s favorite analogy in storage is, “Storage is where solar was ten years ago.” You’re uniquely positioned to be able to comment on both, having worked in solar then and storage now. From a technical standpoint, would you agree with that analogy?

Lidija Sekaric: It is not dissimilar. Because they are both materials-intensive industries, the learning curve should look about the same. In a sense, there is no actual scaling required in the way we think of physical scaling with a computer chip. Scaling with storage is just tied to volume, as manufacture of the materials scales.

Further, you can also consider the obstacles for solar that will be similar for storage. If you look at a breakdown of the costs, we have almost a mirror image of soft costs versus hard costs. They are basically the same, and I can’t say I am surprised.

To illustrate that, let’s look at large scale versus small scale storage. Small scale storage is still going to be very tough for all the reasons that small solar was difficult. From the different local rules for electricians, to system integration, to business overhead, to packaging, it is fundamentally harder on a small scale, when the market is still so small and every solution looks different. Small storage now is harder because it is not standardized at small scale. And non-standard solutions can be expensive, unless that is mitigated in the overall project.

In many ways, solar ten years ago and storage today are the same.

ADVANCEMENTS IN THE SOLAR INDUSTRY

Richard Matsui: As Director of the US DOE SETO’s SunShot Initiative, you previously managed a portfolio of about $1B in project funding in solar R&D.

Having heard $1B worth of pitches, have you noticed trends or shared traits across successful teams?

Lidija Sekaric: Yes—it always came down to how well teams understood the market. From startups to university professors to national lab researchers, when teams possessed the instinct for keeping an eye on the market, they often came up with very relevant proposals. A team can understand the technology and have very smart people, but unless that team truly understands the market, their solution goes nowhere.

In addition, the ability to pivot was also important, because there’s always ways to improve the project.

Richard Matsui: Can you highlight a few projects that you feel really moved the needle for the industry?

Lidija Sekaric: There are several that come to mind and that I noticed in recent headlines. Aurora Solar was funded early on through a SETO program, and they are still out there and offering automated design.

And your team at kWh Analytics won an early SETO award. It was incredibly ambitious, what your team proposed to do all the way back in 2013, building the industry’s data repository. And now you created the Solar Revenue Put with all of that data. It is very significant.

Richard Matsui: Thanks, I really appreciate it.

Lidija Sekaric: We can’t take a hundred percent credit for everything you’ve done, but by association, we’ll say, “That’s in the family.”

Richard Matsui: Without the early support from your team we would not be where we are today. A lot of credit should go to SETO.

GENDER EQUITY AS A BUSINESS IMPERATIVE

Richard Matsui: You’ve previously said that gender equity in solar is “more than a diversity imperative; it is a business as well as a moral imperative.” Can you elaborate?

Lidija Sekaric: From the standpoint of having managed and worked with people from a range of diverse backgrounds—cultural, educational, gender, orientation, and so forth—I have seen the business benefits to having a diverse team. I firmly believe that we bring our entire selves to work, and that where we come from shapes our unique perspectives on life. Having a diverse team means being able to turn a problem over and examine it from many different sides. Diversity is one of the most important things in tackling problems creatively. And creativity is incredibly important in solving problems. For example, when it comes to gender equity in particular, there are studies that show that companies that have women in leadership perform better than comparable companies without women in leadership. When finding the most efficient business practices, diversity needs to be prioritized.

The moral imperative comes into play for companies that have a social mission. Diversity and equality are smart and important ways of bettering society.

Richard Matsui: The Solar Foundation has helped provide important data about the people working in our industry. Their latest survey underscored that yes, progress has been made, but that women and people of color are still underrepresented in this industry. Have you seen examples of initiatives or individuals who are moving the needle on this issue?

Lidija Sekaric: For diversity and inclusion, awareness is a requisite for change. To start, the Solar Foundation provides a valuable service by allowing us all to speak from the same set of facts. For anyone who cares, learning the current realities is an important step towards then being able to ask, “What do we do about this?”

When it comes to initiatives that I see promoting economic equity, I would like to highlight an organization that was started by a former colleague of mine, Dan Conant. Dan founded Solar Holler, which is an enterprise with a solar and economic development initiative at the core.

Dan went back to West Virginia and said, “Look, coal is not going to be around for these people. What are we going to do for the people in the poorest places that we have in the country?” And so he started this program doing installations and providing trainings to develop the skills of West Virginians to develop solar.

This example is not specific to gender equity, but it is about economic equity and giving people opportunities to thrive. It takes exposure to know that an industry is thriving, and for people to think about moving in that direction.

On the gender equity issue, any conference organizer, or a committee organizer, who is thinking about the makeup of that group beyond their degrees and titles, is doing something significant—it is providing human visibility, and visibility begets diverse participation in return.

Highlights from the #Solar100 at SPI 2018

Originally posted on pv Magazine USA.

Through a featured list and monthly interviews, the #Solar100 celebrates our industry’s thought leaders and the ideas that drive them.

This year at Solar Power International, all attendees were invited to nominate who they wanted to see interviewed next for #Solar100. The #Solar100 Leaders nominated both “Next Interviews” as well as “Next Entrants.” Below are select highlights.

Stay tuned for additions to the #Solar100 and new interviews on pv Magazine USA.

Next Interview Nomination Highlights

  • “Emily Kirsch the Mother Theresa of Solar” by Kyle Cherrick
  • “Jamie Nolan the Olivia Pope of Solar” and “Meghan Nutting the Kamala Harris of Solar” by Jen Bristol
  • “Christian Roselund the Yosemite Sam of Solar Media” by John Weaver
  • “Billy Parish the Captain Cook of Solar Finance” by Deborah Knuckey
  • “Tom Weirich the Human in Action of Solar Finance” by Yoni Cohen
  • “Andrea Luecke the Einstein of Solar Jobs” by Meghan Nutting
  • “Stephen Lacey the Edward R. Murrow of Solar News” by Tor Valenza
  • “Yann Brandt the E-Newsletter of Solar” by Kendra Hubbard
  • “Tor the Solar Fred of Solar” by Eli Hinckley
  • “Tim Buchner the Bill Gates of Solar” by Tom Weirich
  • “Susanna Murley the Peggy Olson of Solar Creatives” by Jamie Nolan
  • “Lynn Jurich the Lynn Jurich of Solar”
  • “Adam Browning the Gandhi of Energy Equality”
  • “Tom Matzzie the Clean Choice of Solar”
  • “Elias Hinckley the Renaissance Man of Renewables”
  • “Julia Hamm the Warren Buffett of Solar”
  • “Lidija Sekaric the Visionary of Solar Deployment”

New Entrant Nomination Highlights

  • “Audrey Lee the Julia Morgan of Solar + Storage” by Anne Hoskins
  • “Rosalind Jackson the Heart + Soul of the Solar Movement,” “Jessica Scott the Champion of Nevada Solar,” and “Zadie Oleksiw the Solar Splainer of the Solar Movement” by Adam Browning
  • “Raffi Garabedian the Staying Power of Thin Film Solar” by Lidija Sekaric
  • “Mike Pound the Winston Churchhill of Solar” and “Mauricio Anno the Peter Sellers of Solar” by TJ Kanczuzewski
  • “Jared Johnson the Larry Bird of Financial Innovation” by Jason Kaminsky
  • “John Weaver The Tick of Solar” and “Gregor Macdonald the da Vinci of Clean Energy Writing” by Christian Roselund
  • “Stephen Trimble the Alaska Builder of Solar Growth” by Kelly Pickerel

 

#Solar100’s Anne Hoskins: The Adam Smith of Solar Policy

Originally posted on pv Magazine USA.

In this #Solar100 Interview, Richard Matsui, Founder and CEO of kWh Analytics, speaks with Anne Hoskins, Chief Policy Officer of Sunrun.

Anne Hoskins is best known for her work as an energy policy buff.

What people might not know is that she is an applied economist and lawyer by training (and holds degrees from Cornell, Princeton, and Harvard). Within her analytical economist track, Hoskins describes a rigorous quantitative course load that became foundational to her policy career.

Like Smith, Hoskins’ ideas shape policies. She thrives at the intersection of economics, policy, and energy, and now applies her analytical background to her work at Sunrun as their Chief Policy Officer.

In this interview, Hoskins talks about the frontier of home solar and batteries, whether utilities are “natural monopolies” for behind-the-meter storage, and the quantitative side of policy.

ARE POLICY EXPERTS “SAFE FROM SCIENCE”?

Richard Matsui:  How did your interest in economics start, and how did that result in a career in energy policy?

Anne Hoskins:   I studied applied economics as an undergrad at the College of Agriculture and Life Sciences at Cornell, which encompassed energy and other resource economics. I continued to focus on economics in graduate school at the Woodrow Wilson School at Princeton, including taking a course with professor Bobby Willig, who is renowned in antitrust and utility regulation circles. We studied economics related to monopolies and the regulation of them. Because of this, the economics I studied had practical applications in energy and utilities.

My formal introduction to energy began when I worked at the Energy Committee at the New York State Assembly. I supported the Chairman as he tackled the controversy around the closing of Shoreham nuclear power plant, as well as proposed incentives to support energy efficiency. It was a challenging area to apply analytical thinking and it’s pretty incredible that many of the same issues are being debated in state legislatures today.

Richard Matsui:  I went to Georgetown’s School of Foreign Service (SFS), and it had the nickname “Safe from Science.” There is an assumption that people in the policy world tend not have a quantitative background. Is that true from your experience? And how does your quantitative experience change the way that you view some of these policy issues?

Anne Hoskins:  People definitely look at us that way, but it’s so far from the truth! At the Woodrow Wilson School, there is an analytical economic track in which we took very serious quantitative economic courses. Many of my grad school colleagues pursued highly analytical positions, such as at the Office of Management and Budget, Congressional Budget Office, or economic consulting firms. I took a different path and became involved in policy roles right away; I went to a governor’s office, then to a policy shop, and then onto Harvard Law School. My economic and analytical background was invaluable as my career later expanded into working in the utility industry and as a public utility commissioner.  Today, my economics foundation is making me a stronger advocate for distributed solar and a more diversified electric grid. Having a handle on topics ranging from rate structures to the trade tariff case last year has given me insights to understand what is going to work for Sunrun’s consumers.

 

SOLAR + STORAGE, OR SOLAR vs STORAGE?

Richard Matsui:  Sunrun is obviously leading the charge when it comes to residential energy storage. I once met a policy person from Tesla, who noted that after the SolarCity merger, they suddenly had to contend with two—often competing—policy priorities. What is good for solar is not necessarily good for storage, and vice versa. How do you balance that dynamic as Chief Policy Officer for a company that sells both?

Anne Hoskins:  Well, first I challenge the premise. I don’t think they’re antithetical. We want to encourage customers to do both—to get solar and a battery, which they can use for backup and time-of-use management in a place like California. The technology allows customers to participate in the grid. We view the combination of solar and storage as maximizing the customer’s experience.  Simply speaking, solar and storage go hand-in-hand. 

Richard Matsui:  The specific observation that the person was making had to do with net metering, unsurprisingly. Could you comment on how the rise in behind-the-meter storage changes the debate, or shifts the evolution of net metering?

Anne Hoskins:  It’s pre-mature to shift away from net metering. It provides a simple construct for supporting customer adoption of solar, which is foundational for storage.  In California where solar penetration has reached higher levels than in most states, NEM has been adapted to incorporate time-of-use rates, which encourages customers to shift their consumption and adopt batteries. Net metering rules can be adapted to support storage where appropriate by incorporating time-of-use rates. Society benefits through cleaner, reliable energy, along with job creation when a customer makes an investment in solar. The best way to encourage that is to have a simple system, one in which customers are going to understand what they’re paying for and what they’re receiving for the power they share with their neighbors.

Richard Matsui:  When Sunrun installs and owns the battery, who’s the primary customer? Is it the homeowner or the utility? I read about how Sunrun is going to be delivering grid services, but my presumption is that it’s still the homeowner who needs to sign on the dotted line of the Sunrun lease contract. So the homeowners still needs to see some kind of value proposition from storage.

Anne Hoskins:  Yes, the primary customer is the homeowner. Depending on where the homeowner lives, the reason that (s)he wants a battery is going to vary. If you’re in California with time-of-use rates, then we would expect one of the top benefits would be time-of-use management. In New Jersey, where they don’t have time-of-use rates, folks are interested in having backup for storms. In that situation, they may have five terrible storms and outages, but there are many other times when that battery is not fully utilized. In that case, if we have a thousand customers in a region, we can aggregate energy and capacity from those batteries and provide grid services for both the distribution system and wholesale markets. We see a future that involves pooling resources from batteries, providing a benefit to the host customer, sharing that benefit with the grid, and providing an overall societal benefit.

At the end of the day, the utility and the homeowner both benefit from distributed solar plus battery systems.  The benefits of “value stacking” are not mutually exclusive for homeowners or their local utility.

Richard Matsui: Your example was helpful to understanding this vision. Returning to that scenario where a storm passes through New Jersey and causes a grid outage for a Sunrun customer who has solar plus storage. The homeowner naturally wants to rely on the battery to provide backup power. This presumably could coincide with the societal need for that battery to instead feed that power back into the grid. Does that pose any conflict?

Anne Hoskins: No, it won’t. There will always be a certain amount of power that’s saved in the battery to meet customer needs. When you have thousands of customers, one customer may need the backup, but the one three blocks away may not, because outages are often localized. For the most part, as you get more of these systems, optionality increases. We’re optimistic that this combination of distributed and centralized systems is going to be the best solution, especially compared to relying on one centralized battery, where when that battery or connected transmission line goes down you lose the whole system.

 

UTILITIES: A “NATURAL MONOPOLY” FOR BEHIND-THE-METER STORAGE?

Richard Matsui:  There’s been a marked increase in awareness of how valuable behind-the-meter distributed storage can be from a societal standpoint. A while back, someone from a utility told me, “If energy storage behind-the-meter really does pick up, we are the natural owners because we know where the congestion is and we’re the trusted providers.” Are utilities the natural owners of behind-the-meter storage?

Anne Hoskins:  We don’t think that’s the case. Utilities have a lot of expertise in managing the grid, but they have no reason to go into a customer’s home on the other side of the meter. If you look at storage, all it really takes is for the utility to send a signal when they need access to the resource, which they can do. For example, PJM sends signals to energy generators without PJM owning or controlling the generation. Sunrun’s responsibility would be to manage its customers’ storage units and a system that responds to utility or RTO/ISO signals. This is not all that complicated.

The other point here is that utilities are monopolies—but there is no natural monopoly for behind the meter solar and storage. Competitive companies are ready and willing to provide these services. Utilities are given exclusive franchises to own and operate the distribution grid, which gives them greater market power and requires regulators to safeguard consumer welfare. When there is no natural monopoly, as is demonstrably true with storage and distributed solar, there is no justification for enabling increased market power. The best way to maximize consumer welfare is to facilitate—and certainly not undermine—competitive markets. We know that there’s a competitive market for distributed solar and storage, with new companies emerging to offer these services to customers.

Utilities will say, “Well, both can do it—we can own some and you can own some.” We will look at all options, and we know that some commissions may want to explore this. The challenge is that utilities are able to spread the risk of their investments across ratepayers and also are advantaged by access to customer data and all customers. They bear much less risk if technology, costs, or consumer demand changes. How can competitive providers compete with that? One option is for utilities to offer behind the meter services through competitive affiliates. If utility or their affiliates are allowed to offer service in a competitive market there would need to be stronger regulatory oversight of interconnection and data sharing.

Competition drives cost reduction and innovation. That’s what’s going to get us to the next technical innovation. At Sunrun, we have a strong incentive to ask and solve these questions and improve our quality and service in order to compete. I spent seven years at a utility and three as a regulator. Cost of service regulation just doesn’t give utilities the same incentives to reduce cost and try new approaches to problems. In contrast, companies that bear financial risk have incredible motivation to continually improve the product and service in order to stay in business and grow.

Richard Matsui:  This discussion reminds me of 2009, when Southern California Edison announced a behind-the-meter solar program for 500 MW. At the time, this was a massive program for solar, and especially C&I rooftop solar. SCE carved out a program that was half rate-based and the other half was not. The hotly debated question was, “Why should half of this be rate-based? Is there really a market failure where the private sector is unable to fulfill that role?” One could argue that utility ownership was necessary because solar technology and capital formation was less mature, at that point in time. Fast-forward 10 years, it’s evident that the argument has been decisively settled in favor of letting market force dictate where, when, and at what cost behind-the-meter solar systems get built. It strikes me that this conversation will likely be re-litigated in energy storage.

Anne Hoskins: I’m happy to see the utilities are embracing a role for distributed resources, but I’d like to see them embrace it more across the board. We spend too much time fighting over rate design, demand charges, and initiatives that appear to be intended to reduce the ability for customers to invest in solar.

My concern as a former regulator is that utilities are viewing storage as another way to rate-base capital expenditures. Utilities see that demand is falling for electricity, which leaves them unsettled, because we have an antiquated system for how we allow utilities to recover their expenses and earn returns on their investments. Utilities are investor-owned, so when they see customer interest in storage, they think, “We can grow by extending our network to behind-the-meter.” But why would we put a monopoly in charge of something when it is not necessary? I think this points to the need for regulators to start looking at performance-based regulation. Your home state of Hawaii just passed legislation on this. We need to encourage utilities by giving them incentives to reduce their costs and be more responsive to consumers, as opposed to allowing them to grow through capital investment.

A few years ago, Georgia Power was given the authority to do rooftop solar, and they only signed up a handful of customers. It just isn’t in their wheelhouse. Having spent time at a utility, I know that their strength is in engineering and keeping the system running. Utilities have done that for over 100 years. But most continue to think of residents as captive “ratepayers”—not as customers who they need to find and win over with competitive service offerings.

Richard Matsui:  That’s an important and powerful point. I’m glad that you are able to bring your experience as a former regulator to this conversation.

 

BRINGING STORAGE TO THE MAINSTREAM

Richard Matsui:  I think it’s widely acknowledged that behind-the-meter energy storage is in its early days. What are the important steps for energy storage to become a mature service that mainstream investors can get comfortable with?

Anne Hoskins:  Well, we know that home battery costs are expected to decline significantly over the next 5 years, by approximately 50%-60%. As costs decline, we’ll see greater market penetration.

We’ve been thrilled with how many customers have adopted batteries already. More than 20% of Sunrun’s solar customers in California are adding a home battery to their system, with up to 60% adoption in some markets. The energy storage industry benefits from manufacturing synergies with electric vehicles, and that’s helping us achieve scale and reduce battery costs.

Richard Matsui:  That’s stunning.

Anne Hoskins:  This is partly driven by offering the customer multiple benefits, such as time-of-use management as well as backup power. With the issues in California with fires last year, we see a lot of customers with reliability concerns. When you put all those things together, you can understand why there’s strong demand.

Additionally, when a few people in a neighborhood get solar panels, those early adopters have a domino effect on their neighbors. I think the same thing is going happen with batteries as people realize they can gain energy independence.

Richard Matsui:  For us at kWh Analytics, our lens into the solar market is through its performance data. We aggregate data on ~20% of the US operating fleet, and we use this data to help investors and insurers of quantify the risk and get them comfortable with deploying more dollars into solar. But it’s much more complicated to quantify the long-term investment performance of storage, because of the policy risk. We look forward to continue working with Sunrun and others to build greater investor comfort with this new asset class, because it’s clear that there will be no shortage of interesting challenges to overcome.

Anne Hoskins: Storage will run into many of the same challenges as solar did and many of the answers have already been battle-tested. We’re also seeing forward-looking states recognize the value of storage. Hawaii, California, and New York all have adopted distributed storage policies and incentives, with New York recently issuing a storage roadmap that includes distributed solar and storage. As more policymakers start recognizing the need and opportunity to optimize the use of solar, either for reliability or clean energy purposes, they will create related incentives. It makes a lot of sense to target incentives to nascent technology at the point when customers are on the cusp of adopting the technology, and I think we’ve seen that there’s enough interest in storage to drive these incentives.

 

LESSONS FROM THIS YEAR’S BIG POLICY WIN

Richard Matsui: You recently had a big policy win in Florida. What’s the takeaway for this industry when it comes to opening markets that have been more resistant to rooftop solar?

Anne Hoskins:  I think we achieved that incredible result in Florida because it simply made sense for consumers. We knew from their ballot initiative fight a year and a half earlier that consumers felt strongly about gaining access to solar, especially in Florida, a state that is known for its sun.

As we work with policymakers in places where there should be greater access to solar, we try to keep the focus on the consumer. People want solar, and we have many success stories where we have benefitted not only the direct customer, but also the state as a whole. For example, California is now able to forego natural gas plants and transmission projects because of distributed solar.

My approach is to help policymakers see that not only is there consumer demand for it, but it’s also an avenue for solving larger problems in a cost-effective way. In Florida, we demonstrated to the commission that equipment leasing was perfectly appropriate under their law. When they realized we were focused on serving the needs of Florida customers, they approved it.

#Solar100’s Bryan Birsic: The Tony Stark of C&I Solar

Originally posted on pv Magazine USA.

In this #Solar100 Interview, Richard Matsui, Founder and CEO of kWh Analytics, speaks with Bryan Birsic, Co-founder and CEO of Wunder Capital.

While Bryan Birsic probably doesn’t self-identify as a “genius-billionaire-philanthropist-superhero,” elements of his story mirror that of Marvel’s business magnate Tony Stark.

Leveraging their tech expertise and respective skillsets, Stark and Birsic both changed their careers to respond to important needs they saw in the world around them. For Stark, this means using tech and physics to stop villains, and for Birsic, this means using tech and finance to combat climate change while making returns for his investors. Birsic began his current business after a realization that his previous work wasn’t “addressing the big challenges that humanity faces.” Birsic’s archenemy? Barriers to solar deployment in the C&I lending space. Birsic’s work is resonating with people, and his company recently raised $112MM towards this effort.

In this interview, Birsic discusses finding purpose in solar finance, cracking the C&I market, and the wrong approach for solar startups to take.

Finding Purpose in Solar Finance

Richard Matsui: You first established your career at Bain, then spent 5 years as a VC with Village Ventures. How did you get into solar?

Bryan Birsic: It started when my cofounders Dave, Sam, and I hit a point in our careers where we no longer felt comfortable pursuing tech start-ups that weren’t addressing the big challenges that humanity faces. We wanted to move past only having nights and weekends to pursue our real passions and fulfill what we defined as our purpose. I think this is a common framework for millennials: Looking for jobs that utilize their skillsets and provide good compensation, yes, but also looking to find purpose in their work that extends beyond the requisite financial incentive.

I joke about this, but it’s true: Dave, Sam, and I were basically having a bitch session about how difficult it is to motivate yourself and others to work at the kinds of start-ups where we previously worked. That conversation prompted the questions: What do we care about? What would feel better to work on? And really importantly, are we the right people to do those things?

We convened in Boulder to figure out how we might manifest those ideas into a company. Dave, our CTO who worked at the DOE’s Lawrence Berkeley National Laboratory, came in with this religious fervor about what was happening in the energy space, particularly with distributed solar. He won the day. We saw that there was an under-penetration of software entrepreneurs in solar, and particularly that financing seemed to be an acute problem. On the C&I side, we saw a really big opportunity to grow the solar space with improved financing. All three of us were coming from very different roles—how software applies to finance, advertising, and marketing tech—but those winnowing forces brought us to start something in commercial solar finance.

Founding a Solar Startup

Richard Matsui: You’re a fellow ex-management consultant. Did your management consulting work influence what you bring to the Founder and CEO role today? More broadly, what would you say are the pros and cons of your job as Founder and CEO?

Bryan Birsic: My favorite CEOs are passionate about things like how to structure a company, how to create feedback loops, how to experiment, and how to deliberately create strong cultures and operating principles. The skill of being able to learn quickly, implement that knowledge, and repeat is a virtuous cycle that carried over from the management consulting role to the Founder and CEO role. This is also one of the biggest pros of my current job.

Richard Matsui: That’s interesting. The biggest lesson I learned from my stint in management consulting is that there are very few truly novel problems in the world. The vast majority of problems that any company faces has already been solved before by someone, somewhere. As a consultant, your job is to find that person, learn the answer, tailor the answer to the unique circumstance, and then execute. So it’s a very similar framework to your “virtuous cycle”.

Bryan Birsic: Exactly. And on the con side, it can be very lonely work. You don’t often have the opportunity to share fears or vulnerabilities, at least not in a “I’m having a terrible day” way. You certainly talk about challenging things with your team, but there has to be some “presentation layer” on top of your day-to-day feelings, and that dynamic obviously applies to your investors as well. Even with someone like a spouse, who has some financial connection to what you’re doing, it’s hard to be a 100% vulnerable and honest. That is compounded by the fact that there aren’t a lot of people who can empathize with some of the pressures, demands, and fears incumbent with being a CEO. One thing that I do that I recommend that every CEO do is find a group of CEOs who are all interested in being authentic. Without that resource, the CEO dynamic can be difficult to handle.

Richard Matsui: How does your experience as a VC change that way that you’ve built this business?

Bryan Birsic: Time in VC provided two advantages: The first and obvious one is fundraising, and the second is the focus on the scalability of our software. Non-software teams tend to suffer from diseconomies of scale when they get to a certain size. Our team build and brand positioning as a software-first company stems from my understanding of what my VC audience is looking for. To be really specific, we actively work against the idea that we’re a solar company, because that industry is painted with a slow-to-develop, hard-to-scale brush.

Cracking the C&I Market

Richard Matsui: When I think about Wunder, what strikes me is the difficulty of the problem you are tackling. C&I has been a “next big opportunity” for a long time, despite a lot of smart people working on it. What makes the market so challenging?

Bryan Birsic: I think the reason that there aren’t five Wunders running around is because this work requires a particular knowledge set that doesn’t often come together organically. There are a lot of people who understand this problem space, see the opportunity, and understand that software is required to reduce the fixed and bespoke costs associated with cracking this sub-$2mm, sub-1MW market in commercial solar. However, the folks who have that solar background and see that opportunity tend to be people without technology experience.

Generate, Sol Systems, and Seminole—all firms that I really like and respect—are not software companies, and they all struggle with lending to projects below 1 MW because they have not been able to combine their deep understanding of the problem space with the tools of a software company.

We took a very different approach. I had some knowledge of how software applied to lending, and Dave had experience as an engineer and spent some time at the DOE. We are software people first who only had a few relevant solar experiences. We had to spend two years getting up the curve on some pretty complex topics to gain solar expertise. This approach led us to a different place then a lot of other people who have been in the market for years.

Richard Matsui: There’s a saying that all founders know a secret about the industry they work in, and that secret becomes their company. It sounds like your company’s founding secret was  this software-first mentality. What are the big C&I problems that software solves?

Bryan Birsic: While we use software in many ways, we have identified two main problem areas that software can address.

As outsiders coming in trying to figure out this market, the first thing that struck us was just how much paper and legal work is required in order to get a C&I solar deal done. You oftentimes have three- or four- party contracts, lien or UCC1 filings, regulatory dynamics in different states depending on the size of system, and so on. We mapped out and color-coded all the required steps and realized that around 50-60% of the steps were fundamentally contractual, legal, or involved something regulatory. If you’re an project finance provider in a market where your loan might be a million dollars, and you might make 2.5% as your total closing fees on that loan, that means you have $25,000 to spend, including your margin and fixed expenses, in order to be profitable. If you’re engaging a lawyer or putting contracts together, you’re going to eat most of that $25,000 budget immediately on legal costs. We needed to eliminate the legal-cost table stakes.

So the first thing we built is Docsund, intelligent software that—with five clicks—drafts a custom contract package for each of our deals. Once we encode changes, this system requires no legal costs and no human being to create custom contracts. That is the most important thing we’ve done, and it’s necessary to attack this market.

The second big efficiency that we’ve realized is executing deals quickly. We built Koalify, the second leg of our software stack, to qualify our deals. We’re seeing about two billion dollars of buyer demand annually now, with projects that average roughly half a million dollars each. For each project, we need to first gather the data that requires minimal human interaction, and focus on data that is most likely to kill a deal.

Those are our two big cornerstones. Between those two software products, we’ve been able to realize about a 10X efficiency relative to what we see from manual financing players in the C&I market, taking our minimum project size to $200K from the industry-norm of ~$2MM.

Lending Small and Moving Fast

Richard Matsui: On the borrowers’ side, what is the typical project size that you lend against?

Bryan Birsic: Our average is around $500k or $600k in terms of their debt need, which corresponds to a 200-300 KW system.

Richard Matsui: That’s incredibly small. Late last year I asked Jigar what he was bullish on, and he identified small C&I, saying, “For whatever reason, the investors have all said, ‘We only want to do deals that are 750 kW and up,’ which I think is huge mistake.”

Bryan Birsic: That’s 100% right. We see the rest of the market as willing to go down to 750 KW, about $2mm, and we just don’t see folks that are down market of that besides us.

Richard Matsui: What do your borrowers want?

Bryan Birsic: We have two value props. The first one is that we understand the solar asset well enough that we’re not going to ask for additional assets from the borrower. What you often see in the small C&I space is that a developer gets a potential borrower excited, they quote the system, but they don’t have a solar specific financing offer for these smaller systems, so they send them to their local bank or credit union. That underwriting team does not have a group specialized in solar, so they’re looking at just the financial history of the business, and will require collateral, for example by putting a senior lien on borrower property.  By contrast, we offer non-recourse debt, so even if our rate is incrementally higher, in almost all cases we’ll win that business because we only have recourse to the solar asset. We can do that because we’re underwriting a wide range of aspects of that solar project’s ongoing value, and are capable of monetizing it effectively if God forbid there’s a default.

Next, our partners would tell you that speed and transparency are the two things they value most in Wunder. Installers and developers generally understand that financing sometimes doesn’t come through, so generally what they like is that we’ll tell them within a couple of days if a project is not going to be approved so that they can stop working on it and reorganize their sales efforts. We’ll also let them know why they were rejected, which can often be a black box with other lenders. Then on the speed side, we’ll promise them an executable document within five business days. That is an order of magnitude faster than some of the folks they’re used to dealing with.

Richard Matsui: From our experience developing the Solar Revenue Put, we have gained some insight into what small scale project developers value most. It turns out that certainty and speed are very important factors because the developer is likely working on multiple projects at a time. Upfront cash is also critical to borrowers in the C&I segment, because they need this capital to develop more projects and run their business.

Bryan Birsic: Absolutely. To your point, we did not realize how important speed would be in that smaller C&I segment. These guys are often trying to fill 10 or 15 projects through their quarter, and financing has really been slowing them down. And to your point about cash, I can say explicitly that with your Solar Revenue Put, which I like, we change our loan-to-value rate that we offer on a solar project.

The Wrong Approach for Solar Startups to Take

Richard Matsui: What does Wunder become in five years? Is it a building improvement lender like a GreenSky for C&I? Or does it become something else?

Bryan Birsic: I love that analogy, given GreenSky’s recent valuation. I think we’ve addressed about half of the solution to date. If you look at GreenSky or Dealertrack, they’ve succeeded in overcoming the primary challenge in technology-enabled lending, borrower acquisition costs. They’re not only a great financing option for their partners, but they also bring their partners borrower demand for free, they pull financing into the sales funnel, they help their partners target customers based on the likelihood to get financing, and help onboard new customers through the relatively complex financing process. Mosaic’s also done some really interesting work along these lines in residential solar.

We need to make sure that we’re not only your financing partner, we are also your partner in cracking small commercial solar through the sales funnel. That’s the next big thing for us operationally. The other big shoe to drop is going to be storage. We believe that distributed PV plus storage is going to be a big market and so between those two challenges, we’ll stay pretty busy for the next five years.

Richard Matsui: What else is broken or inefficient in solar? Put another way, had you not started Wunder and were looking at the landscape today, what would you want to tackle?

Bryan Birsic: I think pure customer acquisition is really interesting. We see a lot of folks that are trying to generate leads and then kick them over the transom. Part of the reason that we didn’t start there is because if I send you a lead for a $500k system that you can’t get financing for, solar developers probably won’t even want the lead. We had to start with financing before folks would be interested in solving that customer acquisition problem. The really hard thing is getting a business efficiently through the landlord tenant dynamic. How do you solve that? We see a big opportunity there.

There’s a real misunderstanding of how to apply software to solve the industry’s problem of soft costs. By the way, I think your team at kWh Analytics is doing it right. There’s a broad and mistaken belief from many solar startups that are thinking like traditional software companies: We’re going to sell software licenses to installers. That simply does not solve what customers are looking for. Installers and developers are not people who want to be on their computer all day. If you’re building them software, you have to consider where they are, not where you think the market should be. If I were to go to the bank and say, “Hey, I’m going to sell you software for small C&I,” they would respond, “We don’t do small C&I.” Software is necessary to bring down soft costs, though I think the big opportunity is in software-enabled services. Don’t show up with the software—use your own software to deliver the value to customers. And that will probably be a better business model and an easier sale, too. I’m highly skeptical of folks that are selling software under a SaaS model, as opposed to using software inside of their businesses to be incredibly efficient or building a differentiated data asset like your team. I think most folks are taking the wrong approach there.

Richard Matsui: That’s an often unsaid but brutal truth about our industry. Even though we offer different products, I think that our teams are practicing a similar mentality. If a solar startup thinks of itself as pure-play software, an honest assessment of the total addressable market will usually be small. And small can be great, because small means lean, which can mean profitable. Folsom Labs is a standout example of this. But if a startup is seeking venture-type results, software-only is a challenging path. Those founders need to answer the big picture question: What is the real pain point here? What is our industry fundamentally doing wrong? Software can play a role in that answer, but software alone is often not the full answer.

#Solar100’s Shayle Kann: The Malcolm Gladwell of Clean Energy

Originally posted on pv magazine USA. Richard Matsui, Founder & CEO of kWh Analytics, speaks with Shayle Kann, Senior Vice President of Research & Strategy at Energy Impact Partners.

Shayle Kann is clean energy’s own dedicated Malcolm Gladwell.

Throughout his career, Kann has prioritized the ability to be “curious, analytical, and a storyteller.” He has made it his job to understand the whole industry.

And as former head of GTM Research, how Shayle Kann thinks about a subject has for the past decade of his career shaped how the broader solar industry thinks about a subject. Ideas like solar + storage soon arriving to compete with gas peakers and viral stats like the one President Obama used in his 2014 State of the Union speech (that the U.S. installs a solar project every four minutes) can be traced back to Kann’s work.

He’s also a living example of Gladwell’s ‘10,000 hour rule’—a decade into his energy career, Kann is widely regarded as an expert on not just solar, but how the broader electric industry operates.

In this interview, Kann discusses how he chose his current role at EIP, Greentech Media as a startup, and the solar industry’s ‘Next Frontier.’

Starting in Energy

Richard Matsui: Many people are familiar with your story while at GTM. Prior to that, how did you first get into energy?

Shayle Kann: I got into energy in college through a class called ‘Strategic Natural Resources.’ We read Dan Yergin’s book The Prize and I discovered a whole world out there called “Energy” that was undergoing dramatic transformation. It just hooked me. I found it utterly fascinating.

At that point, I was a psychology major. It was too late for me to change my major without an extra semester I couldn’t afford, so I tailored my major. I ended up studying the psychology of energy behavior, which is this subset of psychology that looks at the types of behavioral interventions that actually get people to change their actions with regard to energy. The big revelation in the psychology literature at the time was that you can tell people as much as you want about how much energy they consume and all the reasons why they should conserve, but that has virtually zero statistical impact on their actual consumption.

Richard Matsui: Don’t tell Opower.

Shayle Kann: But, tell people what their neighbors are consuming, and it does have a statistical effect. Of course, this came before Opower, and that has become the backing to what ultimately became Opower’s model.

Richard Matsui: Right, fair point.

Shayle Kann: After my entry into energy, I took a course taught by a semi-retired Southern California Edison regulatory executive on utility regulation and discovered that I was actually even more interested in utilities and utility regulation. As a result, after I graduated, I went to work at the California Public Utilities Commission. I quickly discovered that I am not meant to be a regulator. However, I learned a lot, and still to this day utilize insights that I gained from my very brief period working there. Understanding how the regulatory process works is invaluable.

In 2007 I received a Fulbright grant to go to Australia. I ended up doing academic research on wind project finance during a credit crunch, essentially asking how you finance incredibly capital-intensive assets when there’s no money. I spent about a year researching, travelling around Australia, and watching kangaroos hop in front of my house (no joke).

When I came back in 2009, I randomly stumbled across GTM when it was a ten-person startup. From there I sort of discovered that market analysis is something for which I have both a passion and a talent.

 

GTM as a Startup

Richard Matsui: When we were first connected during my McKinsey days ten years ago, I remember buying reports from both GTM and Photon Consulting. Back then I would give the edge—sometimes a significant edge—to Photon. What helped GTM, as the underdog startup, to succeed?

Shayle Kann: One thing that was always true for us, whether in comparison to Photon or other competitors later: we never had the most resources. Without as many people to dedicate, we were not as global in scope as some of our competitors. We figured that we could add value by identifying a few specific areas of frothiness and confusion and dedicating attention to quantifying what was happening, identifying the players, and understanding the strategies involved.

Our first major foray into that was going really deep on solar in the U.S. We partnered up with SEIA to start tracking the whole market in detail each quarter. We went as deep as we possibly could, down to the level where we would look at individual micro markets and every policy development and rate structure that matters for solar in the U.S. You could not possibly cover that granularity if your mandate was to cover everything all the time. We decided we would pick places where we could go deep at the expense of going broad. And then as time went on, we continued to do that just in new areas. That worked for us.

Richard Matsui: I like that lesson: The importance of focus. As a startup, it’s difficult to succeed unless you’re willing to take some bets on what’s important and what’s not.

 

Changing How We Think

Richard Matsui: What idea are you most proud of popularizing? Perhaps the idea that gas peakers may soon be replaced by solar plus storage?

Shayle Kann: We made a few calls that I’m proud of. Storage soon arriving to compete with gas peakers is a good, current example, and one that I think will prove to be true. Another is the rise of residential solar loans (as opposed to leases), which we predicted early and is well underway. We also made a concerted effort early on to hammer home the point that the value of distributed energy is a function of rate design – so we started modeling actual rate structures and load profiles rather than just comparing the levelized cost of distributed solar to total retail rates.

We also originated a few viral stats. At one point, a couple of us had a competition to see who could create the most viral statistic about solar in the U.S. We thought the battle was over when I received a moveon.org email forward from my retired mother in Wisconsin which, unbeknownst to her, used one of our stats. But then President Obama used the other one (that the U.S. installs a solar project every four minutes) in his 2014 State of the Union speech, which would be tough to top.

But in the end, the thing we popularized that may have the most lasting power is the term “grid edge” to describe the rapid evolution of electricity where the utility meets the customer. We were sick of talking about the “smart grid”, which no longer encompassed the most exciting things happening in the sector, so we coined this other term in order to be able to analyze the areas we thought were most dynamic. We had no idea it would catch on like it did.

 

What’s Up Next

Richard Matsui: You have an interesting bird’s eye view of the industry. What were the most interesting ideas and opportunities that came to you when you were thinking through what you wanted to do after GTM?

Shayle Kann: Good question. GTM was an iconic experience for me. It was an all-consuming eight and a half years, and I loved it. When it came time to leave, that was no small action for me because so much of my time, attention, and identity were tied up with the organization. So, I wanted to give myself a little bit of mental space to find out and deliberately left without knowing what I wanted to do next.

I explored a range of different options. I considered joining or starting a brand-new startup, which in part appeals to me because I really enjoyed the early days of GTM when everything was in flux and nothing made sense—that was stressful, but it was a lot of fun. I also considered taking more of a strategy-focused position at an operating company. Ultimately, I realized I wanted to retain what I loved most about my world at GTM: It was my job to be curious, analytical, and a storyteller.

I wanted to be able to continue doing that work, but I was also hoping to find a position where I could put my money where my mouth was. It’s difficult to do that as an analyst, because you have a meaningful influence on the market, especially once you get a lot of voice in the industry. I wanted to be able to take a view on something and then take action upon it directly.

So when my current role presented itself as an opportunity, I realized that it had exactly those characteristics.

Richard Matsui: That’s interesting. It sounds like you were looking for two components in your next role: One, the ability to be curious and help craft the industry narrative, and two, the ability to apply your skillset and take action. What about EIP helped you decide this was the right place to take action?

Shayle Kann: EIP is a fascinating venture fund whose investors include some of the largest utilities in the world, and whose portfolio includes some of my favorite cleantech companies. From the outside, I was already somewhat enamored with EIP’s model because I think the company sits at the nexus of those who are ultimately going to be the most important players in energy transformation. On one side, there are the innovators—the startups that are building new technology and services, solving the problems that we are going to face as the next wave of technologies hit the grid. And on the other side, the utilities that are going to have to integrate and manage all of those things, keep the lights on, and maintain the customer base. EIP sits in between those two. EIP gets to invest in the start-ups and gets to work with the utility to provide them visibility and help them adapt and evolve their own strategies. It’s just really a cool place to be within this transformation because you get to see both sides and then try to help each group within that ecosystem to learn and do better.

 

VC Trends

Richard Matsui: When you put your VC hat on in your current role, what are the trends and themes you find most interesting?

Shayle Kann: This is a broad and somewhat tired framework, but I think we have four simultaneous transformations occurring within the sector: decarbonization, decentralization, digitization, and electrification.

Those are obvious trends but what’s unique about this time is that, while each one of them stands on their own, they are all happening simultaneously and they all interact with each other. As an example, electrification puts a bunch of electric vehicles on the grid. EVs suddenly catalyze decentralization because now you have another source of demand response or, potentially with vehicle-to-grid, you have another source of energy storage. The emergence of EVs presents new opportunities and new risks to the system.

Similarly, in the other direction, the proliferation of sensors, communications, and analytics that are happening at the grid’s edge will enable us to manage the upcoming influx of EVs. Were it not for those types of analytics, better planning, and visibility, we would have a much bigger problem when the EVs hit the grid.

I try to think about the way these four transformations are occurring and also how they interact with each other.

Richard Matsui: Is there an anti-thesis—either something that you see as particularly exciting but others don’t think so, or conversely something other people are really excited about but actually you’re skeptical?

Shayle Kann: That’s an interesting question. I would take a somewhat cautious approach to blockchain, not because I’m not a believer in blockchain necessarily, but because the hype to proof ratio is a little terrifying.

I’m also skeptical of startups that rely on getting consumers to spend a lot of their time explicitly thinking about energy. I think it’s widely recognized that customers generally pay very little attention to energy, and I don’t think that a business model that depends on that changing is going to find success.

I remember the Accenture statistic that customers think about their energy bill a total of eight minutes a year. I mean you could imagine that number doubling, but you probably can’t imagine it going up by orders of magnitude.

There are, however, lots of interesting ways to create great customer experiences that hide energy value within issues that are more front-of-mind. For example, EIP is invested in Sense, which offers residential energy disaggregation. You can use Sense to monitor your device-level energy consumption directly, but you can also use it to check, for example, whether your garage door is open or how long your child has been playing Xbox.

 

Solar’s ‘Next Frontier’, Grid Modernization, & Ten-Year Predictions

Richard Matsui: What’s the ‘next frontier’ for solar?

Shayle Kann: I think that the most valuable people in the solar industry right now are the people who understand wholesale markets and electricity financing. Historically, the solar industry didn’t really need those skills, right? Everything had a long-term PPA, so you just built off of that. But now it turns out that solar is becoming exposed; basis risk is a perfect example.

Richard Matsui: Agreed. Recently, I was on an Infocast panel talking about hedges. We were talking about our volume hedge, and the infrastructure bankers were talking about price hedges. They used a completely different set of vocabulary. Sitting there, I was reflecting on the fact that our entire industry, or maybe 99% of the solar industry, has come this far without understanding the basics of the underlying electricity market that we’re serving.

When college students ask me how they can make an important contribution to renewables, I say that I think that understanding of the wholesale electricity market is quickly becoming the new “must-have” skillset. Not enough solar people understand it, including myself.

Shayle Kann: I agree with that. I think having people who understand the wonky wholesale market and these wonky products is incredibly important. For example, the people who are paying attention to the Flexible ramp in CAISO as opposed to flexible capacity—those differences really matter. Especially now that all this solar is getting paired with storage, so it’s somewhat dispatchable. We need people who can understand that in-depth, and I barely scratched that surface.

Richard Matsui: Solar and utilities have had an ongoing love-hate relationship, or at least a love-fear relationship. Last month we talked with Katherine Hamilton, and in addition to sharing numerous insights and reasons for optimism in solar, she warned that the solar industry should watch out for grid modernization as the latest attempt from utilities to maintain profits by rate-basing unnecessary investments that “suck the air out” for other opportunities. Do you see opportunities that are win-win for both industries? Or will the relationship continue to be an adversarial one?

Shayle Kann: I tend to think of the challenge as a function of the regulatory construct. As an example, SolarCity, did all this work to make the case that solar has—in particular locations and at particular times—meaningful value to the grid. Currently, the problem is that value is not monetizable by either solar or by utilities. As a result, there is very little incentive to place solar in the places where it adds the most value on the grid. That’s a problem that regulations need to fix. We need to improve electricity pricing schemes, we need locational pricing, we need to open up opportunities for non-wires alternatives. Those types of things do tend to be win-wins, because ultimately if you believe that these distributed resources, solar being an example, have true value to the system, then we should have a regulatory construct that Is structured accordingly. There are a lot of win-win opportunities, just as long as that’s our north star: Get the right resources in the right places.

Richard Matsui: You’re roughly around your ten-year anniversary of working in and around solar. Do you have a non-consensus bet on what will happen by your twenty-year anniversary?

Shayle Kann: I think in the next decade, we will have an operational solar project somewhere in the world selling power at 1 cent per kilowatt hour.

One of the big lessons for me over the past decade: Do not underestimate the solar industry’s ability to bring cost down. Just don’t do it.

Richard Matsui: I hear you. I remember reading both your demand forecast model at GTM and my own model back at McKinsey. Neither look very smart, today.

Shayle Kann: There was a period during which we would under-forecast global solar demand because a feed-in tariff market would pop up virtually overnight. Suddenly, the Czech Republic would install 2 GW and that would throw everything out of whack. Then we started to calibrate our demand forecast better, and we ended up fairly accurate.

However, it’s still challenging to predict exactly which combination of factors will drive solar down to 1 cent per kilowatt hour. We’re going to see manufacturing cost reductions, longer system lives, and lower cost of financing—and you are more familiar with that last point than anybody else. While some may think we’ve hit the asymptote for solar, I don’t think we’re anywhere near it.

Richard Matsui: I agree, though it’s worth noting that this is the counterpoint to Varun Sivaram’s thesis.

Shayle Kann: Sort of. The core questions in the debate Varun has sparked are whether solar is currently on a trajectory to low-enough cost for long-term growth, and whether the systems around solar (both physical and regulatory) will adapt fast enough to integrate it at high penetration. My prediction here is that we will see *a* project selling power for $0.01/kWh, not that it will be the norm.

Broadly speaking, I agree with Varun about what will need to happen in order for solar to hit 40%, 50% or more of global electricity production. But I don’t necessarily agree that we’re currently off-track. Solar has broken through, and continues to break through, many seemingly impenetrable barriers. And I love looking at all the innovative companies I’m seeing now who are going to solve the next set of challenges.

 

“Solar Nerds Everywhere”

Richard Matsui: Good seeing you at the EIP office warming party. It was great—and I mean this in the best way possible—to meet with other solar nerds that I don’t see often.

Shayle Kann: There are solar nerds everywhere—I was hiking in Tilden Regional Park the other weekend and two people walked by and I heard one say, ‘SolarCity’s customer acquisition costs are crazy.’ [laughs] Can’t escape it.

Richard Matsui: Better that than talking about the latest Instagram fad.

Shayle Kann: That’s true.

#Solar100’s Katherine Hamilton: The Steve Kerr of Renewable Energy

Originally posted on pv magazine USA.

Richard Matsui, founder of kWh Analytics, speaks with Katherine Hamilton, Co-founder and Chair of 38 North Solutions.

Energy veteran Katherine Hamilton reminds us of basketball veteran Steve Kerr (and vice versa). Here’s why:

  • Both are grounded in years of technical expertise: In the ’90s, Kerr was as a basketball player before becoming a coach, and Hamilton worked as an energy engineer before becoming an energy policy expert.
  • Both are respected as industry experts: As the head coach of the winning team of the 2015 and 2017 NBA finals, Kerr is sought out for his insights on his team as well as the broader sport. Known for her energy expertise, Hamilton has testified before the House Science Committee on renewables, advises world leaders on how to accelerate the global transition to clean energy, and serves as Ambassador to the Secretary of Energy’s Clean Energy Education Empowerment (C3E), President of GRID Alternatives Mid-Atlantic, and Co-Chair of the World Economic Forum’s Global Future Council on Energy.
  • Both are quick to recognize their colleagues (and have a sense of humor): When Kerr was asked to compare himself to Gregg Popovich, he reportedly responded, “Pop’s one of the greatest coaches of all time, certainly top three. I’m not… I think I’m fourth.” Similarly, Hamilton introduced her industry colleague Amy Harder as an, “Awesome new entrant to #Solar100. I dropped down one; like to think was making room…”
  • Both are thoughtful advocates: Whether it’s speaking about gun violence and the need to keep citizens safe or commending player Kevin Love for speaking about mental health, Kerr is known for his ability to speak to the core issue in a way that can reach across partisan lines. Similarly, whether it’s casually describing her experiences as an expectant mother testifying before a male-dominated House Science Committee in the ’90s or speaking about the importance of renewables in local job development, economic growth, and community redevelopment, Hamilton has dedicated her career to finding innovative energy solutions across partisan lines.

Katherine Hamilton’s at the top of her game and is this month’s #Solar100 thought leader.

Starting in Renewable Energy

Richard Matsui:  I read that before 38 North Solutions and your current work in energy policy, you were an English major and then an engineer. What first drew you to working in energy?

Katherine Hamilton:  My grandfather started as a surveyor for Virginia Electric and Power Company, and worked his whole career at what he called “The Company.” He was the family engineer and always wanted another engineer in the family. Given my interest in energy, I was the closest thing, even though I have degrees in English and French.

I ended up taking a summer internship with Virginia Power. Practically speaking, my grandfather also saw that utilities were great companies to work for, providing long-term stability, good retirement benefits, and a career trajectory. After I graduated from Cornell and the Sorbonne, I decided to apply for a full time job at Virginia Power.

The utility was looking for distribution design engineers (and I was obviously not one), so I took night classes in engineering. I had to take a test every six months for three years to ensure that I was doing my design calculations right, that I knew the difference between a wye and delta-connected transformer, etc. It was the best possible training on how electricity works and how systems work. I had to really learn the business, and I enjoyed it.

We were very innovative for our time—this was in the late ‘80s and we were implementing energy storage—ice storage systems—with thermal energy storage rates to deal with growing demand.

Following my desire to work with clean technologies, after a decade at the utility I moved to the National Renewable Energy Laboratory (NREL). There I started new programs for the Department of Energy’s Federal Energy Management Program, including energy audits for federal buildings, water efficiency programs, and increased renewables for federal sites.

Richard Matsui:  Wow, that’s an interesting backstory. How did those experiences with energy engineering then lead to your later work in solar?

Katherine Hamilton:  When I was at NREL, because of my background in creative writing, I was adept at translating what NREL’s scientists were doing into language that policymakers could understand. As a result, I was called upon as an expert on renewable energy, testifying as a witness for the Republicans on the House Science Committee in the ‘90s. That is now sadly the committee that does not seem to believe in science. Back then, Newt Gingrich was Speaker of the House, and Republicans and Democrats were still certainly much closer to the middle then than they are now. The Science Committee had a Ph.D. physicist on it who was a Republican.

[Laughs] At the time, I was also pregnant with the third of my four kids, and I thought those House Members were going to have a heart attack when I walked into the hearing room. But they were still interested in science, and, as a result, I was able to tell the story of renewables on behalf of NREL. Those were the days when renewable energy was not politicized to the point that it is now. It was considered innovative to talk about renewables in the context of science.

Policy Landscape After 201

Richard Matsui:  Section 201 dominated headlines and lobbying resources for months, and now our industry needs to quickly pivot to the next policy struggles. What are the biggest policy issues that a solar developer should be concerned about today?

Katherine Hamilton:  The best thing about having this 201 case done and having the tax bill done is that we have more certainty on pricing of modules and projects as well as duration of the tax credits. Now we need to watch out for statutes like PURPA.

Richard Matsui:  What level are you most concerned about PURPA, the state or federal level?

Katherine Hamilton:  While PURPA could probably use some updating, I view PURPA as a tool that has been used to allow competition in states where there is a utility monopoly. PURPA allows other resources to come in and compete, and both solar and wind have benefitted from PURPA. If you could tweak that statute to allow more distributed energy resources, including storage, you could use PURPA to create even more competition.

The problem with touching PURPA is that—just like the Clean Air Act—in opening the statute, it could be tweaked for the better, but it could also be tweaked for the worse. Because Congress is so polarized, it may be that FERC is a safer place to revisit PURPA.

Richard Matsui:  If you take the three-year view on this, in what ways do you see PURPA changing?

Katherine Hamilton:  Some of the calculations on cost benefits are up for discussion based on new applications and services, as is the one-mile rule. But in both cases, opening up the legislation brings us to a slippery slope. At this point, it is better to not revisit PURPA until we have more support in Congress, to ensure that it is managed very carefully and to the benefit of innovative resources and consumers.

Opportunities and Challenges for States

Richard Matsui:  What are some of the opportunities in solar from a state perspective?

Katherine Hamilton:  We can start with the states that already have high renewable portfolio standards—Hawaii, California, and New York.

Then, we can look at states that are considering raising their RPS, like Arizona, which may be creating interesting opportunities for energy storage as well.

And then there are states that might seem like unlikely candidates but that are opening up dockets on distributed energy resources. I think that is the path by which solar is going to grow more—as part of a distributed energy resource. Those proceedings are happening in Missouri, Arkansas, Louisiana, and other states in the Midwest. Even Florida is opening up a bit. We’re going to start seeing solar in states that are looking at the resource in a context that’s broader than just net metering or RPS, but as a key part of a more distributed, flexible, demand-side resource.

Richard Matsui:  I had not heard of this trend. What’s driving these states to see solar from the lens of distributed energy resources, as opposed to an RPS or other “tried-and-true” approaches?

Katherine Hamilton:  These states see that demand response is having an impact. Demand response used to be just load shedding—you would call customers, they would drop their load, and you would the lower the peak, saving consumers money and benefitting the grid. Demand response has become a lot more sophisticated and now enables resources of all types, including  storage and solar + storage, to be more dispatchable and flexible. Solar and other demand-side resources—whether CHP or fuel cells or small wind—create more dispatchable services at the edge of a grid. And those customer-sited resources are only growing.

Regulators know that they want to get ahead of the curve, so they’re responding: “What does this mean? How do we value it?”

A lot of states are currently going through their integrated resource planning. Utilities have to think several years in advance, so when they look down the road, that’s what they’re seeing for the grid: consumer engagement, solar usage, and technologies in combination with solar that change the way residential, industrial and commercial consumers are interacting with the grid.

Richard Matsui: How is the advent of energy storage shaping solar policy?

Katherine Hamilton:  Storage is like bacon; it makes everything better. You can’t limit storage to just being for solar, although solar certainly has a lot to gain from the use of storage. We can get away from relying on NEM all the time, and instead look at the full value stack of what behind-the-meter solar + storage can bring. It starts to look more like straight-up generation, just from the “load” side.

Richard Matsui:  I tend to be quite cautious when thinking about the future of solar. Yes, we have tremendous tailwinds in favor of our industry, but I’m also always waiting for the other shoe to drop. You mentioned that you are an optimist, and I’m wondering—what makes you an optimist?

Katherine Hamilton:  Innovation is moving so fast, costs are coming down, we’re starting to see solar become much more dispatchable with smart inverters, energy-storage technologies, and with tools like demand response. I also do a lot of international work, and globally, the trends are all toward a huge increase in solar energy. The scale of this change and the trends of costs coming down paired with integrating technology costs dropping makes me incredibly optimistic.

Richard Matsui:  What are the top three states that the industry ought to be most worried about from a state policy standpoint?

Katherine Hamilton:  I think we need to worry about Virginia, North Carolina, and states that are talking about rate-basing grid modernization.

Instead of rate-basing nuclear plants that may never run (like in South Carolina), utilities are trying to find other assets to rate-base—for example, unnecessarily undergrounding high-voltage transmission lines. These investments can suck the air out of the ability for a consumer to benefit from investment in more distributed technologies like solar and other non-utility offerings. Utilities are rightly nervous about their revenue model changing, so they are going to protect what they have and attempt to control their own future. This can certainly have an impact on consumer choice and distributed solar.

Finding Allies and Advocates

Richard Matsui:  Vote Solar recently came out with this campaign against the Duke Energy Power/Forward plan for grid modernization, though at the time I didn’t appreciate why this was an issue for our industry. Now I see it. Is this the right strategy for our industry, to advocate on issues like net metering or RPS that extend beyond traditional solar issues?

Katherine Hamilton:  Absolutely. You have to be able to look at the whole system because it’s all interconnected. I think the industry needs to find allies on the ground and those allies can be unconventional. Allies can include the Chambers of Commerce, groups who believe in competition and the free market. Certainly environmental groups have been traditional allies, but an ally can include those who want to protect consumers and allow for increased local innovation. So yes, look to your state Solar Energy Industry Association (SEIA) chapter, but also other allied organizations to make sure that you craft the messages that work in that state. Particularly in red states, those arguments can be about economic growth, local jobs, and keeping costs lower for consumers.

Richard Matsui:  Which organizations are our most effective advocates?

Katherine Hamilton:  I think Vote Solar has done a lot of really good work with quality analysis to back it up. Different regions have a variety of grassroots non-profit and business organizations that help take the lead, so there are a lot of groups combining forces on the ground.

Certainly, on the federal level, SEIA advocates for the solar industry. SEIA did a great job on 201, organizing diverse groups, leveraging the industry collectively, and creating the right messaging. For small companies with limited reach, it is difficult to be engaged with federal policy on a one-on-one level. You’re managing your own business, so you rely on your trade group for advocacy.

Showing Up, A Free Rider Problem, and the Roles of Companies in Shaping Policy

Richard Matsui:  A couple months ago, an energy policy expert came in and spoke at one of our company’s weekly Lunch and Learns. He told us that when it comes to policy, “Companies are either at the table, or they’re on the menu.” Would you agree? If so, what are the for-profit companies that are taking a leadership role?

Katherine Hamilton:  I don’t think that if your company can’t engage directly in policy work, you’re necessarily on the menu.

I think a better way to put it is: Regardless of your size, you need to show up. Showing up could mean going to your local SEIA meeting and ensuring that the issues you care about are included on their list of priorities, or it could mean attending a town hall meeting, or writing your member of Congress a letter on what you care about. It is important to show up and participate.

You may not have to be in every single proceeding in every single state and in Congress. You just need to ask: “Look, if I don’t have the time and resources to do this, who does? I better figure out who does, and work to ally myself with them.”

Richard Matsui:  So, there are different ways of being at the table, without hiring a policy team.

Katherine Hamilton:  There are companies that have big policy teams. It’s great that they have those resources, but not everybody does. So the reality is, you need to be able to work with what you’ve got.

Richard Matsui:  But I wonder about the free rider problem that our industry has always had. Policy teams are a business function that only large companies can afford, and historically, we’ve had publicly-traded giants like SolarCity and SunEdison that would invest in policy on behalf of the whole industry. With the collapse of some of those leaders and, therefore, their policy teams, have we seen a reduction in our industry’s ability to advocate successfully?

Katherine Hamilton:  We are seeing that impact on the state level, because some companies used to be in every state but no longer have the bandwidth. We had more companies on the ground in every state, and then they could work together and leverage resources.

The reduction in the number of companies in each state policy battle increases the importance of finding allies. When we’re the last solar policy group left in a state, we better find allies. We need to ask: “Who else is out here that maybe is not doing solar specifically, but with whom we have shared goals?”

Solar in the Trump Years

Richard Matsui:  How can our industry effectively advocate for itself in the Trump years?

Katherine Hamilton:  Good question. SEIA and other coalitions worked hard to reach the administration in the tariff case and explain that Republicans should care about solar.

What has been most upsetting to me over the last fifteen years is that renewables have become partisan. Part of that has nothing to do with renewables, but it has to do with interest groups influencing Congress and previous Administrations to create a zero sum game between renewables and traditional energy resources. This has polarized the industries—fossil to Republicans and clean energy to Democrats.

I think part of our job is making sure that we change that narrative. For example, 85% of wind projects are in red states. Let’s make sure that we talk about solar in a way that’s very much about jobs, economic growth, and community redevelopment, rather than only about cleaning the planet or having a green resource. We need to be strategic, using words with different policymakers that speak to their concerns.

With the current administration, we need to lead with our business-first points and speak in that language. We have cost-competitive technologies that are challenging and beating the incumbents.

#Solar100’s Ed Feo: The Hank Aaron of Solar Development

Originally posted on pv magazine USA. Richard Matsui, Founder of kWh Analytics, speaks with Ed Feo, President of Coronal Energy.

Hank Aaron and Ed Feo have had homerun successes in baseball and solar development, respectively.

While they are known for their out-of-the-park hits, it is perhaps their lesser-known ‘plate discipline’—knowing when to swing and when to pass—that makes both Hank and Ed exceptional in their respective fields.

Described by fellow #Solar100 leader Keith Martin as “invariably impressive,” Ed combines a lawyer’s attention to detailed process with a solar veteran’s intuition of cost vs benefit. It will be unsurprising to many that Coronal Energy was the first sponsor to employ the Solar Revenue Put.

In this interview, Ed shares insights relevant to sponsors planning their 2018 activity: What makes a great solar developer, what it takes to scale a development business, and how to think about the latest policy uncertainty.

Sailing into an Unlikely Start in Renewables

Richard Matsui:  You first established your career as a lawyer and co-chair of the Global Project Finance practice at Milbank, Tweed, Hadley & McCloy. What is the story behind your shift from lawyer to solar developer?

Ed Feo: I had planned to gain experience in a law firm for five years and then move into something more entrepreneurial.  My five-year legal career kept extending with each interesting opportunity that came along.

I got my start in the renewables business by a fluke. I was a young maritime law associate, and my law firm had a request from a client to finance a wind farm. Nobody knew what a wind farm was, but because I sailed, the partners figured I might know something about wind. That’s how I started in renewables.

One thing led to another, and over time I worked on projects involving all generation technologies, international energy projects, the California market restructuring, the 2001 energy crisis, and the resurgence of renewables in the aftermath of all of that. I first worked on financing solar projects in 2005.  Project costs were just a little bit higher then than they are now.

It was not until 2010 that I finally pulled the trigger and left the practice of law. My then-clients Jim McDermott and Lee Bailey at US Renewables Group had an idea to start a finance company, and they asked me to run it. That was a bit of a wild ride because we were tied in with the DOE loan guarantee program. That was really cool to start with, and we raised a lot of money. It became very un-cool as the program garnered some pretty harsh attention.

For my next adventure, I joined Jonathan Jaffrey in early 2013 and started Coronal as a solar energy finance and asset management company affiliated with Panasonic. Jonathan had worked in private equity for years and had formed a solar company a few years before. He’s a financial magician, and one of the smartest people I’ve ever worked with. Here we are, five years later.

Richard Matsui: That’s a fantastic backstory. I did not know that you got into renewables because of sailing.

Ed Feo: Yeah, it is bizarre. People have asked, “How did you have this vision that renewables would grow into such a big deal?” The fact is that I had no particular vision at all—when asked to work on the first wind deal, I thought it was interesting and quirky, that was about it. From that start, I later did some research and became enamored of a study by Royal Dutch Shell showing the successive waves of energy sources, with renewables being at that time a miniscule but future part of the mix—over the succeeding fifty to seventy-five years. So directionally it seemed like a good place to be.  Anyway, my brief career advice to people is: Be open to opportunities and do work that interests you. If it turns out to be the next big thing, terrific. If it does not, then you are still engaged in work that has meaning to you.

 

What Makes a Great Solar Developer

Richard Matsui: In a previous #Solar100 interview, Keith Martin named you first when I asked him for the most impressive developer. What do you think a developer needs to excel in solar?

Ed Feo: Well, Keith clearly is a person of superb judgment!

Seriously, energy development is an odd and complicated business. I know some people think it is simple.  Keith cited in his interview one client who said even his grandmother could develop a solar project. And I thought, “Man, he must have a pretty smart grandmother.”

Development is a multi-level game in which the rules and variables are constantly changing. The essence of what you’re doing is forecasting a need for a product for delivery years away from today and finding a customer for that future product, all in the context of moving legal, regulatory, engineering, and financial variables. It is, at some level, a little crazy.

I think being a successful development company comes down to three things: One is being able to take a strategic view; two is the ‘how-to’; and three is timing.

The ability to rapidly switch from a tactical lens, which dominates our day-to-day, to a strategic lens is critical. Developers need to see the path to the best upcoming opportunities—even if they are years away from fruition.

The ‘how-to’ is a combination of almost oppositional skills—on the one hand, you need to be extremely process- and detail-oriented, but on the other hand, good development firms are also driven by intuition and gut. In its focus on process and detail, development really is an engineer’s dream. For example, in our company, we spend an enormous amount of time on the process of quantifying the risks and the costs associated with each variable, all to better educate ourselves about the potential of delivering a successful project far into the future. And the numbers do inform the process.  But, ultimately, the decision to proceed also includes an instinct for how the variables will turn out—and that part is hard to quantify.

When we started Coronal, I was very impressed by how many people were in the business. After looking at 150 projects, I was really impressed by how many people did it poorly. They were essentially long on gut and short on process. But at the same time, I would see some big companies doing development without a great deal of success because they were long on process but short on instinct. I think you need to have both to succeed.

Finally, so much of development is about timing—knowing when you ought to be developing, when you ought to be buying, when you ought to be selling. It’s not easy.

All that said, I’m fortunate to work with a group of very smart, dedicated people in our shop who do an excellent job of collectively bringing these three strands of development together.

 

Policy Implications for Solar Developers

Richard Matsui: How does the current policy uncertainty change the way you think about your development pipeline today?

Ed Feo: Uncertainty is just part of this business. If we look back ten years, policy uncertainty, price uncertainty, or supply uncertainty have always been around to some degree.

But now there is additional policy uncertainty at the federal level given the direction of the current administration. In looking at our pipeline, we have had to consider the effect of the section 201 trade case, the tax law changes, and the FERC reliability notice of proposed rulemaking, among other matters.

During the pendency of the trade case, we concluded that we needed to cover ourselves by acquiring panels where we could before a tariff would be in effect. As for assets where we couldn’t cover ourselves, we either sold our position or deferred the delivery dates until we thought there would be more certainty. In times of uncertainty, it is nice to be able to say, “Okay, we can sit tight and wait for things to resolve themselves.”

Thinking long-term still requires that we take a view on how these issues will turn out and the subsequent impact on costs. Every developer has a cost curve for every project component with different assumptions about the outcome of the trade case, etc.  We build our curves into our models, identify a projected time frame, and try to get as much room in that time frame as possible to mitigate the downside risks associated with the policy uncertainty and other issues.

The tariffs announced this week are unfortunate in terms of driving up costs and thereby affecting the attractiveness of solar in certain markets.  That said, the tariff rates are within the range of what we were expecting after the ITC recommendations.  Having greater certainty on cost is a plus. We also expect states and customers with an interest in promoting renewables to lean in a bit. So, we might shift our market focus a little, emphasizing some markets more than otherwise would have been the case.  And of course, a number of factors still need to be played out— the detailed rules on the tariff, the potential for exemptions, the duration of the tariffs in light of possible retaliatory actions by other countries, other cost savings, and so on.  The game definitely isn’t over.

Richard Matsui: When you think about the various items that factor into your pricing, what variables have the biggest room for improvement?

Ed Feo: Overall, cost reductions will continue. Everybody’s lived off of panel price reductions. These will continue over time, but obviously will be affected by the outcome of the trade case. Installation is also continuing to make cost improvements. When you build larger projects, you realize that the implementation of a solar plant has more in common with a manufacturing assembly line than with traditional construction. Improved processes on installation will result in lower costs.

The soft costs—specifically the combination of the costs of funding plus transaction costs—also have room for improvement.

For much of its history, our industry has been built on highly structured financing models involving tax equity, project-level or back-leveraged debt, and third-party equity. It’s a project finance lawyer’s dream. That structure is expensive. Over time, I expect we will be seeing more debt, and more standardized terms, and as a result lower capital and transaction costs.

Richard Matsui: Keith estimated that tax equity’s share of the capital structure will shift from 40-50% of the stack to 30-40%. Debt will inevitably play a bigger role in our capital structure; the question has always been one of timing. The industry is already beginning to make this shift. We have already seen seven lenders issue term sheets at 1.10x or 1.15x DSCR on P50 revenue, assuming the solar Revenue Put is in the structure. Our hope is to help usher in more debt capital into the market and fill in that gap, which is clearly going to be a big issue for everyone in solar in 2018.

Ed Feo: You are right on the mark. That is what we have been doing with Panasonic. Their production guarantee results in more favorable debt service coverage ratios. Your Revenue Put does the same thing, and the arbitrage is made possible by your data, whereby you and your insurers can see a lower risk level in system performance than what the banking community is currently willing to consider on an individual asset basis.

Richard Matsui: Yes, there is an arbitrage element, though it’s also true that panels, inverters, and projects are not all equal, in terms of quality. We see a wide range in our quotes for the Revenue Put, which reflects this variation. Fundamentally, the missing piece has historically been the lack of performance data to quantify this difference in quality. But now that we are managing data from nearly one in five American solar projects, we are able to quantify the risk, and bring in global insurance capacity at attractive rates. We consider ourselves privileged to have worked with your team on closing this first Revenue Put transaction.

Ed Feo: I agree with you regarding the quality of equipment and projects—not all are equal and there are ramifications in terms of long term performance. Given the continuing cost pressures facing developers, your solution is reaching the market at a good time. Over time I would expect coverage ratios to come down and tenors to extend because of the availability of the insurance products in the near term and ultimately because of greater acceptance and understanding of the system performance risks by the finance community and their advisors.

Richard Matsui: Returning to your point on installation, there is an ongoing debate in our industry about how integrated a developer should be when it comes to EPC. Some vehemently argue in favor, citing better cost and quality control. More vehemently argue against, citing overhead and reduced flexibility. How do you see this?

Ed Feo: At Coronal, we started as a finance shop. We just bought projects and financed them. When we grew tired of paying premiums to developers, we bought a development shop. And then, we decided, “Gee whiz, we’re giving away margin,” and so we bought an engineering and construction management firm.   We added our own asset operation and management team, so now we can develop, build and hold an asset if we so choose.

But these investments and the integration of all of the parts into one organization haven’t stopped a lively debate internally, and I’ll bet the same debate is happening at every company that has integrated capabilities. There will be an eternal argument about whether the additional margin capture is better or if it’s better to gain best practices and risk mitigation from working with third party firms. Developers and project managers will be arguing about this as long as there are solar projects to be installed.

Given the intrinsic volatility and complexity of the business, it’s undeniably useful to have the tools to build your own projects. Full stop. But you don’t necessarily want to build all of them, for the same reason that it’s not necessarily true that you want to own all of your assets. Committing to always doing everything is dangerous.

Our approach is to develop each project as if we are going to own it, base case. The question is always: “If I had to build it myself, could I make some money and be okay with the risk profile?” But maintain the mental flexibility to say, “You know what? I’m better off selling this asset today because pricing is strong” or “I’m not happy with the risk profile I see going forward, and it’s time to de-risk.” This ability to carry a project through completion means that we avoid the pickle of a pure-play developer forced to sell into an unfriendly buyer’s market before or at NTP.

 

On Scaling a Development Business

Richard Matsui: How do you think about scaling up your business?

Ed Feo: Development is a kind of business where you have to be ready to proceed where there’s opportunity and stop where there isn’t. If you commit yourself to fixed growth targets, then you are also explicitly ignoring the dynamic of the market. That gets you into trouble. Others could have different views.

Richard Matsui: A VC once asked me why the solar industry feels so volatile. I told him that the leading developers in the solar industry are, almost by definition, successful gamblers. A developer that attains national scale is one that has successfully made dozens of “bet the farm” moves to get there. As a result, these survivors make moves that are consistent with that personal history, even if the risk now seems inconsistent with their current scale of their business. It’s a “risk on” mentality, which works—until it doesn’t. And when it doesn’t, we see big explosions and many journalists come to cover the scene. I hear you making the case for flexibility, but where does process and discipline fit into the picture?

Ed Feo: My personal definition of a good developer is someone who approaches every project with the same amount of rigor, and really thinks through the timeline, inputs, and contingencies. And who can make intelligent bets (that’s the combination of data, process and instinct). There are a number of development companies for whom we have huge respect because they take that approach.

Discipline is a critical part of the process. You need to know what risks you are willing to take. And not. You need to know what you are willing to pay for. And not. It is also important to not get swept up in frenzies that occur along that path.

The long-term picture of solar is obvious: There will be much more solar five years from now than today. The question is how to get there. You cannot—must not—assume that it will proceed linearly and think strictly in terms of market share. I just don’t think it makes sense in this business.

SunEdison is a good relatively recent example of a company that decided that they were smarter than the market, and committed to aggressive growth. When that growth could only be achieved unsustainably, relative to the opportunities being presented—well, that didn’t turn out well.

When you look at the energy business outside of solar, you’ll see that there are developers of energy projects that have been around for a very long time. They know how to develop energy projects, and they have discipline. And they are not Fortune 100 companies; they are midsized companies that may sit on the sidelines for a long time before finding the opportunity they want to act on. I like to study those models, and ask, “Who are those really smart guys who have been doing this for 20 years, and how do they do it?”

Richard Matsui: I strongly believe in that, this idea that being a historian of sorts, a historian of business models, is uniquely valuable in this new industry. Though it’s also worth noting that sometimes you can draw the wrong parallels. When I first entered solar in 2007, everyone agreed that solar panel manufacturing was going to be just like semiconductor manufacturing. Therefore, manufacturers made large capex and R&D bets on the assumption of great gross margins that never materialized. On the flip side, being able to identify the right analogy grants you valuable context. We looked at conventional asset classes like mortgages and consumer credit, and realized the role that CoreLogic and Experian play as repositories for that performance data. It’s provided a powerful template for us to think about growing our business, in the solar industry.

Ed Feo: Absolutely, I really like that point. One of my criticisms of the solar industry is that it’s myopic, and more than a little bit driven by missionary zeal. Yes, we are doing great things for the environment and society, but it’s important to temper the enthusiasm for what we are doing with a clear eye on the harsh realities we face. In this business, people can be mesmerized by the passion and glamorous part and forget that it’s important to do the unglamorous part, too. I’m the curmudgeon of our company because I’m not that enthused about enthusiasm. If I had to choose between someone with a low level of passion (and even a difficult personality) but with good execution skills, versus someone with a lot of passion but less skilled execution—I will choose the former any day of the week.

Richard Matsui: When you think about the financing parties that you’ve worked with, who strikes you as being the most creative?

Ed Feo: Well, anybody who gives us money is creative, intelligent, and good-looking, so…

Richard Matsui: [laughs] That’s fair.

Ed Feo: Our approach is to limit the number of people we work with, and drive as much business as we can to those handful of people so that we achieve high transactability—meaning certainty of closing, timing and costs. I’m looking to get the job done, and then making sure our next deal is easier to close than the one we just closed. All that being said, we work with PNC, U.S. Bank, SMBC, Rabobank, and Bayern LB. They all do a fantastic job.

Richard Matsui: Last question. What’s your biggest non-consensus bet for 2018?

Ed Feo: Well, from a solar development standpoint, 2018 is in a way already over. I’m more concerned about what we have to deliver in 2020 and beyond.  This year does look like a challenging year for developers and we will see some fallout. But to succeed in solar, you need to look at a five-year timeframe. That should be a consensus view.  In terms of non-consensus bet:  The Cleveland Browns go .500 next season.

#Solar100’s Julia Pyper: The Anna Wintour of Cleantech Media

Originally posted on pv magazine USA. Richard Matsui, founder of kWh Analytics, speaks with Julia Pyper, reporter and Senior Editor at Greentech Media.

The two journalists-turned-editors Julia Pyper and Anna Wintour have much in common when it comes to their roles in their respective industries:

In their ability to read and report on the times in a way that shapes public opinion, in their early starts studying their future beat, in their formal positions as editors for Vogue and GTM respectively, in their roles as industry power brokers—what Anna is for fashion, Julia is becoming for Cleantech.

In this interview, Julia takes a wide-angle lens on the solar industry and also shares her best practices for startups looking to grow their media presence.

Julia Pyper is the “Anna Wintour of Cleantech Media” and this month’s #Solar100 thought leader.

Starting in Cleantech

Richard Matsui: I read recently that you were raised on a horse farm and credit your chosen beat to growing up in Canada.  What drew you to working in cleantech and solar in particular?

Julia Pyper: Cleantech journalism combined all my passions: I always wanted to work in journalism to tell stories, to educate and, quite frankly, to support democracy.  At the same time, growing up with family in the energy industry, I have always been interested in energy and climate issues.

Canada is a resource-based economy, and several people in my family work in oil and gas.  My uncle is a former CFO of Enbridge, a natural gas distribution company, my cousins are surveyors who go up to the oil sands, and my brother works for Kubota, a tractor company dependent on the fuel economy—everyone in Canada knows someone who has either worked in or been influenced by the oil and gas industry.

I think we need to be cognizant of the role that oil and gas plays, not just in Canada, but in the U.S. as well.  It is silly to think that oil and gas will go away tomorrow.  And similar to the U.S. coal debate around coal workers, you also cannot abandon the people that work in these industries.  That said, I want explore strategies to diversify economies, because being reliant on fossil fuels seems shortsighted.  People will want those resources for a time, but they are finite.

Driven by my desire to see a cleaner and better world, Cleantech journalism allows me to explore these complex topics.  Let’s see what new features, business models, and technologies we can come up with.

RM:  You started the Empowering Project as a side hustle—what is the Empowering Project and what are you hoping to add to the conversation on renewables?

JP: I love storytelling and bringing in human elements to reporting.  Last year I went to Haiti and worked on my first mini documentary, titled ‘Empowering Haiti,’ to try and cover energy issues in a different way.

Haiti is a case study on the critical role of clean energy in developing economies.  Getting locked into a fossil fuel future is dangerous.  Further, fossil fuels can be impossible to put into place because of the industry’s prohibitive infrastructure costs and technical requirements.  Millions of people will miss out on the benefits electricity brings if they hold out for a fossil fuel power plant.  Cleantech solutions are not some hippie initiative—solar can be deployed rapidly and is proven to enable and empower communities in ways that fossil fuels cannot.

One year after ‘Empowering Haiti,’ I am exploring other opportunities to continue the energy discussion under the Empowering Project.  I want to investigate topical issues like political partisanship in energy, and find ways to address and move beyond that partisanship.

RM: Of the pieces you have worked on for GTM, ClimateWire, and elsewhere, which (if any) has been the most controversial, and why?

JP:  “Why Conservative White Men are More Likely to Be Climate Skeptics.” I wrote it when I was at ClimateWire and the New York Times had an agreement with them, so it ended up running in the New York Times as well.

On the one hand, the findings are not surprising—conservative white men think conservatively. Considering that climate change requires people to adapt to something that is hard to see and feel, it is not surprising that conservative people would be less inclined to take action.

However, spelling it out is controversial.  No one likes to be told that they are wrong.

My mother sent it to a family member, and let’s just say it started a debate.

RM: Was the goal of your piece to start a debate?

JP: No, my goal was to understand how people were thinking about the issue and how their worldviews influence their likelihood to take action.  My piece was based on actual research by university researchers.

That piece brought to life how deeply people’s positions and worldviews influence how they think about progress and the economy.  It is a really tricky topic to report on—people were telling me, “You’re white, why would you write that?”  Other people would say that I did not go far enough in my reporting.  No matter what you write, you have to get a thick skin.

Media Advice

RM: We’ve been seeing an increase in cleantech startups and startup incubators (Powerhouse, Greentown Labs, Urban Future Lab, etc.), and with that, a lot of media being done in-house.  As a veteran journalist and senior editor, can you share best practices for startups looking to get their word out?

JP: Frankly, I think you need to do it all as a startup. A few suggestions:

  • Thought leadership is how people build brands online. Write blog posts.  Share articles and add your two cents to them.  Pitch contributed articles to established trade publications.  Be part of the conversation.
  • Social media can be challenging if you have a very lab- or tech-based product, but in general, establishing your company on social media can go a long way. Social media, coupled with traditional media, is effective in establishing a company voice.
  • Tie what you’re doing to what people already know and care about. For example, a new technology is especially interesting when it is addressing a longstanding problem.
  • Do not assume everyone has the same level of passion that you do at your startup. Make it fun.  Gimmicks sometimes work because you are just trying to get people’s attention, and there is so much competition for people’s attention.
  • Take advantage of your unique perspective. If you have data, share some of that data.  Opower actually did a good job posting some of their insights on their blog.  People shared those links, and it created fodder for reporters to build upon in their stories.  If you’re a company with data to share, I would recommend that strategy.

RM:  Can you share examples of B2C and B2B companies that have done their marketing effectively?

JP: People like aspirational products, they like products with a cause, but they also like quality and convenience.  I think B2C cleantech companies that hit on all of those points in their marketing will be successful.  So, obviously, you have Tesla.  Nest was also groundbreaking in this regard. And I think the startup SolPad, while it still has a lot to prove, did a good job of making and marketing a cleantech product that looked cool and generated buzz.  They took cues from tech giants and appealed to what consumers already know and care about.

Not every company is selling a product like that, though.  When it comes to marketing a product or service that centers on price, I think Ohmconnect does a good job of telling its story to customers with the simple messaging: “Save energy. Get paid.”

B2C marketing can be very exciting, though I think in many ways it is the work behind the scenes that makes the most successful companies.  The marketing strategy must always be backed up by a quality product and strong business execution.

On the B2B side, EnergySage, while a B2C company, has effectively reached out to the business community.  They have put effort into establishing thought leadership at speaking events and through blog posts.  I think eMotorWerks has also been successful, evidenced by the company’s recent acquisition by Enel and list of strong partners.  The company achieved this by offering a high quality technology, but also by speaking at a lot of events and sharing a steady stream of news.

RM:  Any advice for B2B companies serving utilities or other audiences that seem especially difficult to reach?

JP:  A lot of startups attend big conferences hoping to catch the speaker off stage.  That’s not a bad idea by any means, though perhaps difficult to scale.

Accelerators can play such a key role, especially from the foreign utilities perspective, in creating a low-pressure environment for different groups to meet and discuss challenges.  The new global energy accelerator Free Electrons event has done this successfully by bringing together a number of utilities and companies from around the world.

Joining the right accelerator can be a great opportunity to build credibility with B2B audiences, because there is only so much that social media can do to build those kinds of relationships.

RM:  Are there areas that you currently think are being under reported?

JP:  Yes—energy access.  A lot of European players are active, perhaps because they are closer to the continents of Africa and Asia. I find the U.S. market tends to be more inward looking, however, this is a ripe opportunity for U.S. companies to develop and share energy solutions abroad, and that deserves coverage. Community choice aggregation is another story to watch.

The Solar Industry

RM:  You cover the solar industry and policy as part of your beat.  What do you think are the top 3 challenges in solar today?

JP:  On the consumer side, we are seeing a tension between rapid growth and profitability for the residential installers.  The idea of commoditization of solar is gaining momentum; regional players are starting to do quite well.  One of the biggest challenges is figuring out the right model for that sector. How do you keep consumer interest growing?

On the utilities side, the trade case is one of the biggest challenges.  We have no idea how that is going to play out at this point, but the outcome will definitely impact the utility scale market.  If passed, people are saying that Texas solar installations may not make financial sense, which is a massive market to cut off.

PURPA has been a big issue as well, with a lot of the utility scale market relying on it.  Lawyers are saying that it is going to be one of the biggest battles to come.

The Solar Startup Landscape

RM:  Can you name an off-the-radar startup that is tackling an important issue?

JPRayton Solar is trying to manufacture solar panels that are 60% cheaper and 25% more efficient than the market standard using particle accelerator technology for silicon cutting.  They’ve raised money through crowdfunding, which you do not see very much of in this space.  And their spokesman is Bill Nye the Science Guy.  As the industry evolves, slight efficiency improvements or cost savings can disappear so quickly with a policy shift or tariff.  Perhaps that backdrop will make their cheaper solution all the more interesting.  But Rayton’s technology solution is high cost and complex. Other companies have tried this in the past and failed.

RM:  I recently met an entrepreneur with a Material Science PhD who wanted to build a new solar module company with a new chemistry. He was asking for feedback.  I told him, “I am sure you have already been told 100 times, but that is crazy.  Getting a bank to sign off on financing this sans balance sheet will be incredibly challenging.”  He said he knew and had been told that.  With that said, we discussed some things he could try.  It’s just a very difficult problem.  Hats off to people who are trying to make those improvements happen.

JP:  Agreed. I have a ton of respect for innovators. We will have to see how they do.

RM:  Taking a wide-angle lens, any thoughts on how the cleantech landscape is going to evolve in the coming years?

JP:  I think partnerships with utilities are going to be key, especially as U.S. utilities begin to collaborate more with startups.  When I first started covering the industry, there seemed to be animosity and an oppositional dynamic of startups and clean tech innovators versus the utilities.  There has since been an evolution on both sides.  The utilities have realized that they need to bring some knowledge in-house, or at the very least partner with innovative startups.  The startups have realized that a lot of big money comes from the utility sector. The trend of startups and utilities collaborating has already surfaced internationally, with European utilities taking a much more active role in the cleantech startup space. It will be interesting to see how this plays out in the U.S.

People are also asking who is going to be the next big player to own the smart home. NRG seemed to be going down that road with the startups they bought, but that did not work out. There is an opportunity for someone to disrupt that space.

Looking to 2018

RM:  What’s your biggest non-consensus bet for 2018?

JP:  I have seen a lot of headlines that the electric vehicle revolution is here, but until everyone saying that owns an EV, we are not there. When I host panels at cleantech conferences I’ll ask the audience – people who should by all means be early adopters – if they own an EV, and only a handful of people will put up their hand. U.S. EV sales are going to be up about 30,000 units year over year, which is good, but it’s not hockey stick growth. So don’t start kidding yourself that we are at a place that we are not yet. Don’t get me wrong, people are looking at the Model 3 and are excited about what’s to come. We just haven’t cracked the nut on EVs quite yet.

I do not doubt that globally, we will get there.  Compared to the U.S., adoption is actually happening more quickly in other countries.

Here, we are seeing that it’s difficult to get to that next layer of consumers and have them build EVs into their lives.  This is really an opportunity for startups and service companies to make adoption easier for consumers.  This is an opportunity as much as it is an issue. So my bet is that EV sales in the US will continue to be underwhelming, unless we see a lot more technology, but even more-so, business model and policy breakthroughs.

#Solar100’s Keith Martin: The Chuck Todd of Solar

Originally posted on pv magazine USA.

If you try to recall the keynotes at the past five solar conferences you’ve attended, we suspect that at least one—if not all five—were given by Keith Martin.

With over three decades honing his craft, Keith has become known for his domain expertise and tireless work ethic. In addition to his day job as a transactions lawyer, he is also the editor of Project Finance NewsWire and the author of more than 160 articles and book chapters.

In this interview, interviewer-turned-interviewee Keith talks about: the best solar developers, his actual dream job, and the coming shakeout.

Among solar financiers, mentioning “Keith” only refers to this one person. Keith is the “Chuck Todd of Solar” and this month’s #Solar100 thought leader.

Getting Started in Solar

Richard Matsui: I wanted to start out by learning more about you—before you created and established Project Finance NewsWire, before you became the go-to speaker at project finance conferences—how did you get started in solar?

KM: I was originally interested in being a politician or a journalist, but burned out too early on the political side. I worked on Capitol Hill for two U.S. senators, Senator Henry “Scoop” Jackson—he was a presidential candidate in 1975-76—and later Senator Daniel Patrick Moynihan from New York. Moynihan’s staff dispersed after it became clear that he was not interested in a run at the presidency—Tim Russert went to work for Governor Mario Cuomo, Mike McCurry went on to serve as White House Press Secretary for the Clinton administration, and everybody went off in different directions.

At that point, because I was a lawyer, it was easier to go into law than to start over on the bottom rung in journalism. I left the Hill right after the 1982 elections and joined some Joint Tax Committee staffers who were starting a small firm and who had invited me to join them. We were overwhelmed with work. We could not hire fast enough, so we merged with Chadbourne by May 1983.

When I joined Chadbourne, the firm represented the paper industry. Paper companies generated their own electricity and were interested in using PURPA, a 1978 statute, to sell excess power to utilities. Chadbourne litigated against utilities in 20 states to open markets and took a case to the U.S. Supreme Court in 1983 to establish the enforceability of PURPA. Chadbourne got in on the ground floor. Chadbourne represented most of the major independent power companies who were just growing up in that era. That’s how the project finance group that I co-head got started.

The project finance group was basically a bunch of misfits within Chadbourne, who were not part of any other group.  We built a new practice together that was focused on serving the new independent power industry.  It has been almost a 40-year effort.  The group did $53.5 billion in financings the last two years.  It has a wonderful esprit de corps. It did not hurt that I had also been working on Capitol Hill when the solar investment tax credit was first enacted after the Arab oil embargo as part of the Energy Tax Act in 1978. Knowing the history made it easy to shift to advising people on its application.

Developers & Successful Teams

RM: Having seen solar since the ‘80s, what traits do successful developer teams share?

KM: Four things: Versatility, focus, intellectual curiosity, and a manageable burn rate.

I read a piece in The New Yorker several years ago about Cory Booker, the New Jersey Senator. When he first started running, one of his fundraisers told him that in the business world, people bet on other people, not on the business plan. Business plans rapidly become obsolete. It used to take twenty years to build a big business. Now, a business model may be obsolete in five years, so you have to be versatile. My number one lesson is: Bet on a team that can figure its way through the changing market.

Focus is also important. Probably the worst thing you can say to potential investors is, “I have a pipeline of 25 projects.” You cannot possibly develop 25 projects if the answer to the next question is, “How large a team do you have?” and the answer is five people. It shows that the developer is just not focused enough. Investors want to see a laser-like focus in getting a project across the finish line, and then move to the next one.

Third, because there are a lot of sophisticated people in the market, it is important to know what you don’t know, and not be afraid to ask questions.  Be intellectually curious.  Learn as much as you can. There is always a learning curve, and you have to work hard at moving up that curve.

It is also important to keep an eye on burn rate. When you are starting a company, you can staff too many people with too many senior titles—all executives, no workers—and just burn through capital before you have anything to show for it.

RM: With these traits in mind, what team do you admire most?

KM: I spend a lot of time talking to CEOs, and it is interesting to hear how they got started, how they read the market, and the different business models each pursues. There are many highly capable people:

Ed Feo at Coronal—he is invariably impressive.

Tom Buttgenbach at 8minutenergy Renewables—he is a physicist by training. All disciplines, whether law, economics, sociology, physics, medicine, teach how to think through problems in a disciplined way. I like the exposure to people who come at issues from different perspectives; he is one of them.

Ryan Creamer at sPower—he just created something out of thin air. He managed to create a substantial company from a standing start.

Paul Gaynor and Michael Alvarez at Long Road Energy Partners. They built a substantial company, First Wind, sold it to SunEdison, and are now doing it again.

I have had the good fortune to run into many, many impressive people; it would be hard to name them all.

RM: Is solar development a commoditized service at this point?

KM: Gabriel Alonso, the CEO of EDP Renewables, said there are two things his grandmother could do—one is develop a wind farm in Texas, and the other is develop a solar project anywhere in the United States. He thinks it does not take much.

But I am not sure that is fair—there is a lot of knowledge and just pure grit that is required. Is it a commoditized service? There are people who offer contract development services. My impression is that there are probably easier ways to earn a living. If I were trying to jump into the business, I would be a true developer. I think that is currently the scarce resource in the market. There is plenty of capital; there are too few projects.

RM: Right. From our position in Silicon Valley, I like to say that if you’re in solar to make a quick buck—you’re in the wrong place. Finding the next ‘Instagram’ is easier. Solar is hard and chaotic.

Capital Landscape

RM: The “wall of capital” you often allude to now seems to be a double-edged sword: there is a lot of investment interest, but margins for all participants are razor thin. Do you see a massive shakeout coming if this continues?

KM: Among the developers, there are two trends: gradual consolidation and low barriers to entry for solar. Notwithstanding the gradual consolidation, there are not really any large pure solar companies like there are larger wind companies. The big balance-sheet wind companies are shifting resources to solar.  They may eventually come to dominate the sector.  At the same time, the low barrier to entry in solar, particularly for PV, has been a brake of sorts on scale..

Turning to the capital providers, I remember the last shakeout among the banks was when Enron collapsed. Prior to that, the banks had moved to finance merchant gas projects. It seemed toward the end of the cycle as if there was a merchant gas project on every street corner in Texas. There was too little product, and there were too many bankers and banks chasing deals. There are some parallels with the current cycle, but there are also differences.

Tax equity has always been somewhat scarce—the yields are frustratingly high from a sponsor perspective, so there is probably more room in that market. There is also room for more capable developers.  The deal flow has been pretty weak.

RM: In the utility-scale segment, I think we’re seeing 2 fundamentally different models of solar development compete. Fully vertically integrated firms versus a fragmented “network of specialists” comprised of part-time, hyper-local land developers, permitting specialists, independent EPC, and pension funds as long-term owners. Is that how you see utility-scale solar?

KM: I think of it differently—I think of tiers of developers. The tiers are a little easier to see in the wind industry where you have first-tier, balance-sheet players like NextEra, EDP, Avangrid Renewables, EDF, Enel. Then you have some that are just slightly below that: Apex, Invenergy, Long Road, Geronimo, Tradewind, Lincoln Clean Energy. These are substantial players who built scale. And then you have the smaller players, all the way down to the two guys and an Avis card who are out just trying seed projects. Maybe they will get a site. They used to be able to get a power contract, but they have had a harder time getting traction since the utilities began requiring large letters of credit be posted to hold interconnection queue positions. It is harder for the little guys to get the traction they used to.

In the solar market, you have different market segments:

First, you have residential rooftop. Several companies—SolarCity, Sunrun and Vivint—made concerted efforts to create national brands. They assumed that once they built the brand, they would be able to open up substantial distance between themselves and the nearest competitors. They have been facing challenges since the market got spooked after SunEdison collapsed.

Second, you have C&I, which has never really gotten scale. The reason is lawyers. C&I off-takers do not just sign form power contracts. They negotiate the terms. Every deal has its own power contract, which makes the transaction costs to finance portfolios of such projects prohibitive.

Third, you have utility-scale solar. There are a number of capable developers who know what they are doing—8minutenergy, Cypress Creek, Strata, Origis, Coronal, Recurrent, sPower—but it is hard getting to scale by building 20- and 30-MW projects.

Solar is a different animal than wind.

RM: At the last Infocast conference, a few mezzanine lenders describing their rates as somewhere between 9-11%. I was surprised to hear that number. What does the rise of mezzanine debt say about our industry?

KM: There are two types mezzanine debt. There is mezzanine debt offered by private equity funds that is being offered to companies that do not have the same options as the big players, and so they need to end up paying more for capital.

And then there is back-levered bank debt, a separate type of mezzanine debt that is for more established companies, who are pricing it below the tax equity yield, even though it is behind the tax equity in the capital structure. Back-levered debt might be 25 basis points over what a senior-level loan would bear, and senior-level debt for the best deals and developers is 162.5 to 175 basis points over LIBOR—it is very cheap money.

RM: As solar matures, it is interesting to see specialized forms of capital come in to take specialized risk. For instance, a sponsor can now buy a “wrap” on tax recapture risk. We use insurance capital to “wrap” energy production risk, through our solar revenue put. Over the long term, how do you see specialized risk allocation evolving in solar?

KM: That is an interesting question. Project finance is an exercise in risk allocation.  Nothing gets financed until the parties have catalogued all the risks and allocated them among the various parties at the table.

The basic rule of thumb is, “He who best understands the risk takes it.” Sometimes someone who is not at the table—an insurance company or other specialized party—has taken the time to understand a particular risk and is willing to bear it at a tolerable cost to the project.

An example of dividing up risks that is more transactional in nature is yieldcos. The idea was to create value value by separating higher-risk development assets from lower-risk operating projects. If both types are folded into a single company, the company cannot raise capital as efficiently as it could if it disaggregated the risks and raised different types of capital. There are other meaningful opportunities to create value, as you have found through your solar revenue put.

RM: Where will the next opportunities for specialized risk transfer be?

KM: A clear one is basis risk for corporate PPAs. Nobody feels able to quantify that at the moment. Developers usually end up bearing it, but it is not a comfortable risk for them to bear. Another area is merchant risk in solar projects—the price risk. You have merchant wind farms because people are willing to put a price floor under the electricity, but we have not yet seen deals close on a merchant basis in the solar market, although they are coming.

RM: What is your biggest non-consensus bet for 2018?

KM: The U.S. power market is a competition for market share among three big players: independent generators, utilities, and rooftop solar companies.

The independent generators and utilities had reached a stalemate in terms of the shares of generating capacity. For the independent generators, previously the only way to customers was through the utilities, but now they have bypassed utilities and are going directly to the large corporations. Until recently, the utilities had not been doing enough to try to retain these customers.  Meanwhile, the rooftop solar companies have been picking off the best residential customers from the utilities. Blockchain, or open ledgers, are opening up new possibilities.  People with rooftop solar can sell excess electricity to their neighbors and creating neighborhood microgrids. New business models are appearing.

The interesting question will be how this sector transforms itself. I do not think California with its CCAs is exactly the right way to do it—there are just too many frailties in that model and in the equities. But I think we are in a period of transformation as significant as after the Arab oil embargo in the 1970s when the independent power industry was born. It is a little difficult to see what emerges from it exactly, but it is a fascinating time.