Originally posted on pv magazine USA.
In this #Solar100 interview, Richard Matsui, Founder and CEO of kWh Analytics, speaks with Jenny Chase, veteran solar analyst at Bloomberg New Energy Finance.
It’s that time of year when people are reflecting on the past year and thinking about what the new year will bring.
Here to talk about 2018’s “Unpopular Solar Opinions” (ironically a pretty popular Twitter thread) is Jenny Chase, BloombergNEF’s Head of Solar Analysis and this month’s featured #Solar100 leader.
Chase has her degree in Physics from Cambridge and has dedicated her career to solar market research. Having thus studied solar’s history for almost fifteen years, Chase knows solar’s past, and we think she’s one of the most qualified people to discuss solar’s big picture trends and future.
Richard Matsui: You’re known in the industry for your solar analysis work through Bloomberg New Energy Finance, but can you tell us about your path to BNEF, and how you ended up in renewables?
Jenny Chase: To be honest, there isn’t much of a story before BNEF. I was one of the many students who wanted to do something for the environment, and I thought energy was a good bet. I went to study physics, but I wasn’t actually that good at physics, so I chose an internship with a slightly unusual chap, Michael Liebreich. He hired me, the company was reasonably successful, and then in late 2009, Bloomberg bought us and we became Bloomberg. Our first location was a very startup-y office in London—it was a big celebration when we first got a kettle.
Richard Matsui: [laughs] That kettle story is relatable. You mentioned that you wanted to do something for the environment. What prompted that interest?
Jenny Chase: My parents are kind of hippies, and when I was a kid I read a lot of news articles, the New Scientist, and a lot science fiction. Old science fiction focused on environmental awareness. For as long as I can remember, I thought that the most important problem to solve was going to be environmental degradation and climate change.
Richard Matsui: What were some of your favorite books back then?
Jenny Chase: I very much love Ursula Le Guin’s The Word for World is Forest and Isaac Asmiov’s work. Although Asimov is best known for robots and early space fiction, he had a deep if matter-of-fact environmental consciousness to his work. A lot of science fiction includes terraforming and other fundamental changes to the way things are. It’s an entire genre based on the idea that we can change our world, on purpose or by accident, and that could be good or could be very, very bad. It is much harder to be a climate denier when you just finished reading a smart novel set during the terraforming of Mars.
Richard Matsui: As someone who also grew up reading science fiction, I can definitely relate to that. Shifting back to the “startup-y office in London,” any other anecdotes that capture what it was like to work for NEF in the early days?
Jenny Chase: A couple of years in we brought in a chap called Chris Greenwood as a manager, and because I’m generally totally oblivious to anything that’s outside my sphere of immediate interest (solar), I wasn’t expecting him in the office. But one morning I came in and this guy was washing all the dishes in our absolutely filthy sink. Chris turned out to have a lot more to him than just being able to wash the dishes, but the fact that he didn’t know what to do because nobody else was in, so he cleaned up, was amazing. He had a history of management consulting and he really brought us to the next level professionally. But the first time I met him, he was washing our cups.
Richard Matsui: That’s what you need in the early days especially—smart people who just aren’t afraid of that kind of work. It speaks volumes that so much of your early team is still there. You seem to still be very tightly knit, which is impressive from a company culture standpoint.
Jenny Chase: Michael [Liebreich] said he wanted it to be an “Asshole-Free-Zone,” and I think he was successful. We’re very proud of our company culture.
UNPOPULAR SOLAR OPINIONS: A DEEP DIVE
Flattish Prices in Solar Tenders
Richard Matsui: You have a great “Unpopular Opinions on Solar” thread on Twitter. I wanted to ask you to expand on a few of those. To start, can you expand on #13? “We’re in for a couple of years of flattish prices in solar tenders, generally $25-35/MWh in sunny risky countries with a few below in sunny stable ones. Many Indian projects which bid low prices won’t be built at those prices.” I think this is a more controversial one than some people might realize.
Jenny Chase: I think costs will carry on coming down, but not necessarily as much as people assumed they would when the bids were made. We’ve seen no new record in 2018 in India, where the record still stands at 2440 rupees $34.8) per megawatt hour for Indian vendors set in May 2017. They’re not inflation indexed, that’s what makes them so difficult to understand! Inflation in India is really high so the cost of capital is high, but these tariffs are fixed.
Richard Matsui: Fair point. Given the bidding dynamics, the expected rate of cost reduction obviously matters, but so does the market perception of that cost reduction.
Jenny Chase: Exactly. And we’ve already seen in the intent that we’ve seen no new record for Indian bidders that, in the past year, that’s at or below $34.8 per megawatt hour. When we try to estimate the assumptions that Indian developers must have made on capex, capacity factor, operating costs and financing costs to expect a profit at these bids, we struggle to use realistic figures. One of the problems is that these tariffs are fixed for 25 years, not inflation indexed, so as India’s inflation is high the value in later years will be much lower than it is today. I honestly still have difficulty understanding how they expect to make money, and think it may be to do with tax treatment that I do not understand.
Richard Matsui: The Indian solar market historically featured an abundance of solar developers that are both aggressive and relatively inexperienced. The resulting lack of pricing discipline has been problematic for the market, and has resulted in projects promised but not delivered. You mentioned that there hasn’t been a new record low bid in the last 12 months, which suggests pricing discipline. What’s enforcing that discipline?
Jenny Chase: I think developers are pulling back a little bit because some of the more extreme projects have not been built. The latest bids out of Gujarat are higher than previous ones. But at the same time, the state government is saying “Well, you can bid lower than that, set a new record!” Meanwhile, banks are not super willing to lend, although they can be fairly sure they’ll get their debt back. Equity holders are hurt first when projects underperform, not debt holders.
Curtailment: Feature or a Bug?
Can you say more about #6? “Curtailment (cutoff when the grid can’t take all production) of solar is going to be a widespread phenomenon. It’s a feature, not necessarily a bug.”
Jenny Chase: I think we’re starting to see a clash between the engineering view of the world, where efficiency is very important, and the financier view of the world (which is probably more realistic these days), which is that if it’s cheap, it doesn’t actually matter if you generate too much. The engineer is horrified by the idea of throwing away excess power, but by doing so you can help the grid out quite a lot. The problem with solar is that it’s very peaky. You generate a lot of power between about 10:00 a.m. and 2:00 p.m., and then it tails off quite quickly and this peak and this ramp rate can be a problem for the grid. However, solar is so cheap now that if you can get halfway decent prices for off-peak power, it can make sense to simply throw away some of the peak overproduction.
Curtailing solar is also pretty easy from a technical perspective. For example, one of the issues with the California gas market is that some gas plants don’t shut down in times of peak power production because it takes them too long to ramp up again. With solar, you basically just have to tell the inverter to move the system voltage and current away from its maximum power point. . By curtailing relatively small amounts of solar production, you can massively reduce the amount of ramping that the rest of the grid has to do. You can possibly reduce wear and tear and even demand for other components of the grid, and without curtailing more than a few percent of total generation, which is really cheap anyway.
The PV Project Stakeholder Landscape
Richard Matsui: In #19, you wrote, “Operation and maintenance in desert environments will prove more challenging than PV project stakeholders expect.” Can you say more about what you’re thinking there?
Jenny Chase: I’m talking about some of these super low solar power price bids, particularly in the Middle East, which are so low that they must assume very cheap O&M. . I don’t think anyone has a lot of long-term experience managing photovoltaic systems in hot, dry, dusty environments on a shoestring budget. Some of the PPA prices, if you try and back-calculate what they must be paying, there’s not a lot of margin there. I think that dust will be a little more problematic than they think it will be.
Richard Matsui: Right. Everyone wants to bite at the gigawatt solar project.
Jenny Chase: Because of the way the solar market works at the moment, if you don’t bid beyond what every sensible person would be comfortable with, you don’t get a project and you don’t have a job.
Richard Matsui: That’s the brutal reality of it. We’ve been asked to quote the Solar Revenue Put for a couple of projects in the agricultural heartland of California, which is very dusty. And we’re seeing sponsors take—in our view—an aggressive view on soiling losses that isn’t substantiated by historical performance data. To your point, we understand why they’re doing it. They have to be aggressive to win, but some of these bidding behaviors don’t seem sustainable.
Jenny Chase: Absolutely. You never want to say, “Sure, we’re going to lose on this project.” But I would be a tiny bit concerned about that if I were them.
Richard Matsui: I think it’s interesting that the sentiment in the solar market now mirrors sentiment in the public equities market, where “everyone knows” that the market is overheated and that a correction is inevitable. What do you think happens in the next three to five years—will there be a blow up?
Jenny Chase: Well, it might not be as spectacular as a blow-up. If your investors are expecting five percent of return on equity and they actually get minus one percent, what can they actually do?
Richard Matsui: Well, they could sell, right? They could theoretically sell at a discount and write off the loss. There’s a class of nimble investors like Generate Capital that would be glad to pick up distressed assets.
“Losing” vs Waiting for a Bargain Price
Richard Matsui: #3 is the last one I’d like to talk about specifically: “Countries that have built little solar to date are not “losing” to high-solar countries. They wisely waited for a bargain on price!” I read that and thought, “That is a great counterintuitive perspective.” You’re right. But a couple things that came to mind: One is that Germany did the whole world a favor by signing up for solar at €0.50 a kilowatt-hour for 25 years and taking a multi-billion dollar hit. I mean, would any of us in solar have the jobs that we do today if it wasn’t for them?
Jenny Chase: [Laughs] Yeah, I am super grateful to the Germans for giving me my job.
Richard Matsui: If I’m going to take the opposite side of the argument, which is hard, I would argue that while the Germans didn’t get the upstream manufacturing businesses that they thought they would get, there’s also a number of German renewable energy developers that are based in Germany because it is the birthplace of our entire global market.
Jenny Chase: While it’s true that there are some fantastic German companies that wouldn’t be there if the market hadn’t started in Germany, most are in project development or EPC, where the problem is that the barriers to entry are fairly low. It’s difficult for developers and engineers to take huge, long-term leading market positions.
Richard Matsui: That’s fair.
Jenny Chase: I admit that was more driven by the other side of the equation, which is countries that are saying, “We are only number 89 in solar capacity!” And to that I say, “Who bloody cares? Build it now!” We’re seeing really dramatic price falls – module makers are arguing about cents per watt rather than dollars per watt, so now is a better time to build solar now than at any point in the last ten years for a country. Next year might be slightly better, but now’s not bad.
Richard Matsui: It’s true. Of these unpopular opinions, which has been the most unpopular or controversial?
Jenny Chase: That’s a good question. I’ve actually been surprised over how little pushback I’ve gotten on any of these. It’s possibly because I muted all the nuclear people who just ask, “What about nuclear? What about nuclear? You should talk about nuclear more.”
Possibly the most controversial: #27 “Getting to 100% renewables is really hard, but getting to 50%, 60%, 70% will not be as hard as we think and after that we will have a better toolkit for the rest..” This is a little bit contentious because it is very difficult to see that renewable energy can fully provide the current rate of on-demand power that we consume. On the other hand, we don’t need to use as much power as we do now to live high quality, developed-world-standard lives, including all of the people that don’t currently have energy access. The big challenge is not going to be lowering the total amount of energy, but shifting when we use that energy.
Richard Matsui: I’ve heard Shayle Kann from Energy Impact Partners, who we’ve also interviewed previously for the #Solar100 series, say, “In the past we used to forecast load and dispatch generation, and in the future it will be the reverse.” I think it’s another elegant way of stating that idea.
Jenny Chase: Yeah, that’s great.
THE ARCHIMEDES LEVER
Richard Matsui: Is there one of these “Unpopular Solar Opinions” that you stand behind the strongest?
Jenny Chase: You and Shayle understand financial theory. But I don’t think enough people in the environmental community understand financial theory. One of the reasons that I wrote a book [Editor’s Note: Jenny Chase’s book, Solar Power Finance Without the Jargon, is coming out with World Scientific Publishing in 2019] is because my past environmentalist, hippie, science student self did not realize how important finance and the concept of discount rates were in decision making. That knowledge needs to more widespread.
It’s actually quite a deep concept, because otherwise we have no way of comparing costs and benefits now with costs and benefits in the future, which are also uncertain.
You can argue all day about discount rates, and you should if you’re making an investment. But you can’t argue against the principle of using the appropriate discount rate to reflect the risk that a scenario will not come to pass.
Richard Matsui: Absolutely. In our hiring and onboarding process, as well as in our ongoing team meetings, it’s important that our team understand the underlying finance in our industry. Bryan Birsic at Wunder puts it really well. He describes finance as the Archimedes lever—the one thing that you could really move the needle on, precisely because the discount rate that you apply to a given asset is tremendously impactful. Most people don’t realize this.
Jenny Chase: It is. I’ve also just seen a couple of tweets over the last couple of days that mentioned that discount rates are fundamentally unethical. But they’re not; you’re comparing a certain outcome, something happening today, with an uncertain outcome. Preventing the certain bad outcome or ensuring the certain good outcome is worth more than the uncertain one.
BIFACIAL MODULES EVERYWHERE
Richard Matsui: Predictions for 2019? Especially things that you think are going to catch people by surprise.
Jenny Chase: For 2019? Bifacial modules everywhere.
Richard Matsui: I like it. What makes you think that?
Jenny Chase: Turns out that you can use glass instead of backsheet. Sorry DuPont, they do seem to give you more energy output in a lot of applications, and probably make a more durable product.
Can I give you a 2029 prediction?
Richard Matsui: Please.
Jenny Chase: By 2029, we’re going to be talking a lot more about seasonal energy storage and solutions for decarbonization. So far, we’re just getting our feet wet, we’re paddling around the shallows of decarbonization. Hopefully by 2029 we’ll be starting to wonder what happens if we turn off our coal and gas plants, even in winter. I realize that most of the U.S. is actually south of Europe, but seasonal differences in power demand and in solar generation in Germany or the UK are massive. We have a lot of variants between summer and winter in terms of day lengths and energy demand. And that means that from a [solar] perspective, solar may be the cheapest way of generating energy, even potentially somewhere like Germany. But, it’s pretty useless in the winter, so we might see some really strange things on the table. One I’m currently looking at is keeping a lake of molten salt under a lot of ground.
Richard Matsui: Sorry, one more time?
Jenny Chase: Keeping a lake of molten salt underground.
Richard Matsui: Wow, that is interesting.
Jenny Chase: You heat it up in the summer and, hey, maybe you generate power, or you use it for heating in the winter. I’m sure there are startups doing this, but the ones I found so far have already gone bankrupt, so either it’s incredibly challenging for reasons I have not yet found, or it is an idea whose time has not yet come. The whole issue of seasonal storage, for both heat and power, is going to be much more on the radar in 10 years than it is today.