Going with the Flow

posted Apr 26, 2018, 7:47 PM by Nate Shanklin


Storage and smart inverters bring lasting relevance to the renewable industry

The solar business as we know it is on its way out.  The days of large ground mounted systems dumping energy on the grid when the sun shined or roof top systems not being able to support second shift operations are over. Smarter solutions are here to take their place.


Simply put, the renewable energy business is turning into an on demand custom solutions industry.  As the tools become available, we are beginning to see systems that are addressing issues never before tackled by any form of energy generation...  


And that is really it, generation is not the key. Generation is not what customers buy, they buy delivery.  Up until now, if demand overloaded a line, then heavier infrastructure and generation was the only answer. Renewables, in an effort to overcome a limitation of intermittency, developed storage and delivery systems.  These systems do not depend on more and more energy to solve problems on the grid. They depend on the storage and efficient distribution of the energy that is already there.


Problems of a certain scale and magnitude do not always hit home directly. Their effects are just too generalized.  The disfunction of the grid is not such an issue. Each month, utility subscribers pay for this problem in the form of demand and capacity payments.  The problem is that generation is traditionally fixed, whereas usage is variable. On many electric bills, demand and similar charges represent 40%+ of the total bill.  This is not energy used. This is energy demanded for a moment and then problematically and expensively supplied. As the grid begins to attempt to mend these issues, businesses are wasting no time addressing the issue from their end. Through the proper application of renewables and storage solutions, businesses now have the ability to massively shrink their presence on the grid and their exposure to its costs.  We are seeing the adoption of these technologies as a growing and possibly industry shifting force for utilities.


As this industry marches forth, the growing prevalence of batteries and storage solutions means that renewables can now offer the kind of reliability and flexibility that we could only have dreamt of a few years back.  In a big way, stability has always been the missing component for renewables to achieve true relevance. With this matter in hand, it is time for renewables to truly shine.


Not Getting Swept Away

posted Nov 14, 2017, 11:27 AM by Nate Shanklin

The Solar Industry survives a close call with protective tariffs

By Nate Shanklin

If you work in any industry long enough, you will inevitably begin to care deeply for issues that have next to no recognition amongst the general population.  I am sure that the readers of Parking Today are uniformly concerned with issues that the readers of Sandwich and Snack News cannot find the will to care about (both real publications).

It is with this in mind that, I fully realize that the recent International Trade Commission case for solar panel imports may not resonate with everyone.  But this case represents something larger than solar panels, and so instead of laying down a complex argument about the past and future of the solar industry, I think it would be better to focus on something that we all have a commonality with, brooms.

The United States whisk brooms industry is presently protected by a 32% protective terrify on imports. The Federal Government has long played with protective tariffs to generate federal income and to protect domestic industries.  Starting from the first tariff in 1789 (originally on all imported goods), the United States Government has had a binary decision to make in terms of fostering the development of domestic industries.  The choice is to either support local industry via tax breaks or through attempts to foster innovation or to tax imported goods as to allow domestic industries to sell their wares at a competitive price.

Stemming back to 1913, arguments were made to the Congressional Ways and Means Committee that the domestic production of brooms, specifically those with a wooden handle and with natural fiber bristles, were a strong domestic industry and one worth protecting.  Over the year, the wording of the tariff became increasingly specific as to not artificially affect an entire industry. As time has moved on, this has meant that home cleaning products have innovated and blossomed, but to this day at the Libman broom plant in Arcola Illinois, along with all of their modern products, there stand a small troop of workers who are still paid by the piece to run the machine that bunches the fibers and then wraps the wire collar around the wooden handle to make the protected brooms.

Tariffs do help in two specific cases. First, with dumping where one government is subsidizing the cost of a product to intentionally depress that same industry in another country, and secondly to stabilize the domestic production of commodities.  The protection of commodities is usually seen as important as a national stability and independence move. In no case however, does a tariff ever typically encourage the innovation of a domestic industry for the specific product being protected.  By its very nature, the specificity of most tariffs actually encourage the stagnation of a product as it will tend not to change and risk losing its protected status.

In the end, innovation is what moves industry forward.  For any tariff, on broom or other, we must consider the larger ramifications of that restrictive action.  If associated industries, such as the sanitation and janitorial business are able to get their goods at a cheaper price, then they will be able to operate more efficiently, offering them the ability to grow. While this is not a one for one market reaction, it must be understood that no industry operates in a vacuum.  Preserving jobs is always at the forefront of any protective effort, that, or federal revenue. We need to make sure that the far reaching effect of a protective tariff do not needlessly sweep away the capabilities of a greater swath of industries only to protect the fragile bristles of a domestic business that is unable or unwilling to change.

Also, if you are a private equity firm attempting to recover a $50 Million dollar convertible equipment loan from the solar panel manufacturer, Suniva, and you are willing to drag down a multibillion dollar industry by petitioning the United States International Trade commission for a protective tariff of nearly 200% of present panel prices all because you invested in a company that kept making small panels even as the industry moved to large ones, well… you shouldn’t do that either.

 

Shine on everyone.

Wolcott Energy Group

www.wolcottenergygroup.com

Saddling Up For 2017

posted Jan 4, 2017, 9:53 AM by Nate Shanklin

The solar energy business ramps up for a busy year

By Nate Shanklin

Managing Director, Wolcott Energy Group

If we are going to call a year the one where renewables really broke through, it looks to be 2017. As it stands, per the United State Energy Information Administration (EIA) data (http://www.eia.gov/outlooks/aeo/), we have just entered the busiest year in the history of the renewables. Bloomberg has recently reported that in 2016 renewables and specifically solar became the cheapest form of energy on earth, beating out all fossil fuels in some cases by nearly 50%.

Link to the Bloomberg article: http://tinyurl.com/jp8gsjk

All of this momentum is in spite of an United States presidential election that went for a candidate who is decidedly uninspired by renewable energy.  The election and the roaring nature of the renewable industry illuminates an important aspect about the domestic renewables market as a whole; states control most of the energy related decisions.  Outside of the Federal Investment Tax Credit, which is not to be underestimated, state legislatures are the bodies that determine the vast majority of energy policy.  It is at the state level that renewable energy portfolio standards are determined, and Renewable Energy Certificate policy and pricing is set. It is these two factors that drive the utility consumption of renewable power. Additionally, state legislatures are in charge of net metering policy which determines the feasibility of the vast majority of commercial and aggregated residential renewable projects. While some states such as Arizona are shying away from renewables, the vast majority of states are warming to the idea.

This is going to be a busy year, but one fraught with challenges. While the volume will be high, the price of power sold will be relatively albeit uncomfortably low.  The incredibly low price of systems will likely be a one two punch for unprepared companies.  We can expect to see a thinning of small or inefficient groups as low margins on a high volume basis, favor efficient companies.

Despite the challenges ahead, all signs point to 2017 being the year of solar, it should be quite a ride.

The Sun Shines On Illinois

posted Dec 13, 2016, 9:17 PM by Nate Shanklin

Illinois revises its energy policy and steps onto the renewable mainstage.

In the first week of December, the previously unthinkable happened, the Illinois Legislature passed the Future Energy Jobs Bill (SB 2814).  This bill largely fixes the Illinois Renewable Portfolio Standard (RPS) and sets a goal of 25% renewable energy for the State by 2025. Much thanks goes to Solar Energy Industries Association of Illinois (SEIA) as their lobbying and outreach efforts were a significant positive force in the passage of this bill.

Presently per SEIA data, (www.SEIA.org), Illinois has a total of 66 Megawatts (MW) of installed capacity. With the passage of this bill, it is expected that this number will jump to 2,700 MW before the end of 2017.  This expansion will be divided up into 50% distributed generation and community solar (residential and small commercial), 40% utility scale (large scale systems), and then the remaining 10% dedicated to brownfield (toxic land sites) and other niche renewable projects.

While this is a tremendous moment for Illinois solar, which currently lags at 27th in the country, there is still much to do.  Presently, Illinois lacks much of the infrastructure at the governmental level to manage the onslaught of projects.  Illinois agencies will be well advised to look at the successes and pitfalls of states such as Massachusetts and North Carolina as they fought to develop their own renewable markets.

While there is still much to figure out, Illinois is now set to become a major player in the renewable market. Tangible effects of this bill are expected to be felt by the end of 2017, many groups have already begun to plan and plot for when the queues are finally established.  One thing is for sure, with the lofty goals set forth in this bill, solar in Illinois is about to get interesting.

In a Land of Falling Goliaths is David Really King?

posted Aug 17, 2016, 6:06 PM by Nate Shanklin

Small developer look to find their feet in the midst of stumbling giants.

By: Nate Shanklin 8/16/2016

In the past six months, SunEdison has gone bankrupt, Solar City and Tesla have merged with one billion USD in losses combined, and First Solar has had their third quarter of loss with a 200 million dollar shortfall.  These giants were once set to dominate the renewable energy landscape of the United States, but it was not to be.  While the demise of these companies may signal an intriguing opportunity to the bevy of smaller developers, they would be wise to understand the market conditions that brought their larger brethren to their knees.

Large companies are good at addressing the needs of large homogeneous markets, think cars and shampoo.  Looking at the ubiquity of small businesses, manufacturing plants, and houses in the United States it stood to reason that renewable energy would be as readily applied as toothpaste and baby powder, this was not the case. While we may be the United States, there is little if any unity of state by state energy policy and regulation.

In a recent quote when asked about renewable energy and climate change, Chip Beeker, Chairman of the Alabama Public Utilities Commission stated, “I believe that no matter what you call it, a myth is still a myth, and the so-called ‘climate change crisis’ is about as real as unicorns and little green men from Mars.”  There are more reasons than little green men (extreme adherence to coal and the coal lobby) that influence states views on renewable energy.  First and foremost is the issue that often utilities are afforded state sanctioned monopolies in exchange for their voluntary regulation.  This is often a slightly incestuous relationship as utilities donate to campaign funds and hire former elected officials into their ranks and intern get preferential treatment from the sitting government members who seek the utilities donations.  Utilities make money from the hedge between raw fuel costs and the price at which they sell power.  When renewable energy providers sell utilities power, it is akin to selling a baker muffins when what they want is flour.

The large companies were and continue to be aware of this fractional market, but the rapidity of the changes is proving to be nearly impossible for them to navigate.  In the period of 18 months, nearly a dozen states have undergone significant changes to their markets, essentially turning the flow of projects on and off in some states (think North Carolina), while in others such as New Jersey, the ever growing line for the interconnection queue has slowed progress to a trickle.

Without a solid and widespread market, large companies have found it difficult to support their overhead.  In an August 1st article regarding the Solar City/ Tesla merger, Forbes reported that:

“Solar City will benefit because: it will not go out of business, will have access to Tesla’s distribution network (effectively slashing the cost to acquire new customers – which is currently ~ 30% of the price of a solar panel!)”

The missteps of the largest players does indeed open an opportunity to smaller developers.  This market will serve dynamic firms that can adapt to the changing landscape and not be saddled with unattainable margin requirements.  Firms will have an ongoing challenge in obtaining confidence in financial partners that watched their large clients falter, but strong opportunities will stand on their own.  Renewable energy continues to grow and is paving a path forward. The evolution of any industry is a messy endeavor, one bound to be laden with the remains of those who could not adapt.  Adaption while an almighty challenge, is an opportunity for those that are able to do so.  The upcoming year will present just such a situation for many developers across the United States.

Into the great beyond

posted Aug 2, 2016, 2:34 PM by Nate Shanklin

With traditional solar markets softening, developers are looking to new markets.

There was a time (roughly 5 years ago) when solar companies knew where to work.  The cost of equipment made projects utterly dependent on SREC markets and unusually high PPA rates.  While these conditions functionally hemmed solar into the mid-Atlantic, East coast and California geographies, there was a sense of organization and function to the market that seemed to work.  It was not as if the other states were off limits, but rather as if they ceased to even exist. 

Today, solar is an industry in its late infancy and changes have been brought forth through dire need, rather than bold exploration.  In this past year, large development in Maryland and an ever lengthening queue lines in New Jersey have all but taken the luster out of these markets.  Pennsylvania continues to lay lifeless and North Carolina’s lack of a state credit means it is still open for business, but there is little on the shelves and even fewer buyers. Not to be left behind, California continues to win as the most saturated solar market in the country. With traditional options dwindling, developers and financiers are looking north and
inward to find additional viable markets.

Due to the ever changing legal landscape and the flat lining of historically strong markets, the Northeast and Midwest are starting to look pretty good.  But, much as cowboys leaving the east heading for the Rockies for wealth and independence in the 1860’s would find, new territories lack certain amenities that make life easier.  Simply put, there is not an abundance of qualified and established developers, engineers and installers in many of these geographies.  Conversations with electrical contractors can quickly take on an alien tone.  Still, there is value out there, and savvy developers who are willing to dig are making it work.

Project size may not be astounding, but there are few markets left in the United States where electric rates and solar irradiance cross in such a favorable manner.  These markets, much like the original ones out east, will eventually find their legs, and turn into a stable and worthwhile market place, but that may be a couple of years off.  Until then, you will have to occasionally hear the question “you’re working where?”

The buffet is closed.

posted May 30, 2016, 3:10 PM by Nate Shanklin

Solar developers feel the pinch in the return to normal IRR requirements

SunEdison’s recent bankruptcy was decidedly the largest failure in the industry and has sent ripples far and wide.  One effect of this bankruptcy has been the sudden availability of projects.  Developers that had set their sights on SunEdison are now scrambling to find a new home.  While this might appear to be a boon for alternate investors, a trend has become apparent with these deals, they nearly universally have single digit IRR’s.  SunEdison’s loss leader buying strategy has yielded a crop of developers that have been trained to think an unlevered 6% IRR is a solid opportunity and one that earns them bargaining chips.

As a rule, renewables, being alternative investments operating single high capital requirement projects, should demand IRR’s from 8-11% based on credit.  This has been the rule for much of the industry’s history.  As a fact, the required returns were one to three points higher than that historically due to the infancy of the industry and banks inability to accurately price associated risk. 

Some project geographies are just not going to produce high IRR’s, Pennsylvania, since the SREC crash has struggled to produce a project above an 8% unlevered IRR. While there are reasons many of these markets produce thin deals, others really don’t have a foot to stand on.  Markets such as New Jersey, for example, are an understood entity.  With the number of installed projects, there are few legitimate reasons to see significant development cost overruns.  So when a developer comes forth with the excuse that they had 30% more engineering than other comparable projects and similar overruns in permits and public hearings, you know they are trying to defend a rapidly decaying margin.

While it is easy to become frustrated with developers, it is frequently not their fault. For the better part of the last two years yeildco’s and similar market instruments have been teaching developers that low IRRs are acceptable as long as the projects are large.  This, however, is just not the case.  As private equity has stepped in to fill the capital void left by the yieldco’s IRR requirements have  returned to normal levels, leaving many developers grumbling.

While this change has caused a fair amount of friction in the development community, there is hope. Large projects are valuable if managed properly, and when presented with prospect of NTP buyouts, or similar treatments, agreements are being reached.  No diet is fun, but just like with our own midsections, effective trimming will leave the solar market looking better and in a far healthier condition. 

Testing the Insolubility of oil

posted May 26, 2016, 8:17 AM by Nate Shanklin

Renewable energy has little to fear or to offer to the US thirst for oil.

 

Each morning, millions of Americans listen to the news on their way to work.  A statistic of particular fascination seems always to be the price per barrel of light sweet crude.  For most, this price reflects the cost of gasoline, energy, and somehow the nature of global business. For those in or around the renewable energy business, the brutal fascination with the ebb and flow of oil, is largely becoming a fascination unfounded.

The US Energy Information Administration reports that at present, oil presently supplies 1% of the fuel for current electrical generation. If anything, solar is fighting its greatest battle against coal and natural gas representing at present 62% of electric production.

Given the disassociated nature of oil and renewables, the oil lobby has become a motivated advocate of renewable energy policy, sort of. The recent extension of the ITC and PTC (Investment Tax Credit and Production Tax Credit) were neatly packaged with a lucrative lift on the export of oil that had been in place since 1975.  Still, it would be hard to find anyone in the renewable business that regrets the extension of the tax credits, so vital to this industry, no matter how they may have been sustained.

While oil may make for strange bedfellows for renewables, natural gas more clearly defines the battles to come.  In late 2015, North Carolina state legislatures began debate of a bill that would cap the state’s utilities need for renewable energy at 6%, halving the current obligation and eliminating it entirely by 2021.


NC Republican House Whip, Mike Hager was recently quoted as saying: “We could never have imagined in 2007 such an abundance of domestic natural gas,” Hager said in an interview. “We need that Marcellus shale gas to offset the high cost of renewables and prevent electricity prices from rising further. It’s like raising children: they need to grow up learn to live in the real world.”

The real world may not be as clear as Mr. Hager would indicate.  At present, the Energy Information Administration (EIA) has indicated that at present the levelized cost of power from now until 2020 is estimated at $125.30/MWh for renewables and between $141.30 and $113.50/MWh for natural gas dependent on varying uses of the fuel. Given this, renewables are surely not responsible for rising energy costs. Mr. Hager’s prior employment and ongoing relationship with Duke Energy is surely informing his decision on these matters. As an engineer at Duke’s fossil fuel plants for more than 23 years, his attachment to his former company’s significant investments in gas and coal is not surprising.

Up and down the East coast, utilities and lobby groups are proving to have varying effects on state governments.  While many states such as New Jersey and Massachusetts have proceeded to expand their RPS standards thus backing renewable energy, the Carolinas, and much of the South have a much closer and more complex relationship with their utilities and natural gas and coal.  This is a relationship which is not likely to change without sweeping federal regulations, which these states regularly oppose.

As the installed cost of utility scale solar plunges to $1.18 halving its cost from five years ago, renewables continue to make an argument that only grows stronger. And while oil prices will continue to dominate headlines and power the transportation sector, they are unlikely to ever cross paths, for better or worse. Each will have their own battles to fight.

The curious world of Solar Yieldcos

posted May 26, 2016, 8:07 AM by Nate Shanklin

February 17, 2016



2015 was not the year of the Yieldco. 2016 is not looking to be much better for the funding structure that one stood to be the unlimited fountain of capital for the renewable energy business.


There was a time when altruism was a pretty significant factor in renewable investment.  Pioneering companies delving into investment in renewables would have to convince their boards that “Going green was good for business”. Whether or not that was true, it was hard to make an argument based solely on economics. At the start of the 2000’s, electricity from renewables could be upwards of 10 times as expensive as power from the grid. But, like many industries, efficiencies and competition began to bring system prices down. Year by year, the cost of renewables, and specifically solar became more and more reasonable. By 2014 a convergence occurred, the levelized cost of energy (LCOE) fell to the point that it matched and even fell under grid produced power (data from EIA.gov).


The LCOE for renewables falling under the average commercial rates for electricity meant that renewables were now viable nation wide, and billions of dollars of projects were for the taking.


While the opportunity was undeniable, there was a problem. No one, not even the biggest solar houses had access to enough funds to make all of these projects a reality.


Traditionally, capital raises depended upon structures developed in the commercial real estate markets such as real estate investment trusts (REIT) or similar. The problem with these structures was and is first and foremost they pay taxes twice.  They pay corporate taxes from their revenues and then their members are taxed as if the dividends were regular income (not capital gains). Beyond this primary issue, their private issuance, can limit their exposure to capital markets, slowing investment. A more efficient model was sought.


And so came the invention of the Yieldco.  A Yieldco, is simply a public company whose assets are long term income generating projects. The parent company owns at least 50% of the Yieldco stock, gaining initial revenue from the IPO. The Yieldco then pays out roughly 80-90% of its net income out as a dividend, thus supporting the stock price and infusing the parent company with project development capital. A Yieldco benefits from the fact that by claiming depreciation and operating expenses and then throttling its dividend payments they can typically avoid paying taxes, making it a seemingly highly efficient structure.  Per Bloomberg, in 2014, 15 Yieldcos went through IPOs netting $12 billion in initial revenue.  While the rise of the Yieldco seemed all but assured by late 2014, mitigating factors began to mount quickly in the following months.


When the markets opened up in 2014 the major players never dreamed that keeping their Yieldcos filled with projects would be like feeding a monster.  Since projects are continually retired, projects must be regularly fed in the front end of the Yieldco, but additionally, since this structure pays out so much of its free cash flow, projects must be added nearly exponentially to stop the price of the stock from falling due to a tumbling P/E ratio.feed the beast 16-Feb-2016 19-07-25_Page_1.jpg


This is where the first big issue came to fall against Yieldcos.  As development exploded, the major developers began to notice that they were bumping into each other like never before.  Given that the middle swath of the United States is not a hotbed for solar, the traditional East and West coast markets became swarmed with development reps from the various publicly traded firms.  For many, it has proven nearly impossible to fill their pipelines sufficiently.


Another major issue to affect Yieldco performance is that of leveraging, or rather the cost of the capital used to leverage these companies.  The solar industry is dependant on incredibly cheap money. There is still only a small margin between solar and traditional grid prices, and small changes in the long term debt rates will erase that difference. Essentially, solar systems pay out like mortgages, in set increments. if the cost of capital to borrow rises above the IRR of the projects, the Yieldco will nearly immediately be underwater. In the past month, Janet Yellen, Chairman of the Federal reserve has stated the Fed’s intention to raise long term interest rates. While there is current doubt as to the realization of this hike, uncertainty never speaks well to stock prices.TERP Interactive Stock Chart _ Yahoo! Inc.jpg


Without a high stock price, Yieldcos are finding it nearly impossible to attract the equity to allow for the leveraging and create development capital as they were originally designed to do.  


In what has become the largest and most public saga in the solar industry, the fickle nature of finance and the endless thirst for projects generated through their Yieldco, Sunedison is presently headed towards a bankruptcy within the next 12 months.  While not the only culprit to their current state of peril, Terraform Power Sunedison’s Yieldco surely cannot be held blameless.  The draining nature of the dividend payments has meant that Sunedison has had to add more and more projects to their pipeline.  Developing their present portfolio of 2.9 gigawatts will easily surpass their current on cash holdings of $695M.  All this and the Terraform monster cannot be contained as its stock price continues to dwindle.  To make matters worse, a current $500M lawsuit against Sunedison proposed that the company used funds from the Yieldco to make up the losses of Sunedison in the form of inappropriately small dividend in this past quarter. Rather than being the tree that feeds the parent, Terraform has become a gluttonous fund draining leach to Sunedison. Like a scene from a western, the hedge funds have been buying stock and circling like vultures as a takeover becomes ever more likely.feed the beast 16-Feb-2016 19-07-25_Page_2.jpg


While Yieldcos have their own list of problems, their recent troubles are by no means completely their own.  Seemingly irrationally as the price of oil and fossil fuel stocks have come down, they have drug solar Yieldcos down with them.  In operation, oil and solar do not really touch. as Solar goes towards electric grid production, the vast majority of oil goes to support transportation.  So why does this connection exist? In a word, diversification.  Portfolio managers are continually seeking diversity. When they arrived on the scene, the Yieldcos represented a strong and credit worthy alternative to the fossil fuel stocks while staying in the energy sector.   By fund purchasing shares of the Yieldcos for their energy portfolios, they inadvertently tied the Yieldcos at least partially to the price of oil because as these funds move in value they tend to drag everything with them.


Given all this, where does the future of solar finance point? There are several directions that seem plausible and no one single path may be the answer.  Funds such as NRG’s may continue to diversify further with fossil fuels and thus mitigate some of their non systemic risk. Alternatively, private equity funds have started to make compelling argument for their value in the market as their relatively efficient acquisitions have proven a solid outlet for current project portfolios.  In the end, if long term interest rates do not see a significant uptick, which at this juncture, seem unlikely, solar will continue to find a way, with or without the beast that we call Yieldcos.

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