Solar Forecast: Sunny After Some Scattered Clouds

By Yann Brandt

Solar is often presented in a complicated way to those not living in the industry on daily basis. We all know the headlines: bankruptcies, tariffs, utility smears and more. It is easy to understand that while solar enjoys a positive approval rating, there are legitimate questions. So when smart and successful people ask good questions and want to get on the supporting side of solar, I listen.

So the questions to be answered: Is solar’s current success permanent? And can it become profitable for investors in projects and companies? In a lighting round of updates, here is your current weather report for the solar industry.

Result of the tariff battles

Without a doubt, the tariffs imposed on solar equipment are bad for the industry. The latest round adds a cost of approximately $0.10-$0.15 cents per watt and brings the cost of modules into the mid $0.80s for larger purchases. These are costs that are going to impact the profitability of the value chain including the installer and financing party. In the end it increases the cost of solar electricity or slows the decrease of costs the industry has benefited from.

Companies will aim to work around the tariffs and will most likely open manufacturing lines in free-trade Countries like Mexico in the near future. SolarCity has already announced plans for their plant in New York and expect more of this to occur. In the meantime, don’t expect the tariff to slow the speed of development in the solar industry.

Markets and sectors

Solar can be separated into four categories: residential, commercial (private), commercial (public) and utility scale. In general, residential is growing (rapidly) and utility scale is now slowing year over year. Both of these segments have become very exclusive for investors, Wall Street with residential and utilities buying large solar farms. Commercial solar is primarily separated into investment grades. Good credits, like schools, government buildings and publicly traded companies, have access to scalable third party financing products. PPAs rule the commercial space which requires scale. All other commercial is essentially untouched and probably the biggest market opportunity alongside residential growth.

Markets are separated in geographies across the Country with each State representing multiple markets. Due to regulations and existing infrastructure costs, electricity customers see a different benefit from installing solar. Residential solar markets are now active in almost 20 States, getting us closer to a national effort to put solar on every home.

Effect of rising interest rates

Probably one of the biggest upsides to the solar industry is the cost of capital. Even in a low interest rate environment, solar projects still pay very high rates. Investors currently view solar as an investment with some risk with most investors seeking high single digit or low double digit returns. Solar debt in PACE markets still achieve project based returns above 6%, which is incredible considering that recent securitizations in PACE and residential solar have been in the 4.5% range.

Things are looking up however, with future securitizations continuing to drop the cost of capital in solar. Scale and more investor success will drive competition into these investments, therefore lowering the cost of capital further, one day matching the rates we see in residential and commercial mortgages.

What is hot in solar?

Software and financial innovation is driving more investment downstream in the sector. Financial models such as crowd funding and credit enhancements create an opportunity for more people to invest in and benefit from solar energy.

Software (cleanweb) is creating the ability for solar development platforms to lower the cost of each project. Developers are coming into solar to solve pricing inefficiencies, permitting issues and make complicated things like solar layouts an easy task. We continue to see financial and cleanweb startups making a very good case for more venture capital investment in solar.

What does solar need?

We cannot increase the amount of sunlight but we can add more participants in the industry. All of those angel investors that are funding the next software app or website should look for a solar version. Made money on a financial advisory firm? Invest in the next solar financing model. In short, solar needs the innovation that is happening to get more capital runway.

The importance of helping the development and efficiency of project development is that it helps the speed of project capital deployment. Billions of dollars are looking for a solar project to call home, the problem being that there are not sufficient investment opportunities in the marketplace.

Clouds in solar are causing the current turbulence we are encountering. The forecast however is sunny skies and smooth sailing in the near future. Hope you enjoy your trip in solar!

3 Ways Permitting Creates Opportunity

By Yann Brandt, Managing Editor of SolarWakeup

California made some headlines with Assembly Bill 2188. The bill made it through the State Assembly generally easily with a 58-8 vote after two unanimous votes in committee. The bill would help residential solar installations get their permit more efficiently or at least in a more pre-determined process. Permits would have to be issued within 5 days and probably more importantly the system would only be inspected after installation.

Having recently installed solar on my home, I can speak from experience that putting a 5kW on a home is not simple. Between the back and forth from the engineers and various Town departments, it took over 3 months from initial submittal to receipt of the permit. The mess of residential solar permitting processes creates enormous opportunity for various solar players; if only on the basis that several hundred thousand systems have already installed. Before long, we will have more than a million homes with solar, and reducing the time and cost associated with permitting will enable some to take financial advantage of this hurdle.

In California, installers currently work in around 500 municipalities with nearly none of them following the same process. The effort of AB 2188 along with SunShot efforts such as Go Solar in Broward County, Florida can create the uniform requirements that solar is looking for.

Assuming things clear up, let’s review three ways that solar companies could take advantage of the new rules.

App based solar permitting embedded in Sales

Some startups have already begun working on the concept. Sign up a customer and before leaving stand in front of the home and take some pictures on your iPad. The app, with the help of Google Earth aerial imagery, estimates a system size that the sales person can verify on site based on energy usage. Through the software’s locational awareness, the permitting guidelines are taken into account and a system design is created based on your product choices.

It seems a bit farfetched but realizable in short order with the simple creation of permitting guidelines that create scale in developing the software. Nobody is going to develop the app for 500 markets in California, but for an entire State it could be in our foreseeable future. Imagine the possibility of closing a sale and building a permit package before leaving the site on the first visit; scalable efficiency generated by smart regulations.

Welcome the era of micro-inverters?

A few years ago, residential providers actually allowed homeowners to select an installation date for their project on the website. Of course, prior to the actual installation, an installer had to visit the site and measure the roof. Google Earth, Pictometry and other are pretty accurate but nothing will replace the hand measurement of a home. Pipes, shading and other potential hazards are always missing from the imagery.

With micro-inverters, the permitting is in many ways agnostic to a few panels more or less. An installation crew simply comes to the site and understands the technical parameters that need to occur for the financial model to work. Trucks will come prepared with extra materials and a few more panels than the job calls for, no need to come back a second time or change out the inverter in the permitted designs.

This isn’t farfetched; during my installation I was not sure if the southern faces would end up working for all 20 panels due to the location of the exhaust pipes from the bathroom and kitchen. By using micro-inverters, I was able to plan for either scenario from the start and notified the building department ahead of the time that some panels had a potential secondary location.

More solar everywhere

Take away the significant cost of permitting, and you probably shave $0.30-$0.40/watt off the installation. By making it more efficient thus reducing the site visits and engineering costs, it may be possible to remove a large portion of the soft cost.

Removing costs, lowers the cost of solar for the consumer and in turn opens more markets. At $0.115/kWh in Florida, residential solar is very close to making financial sense for solar loans and solar leases. With improved permitting processes and installation efficiencies, these markets become immediately viable. By the time that President Obama gives his last State of the Union, we could hear solar is being installed every minute.

In a utopian vision, residential solar installations will have no technical site visits for installation or permitting. The only company representative that ever comes to the site is the sales person with some software. It all starts with Government taking away the significant barriers that have no effect on safety; it just creates uniform standards based on the local building codes.

SunShot Is Proof That Venture Capital Is Missing Out

SunShot Is Proof That Venture Capital Is Missing Out

By Yann Brandt, Managing Editor of SolarWakeup

On a day when the Wall Street Journal sings the praise of how much capital is flowing to solar companies like SunRun and Sungevity, Minh Le, director of the Solar Energy Technologies Office, stands before a group of over 800 participants of the SunShot Summit. As the Department of Energy helps solar companies across the country cross the proverbial valley of death, the success rate is remarkably high. So high in fact, it appears that the data is showing venture capital that early stage solar makes financial sense.

$1.8 billion dollars of direct corporate investment for SunShot award winners is the statistic and that does not include the project finance capital used to invest in projects which brings the total to over $3 billion. Regardless of the success of SunShot, there is little doubt that investors are not doing early stage investing in the space. A fact clearly pointed out by Rob Day of Black Coral Capital in his recent piece. Rob knows what he is talking about; his twitter handle is @cleantechvc.

Let’s point out the reasons that SunShot is having success and why there is much more room for VCs to participate in this market. Having the private market replacing the Department of Energy is a reality that top brass at SunShot are hoping for, they do not, in fact, want SunShot to be the early stage investor in the space if the private market is willing to take over.

SunShot has a public goal of bringing solar costs to $0.06 per kWh, which according to the recent procurement by Austin Energy of $0.05 per kWh is already happening but not for the everyday market. The goal is listed as 60% accomplished and the outlined path includes many different parts of the market, creating investment opportunities for all types of venture capitalists.

Solar is a huge market, growing 10x since 2009. It also retains many inefficiencies in the soft cost side of the development structure. An important factor since many VCs look at solar as a sector where they took a beating in the past investing billions in big manufacturing plants. Soft cost inefficiencies are addressable by “3 founders and an iPhone app” according to one panelist at the summit, meaning it is not a capital intensive endeavor. The appetite for soft cost reduction is also there as companies continue to partner and acquire whenever possible.

Soft costs represent 64% of the cost structure according to the SunShot team and that is the opportunity the market with the help of venture capital could and should address. SunShot is accepting approximately 5% of applicants, lower than Harvard but higher than current VC investment in the space. With $1.8 billion in follow on investment, a SunShot syndicate portfolio would surely represent a healthy return to VC limited partners. In simple terms, SunShot says the private investment has been $18 for every $1 of their public investment. Let’s assume a conservative $3.6 billion in valuations (aggregate) and the return to a $100 million ‘fund’ would be quite impressive.

The success rate is proven by the SunShot experiment. Can the investment community look at solar, particularly very early stage, as a valley of opportunity instead of the proverbial valley of death. SunShot is doing its part to de-risk but we cannot expect that to last forever.

This is your SolarWakeup for November 11th, 2013

Solar should be on every school. The NFL thinks every football fan captured by the age of 13 has a cumulative lifetime value of $200,000. The same probably holds through for solar. NRDC and Mosaic recently rolled out solar on schools initiatives. I have owned solaronschools.com for the past 5 years, and I look forward to use it for a good cause!

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Yann