In this episode of energywakeup I am joined by Jon Abe the CEO of SunWealth. Sunwealth is a solar start up based in Boston Massachusetts focused on financing small commercial and nonprofit solar projects. The innovation at sunwealth is getting new capital into solar by educating them about the small C&I market.
In our conversation Jon tells you about his work to grow a partner network for scaling and partnering with a corporate investor to fund the business. Jon is a solar veteran that made the jump to a startup and is looking to do great things. This podcast was recorded in front of a live audience at SolarWakeup Live Boston.
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YANN: We’ve got John Abe, he’s CEO at Sun wealth and before I tell you a little bit about his background. I wanted to have John on and have him speak to you, because I believe in the market that he’s serving. I spent many years focused on C and I and it’s an incredibly frustrating, difficult, low margin business and you know, John is tackling it and I think he’s tackling in a unique way and that’s why we want to have him speak. But as by way of background he spent a few years at a Massachusetts state agency, which we’re not going to- we’re going to get into that a little bit and he was also a vice president NEX Amp before starting sun wealth.
Well, we’re going to start off the conversation because he told me a really interesting story about evergreen, and I almost asked the senator about, the history of manufacturing in Massachusetts but it’s timely, right? We have this conversation about 201 happening and the role of manufacturing or module assembly in the US, versus the rest of the jobs that are created in the solar market. So John, welcome to solo wake up live why don’t we– why don’t you tell that story so that people get a little bit of the background.
ABE: Sure, well John thank you for having me and of course I’m not tackling C&I all my own but with great partners and with a great team and we’ll get more into that. So, everyone knows how Obama has Solyndra, but most people don’t know that Romney had evergreen. And I worked at the Massey’s before was called the Massachusetts technology collaborative Renewable Energy Trust. And one of the things that we were tasked with there was making investments in creating jobs in the solar industry. And so, it was at that time when the state threw in large part the M. T. C Renewable Energy Trust made a large investment to help fund and largely subsidized a manufacturing plant for evergreen, in Massachusetts.
And so, what was interesting enough is there was a lot of debate at the staff level, in that recommendation and I think the prevailing wisdom at the time was that. It made a lot of sense for Evergreen to have their R&D facility here in Massachusetts but that again this is just the staff level. That it probably did not make sense for them to have a manufacturing plant but hence you know the political winds prevail and of course we had Evergreen and the state funded manufacturing plant.
YANN: So, the moral of the story is the 15,000 jobs and solar in Massachusetts came through the market, but not the manufacturing?
ABE: Yes, at least at that stage.
YANN: Well, I don’t know what that mean.
ABE: Yeah.
YANN: Module manufacturing we’re going to separate–
ABE: The first 10,000 jobs here in Massachusetts were for the most part downstream solar jobs.
YANN: Absolutely. So, tell us a little bit about Sun wealth and your focus on C&I in particular the–you focus on the small side of S&I and you’ve got some unique financing structures. But startup, give us the background of how you got to starting Sun wealth and what mission you’re trying to solve.
ABE: And so, as some of you know I used to work at NEX Amp and NEX Amp, basically started as a residential small C&I installer. Went to more of a C&I installer but really overnight went to a small utility scale. Develop build own operate model, and I really love the C&I business, I loved it when I was that NEX Amp I loved it, when I was working at Renewable Energy Trust, it was the champions are not-for-profits, local businesses and municipalities that really create the foundation for what Solar is today. Not just in Massachusetts but everywhere.
And, I was in a boardroom doing what is about a million dollar, closing C&I deal and there were 27 file folders. There were, no three attorneys in bow ties walking around, one of them might have been an accountant. There was a really nice lunch that ultimately, we were paying for and you know a couple investors would come in and do their signatures and leave. And, we got the bill on that and it was probably a hundred and thirty, hundred and forty thousand dollars and third party legal consulting and accounting fees for that deal.
Then you know fast forward a whole whopping two and a half months and you’re in almost an identical room, but with the same law firms I think they’re just on other sides of the deal, and the exact same deal structure and they still charge 120 thousand dollars on everything. And at that time, [inaudible 00:05:41] use the chairman of panel clause, well you looked that meaningless, “You know John there’s a better way of doing this,” and I said, “Yeah, absolutely,” and so we’ve started and founded sun wealth on the premise that you could do a lot better around C&I deals or financing smaller solar projects in general. And so, what we did was, base that on the premise that with experience, standardization, of all the documentation, and a little bit of technology. You can work with developers to help them provide PPA’s to their small C&I projects and you can create a new source of capital that’s going to reduce the transaction costs and believe in the standardized method, especially after you do a couple deals with them.
YANN: But, you weren’t further right? The standardization isn’t– that’s not novel right? Sap C and now there’s sap C 3.0 pace, you know some of these things have been around but you also merged crowd funding, kind of crowd sourcing whatever the term is that keeps you out of legal trouble. You also merge that into it you know. Why did you do that and what has that–what benefit has that created for the structure?
ABE: Yeah and so, when we looked at the traditional sources of financing for solar projects, whether it’s bundles of residential, assets or larger utility scale projects or even at the high end of C&I, where you have investment grade credits. There are a number of boxes that they just have to check to do those deals. And there’s a number of fixed costs that goes into those deals and there’s deal size limitations. So for example, you know we wanted to work with middle market local installers, to let them build and operate these projects and talk to XYZ institution, they said, sorry we can’t underwrite that installer. That makes no sense! Some of the best projects that have been installed across the state have been done by qualified installers that Wall Street would never underwrite as an installer.
YANN: Because of their bank ability?
ABE: Because of a perceived Bank ability. And you know I’ve seen, other companies that are much larger and check the box on bank ability, build some really crappy projects that we would never underwrite. That’s unlawful.
YANN: I think we all have names to be redacted.
ABE: So, a second thing that they might not under write is actually the credit of the off taker in the PP A’s and I’ll give you a couple examples. Where typically they’re looking for a bundle of residential projects and they’re underwriting a FICO score of 740 and above or something like that or they’re looking for a very large C&I project or utility-scale project that has a contract with Google or Apple and they’re underwriting that credit and that’s being great. What they might not under write is, I’ll give you an example the Walden Woods project where we couple solar projects with. So, this is a not-for-profit that was founded by Don Henley 25 years ago, because condo developers were about to buy and develop the land around Walden Pond State Park.
So, he bought it with a couple other people and they basically funded it but you know what’s worth probably tens or hundreds of millions of dollars with the property and endowed it, you know to basically do mission work, similar to Thoreau. And what they have now is, they have a center there, they have a library, that actually uses a lot of electricity because it houses some of the original Thoreau works, and it’s dramatically sealed. They have, let’s see over a 25-year operating history. They have a huge endowment relative to the size of their and budget and they own a ton of assets. And so by any logical underwriting process, their credit is good, and it’s good for not just the 10-year PP A or 20-year PP A but probably for generations to come. And that is a credit that Wall Street would not underwrite.
YANN: I mean credits, a bigger story right? Because there’s the credit that won’t default but then there’s also the credit that you won’t foreclose and maybe that you– because a lot of pace lenders for example won’t do deals with churches because who wants to foreclose a church? And you know, but if you don’t have the credit, you know you and I could make a personal business decision and say, well that makes sense. But you still have to get the lender to– unless you’re going to just do unleveled deals throughout, you know how do you solve that piece?
ABE: So, how do we get the lender comfortable–
YANN: With your portfolio?
ABE: With our portfolio? So, there’s a couple ways we do that. So, the first thing we do– the first underwriting criteria we have, is that our PP A provides clear, long-term savings to our customers. So, you know people come to us and say, well you know they’re willing to pay a 13 cents and I think they’re avoided cost this, you know about 13 cents and I say well you know you’re actually including demand charges and calculating their per kilowatt hours probably closer to 10 like, let’s get them to 8 cents a kilowatt hour, we’re not going to underwrite this project.
So, operational savings is fundamental to every deal we do. Then we do your standard credit check, we review financials and then we ask this question. You know, has this business or organization or government entity been around for a generation and do they provide a product or service that’s going to enable them to be around for a generation or more? The next criteria look at is geography, in terms of their replacement value in the event, you know they can’t pay their bill somebody else can. Give in geography or building function and based on all those criteria, we get our debt to invest in the project. They want to see it, but it’s not just the data, you have to tell a longer-term story about it.
YANN: Are you going to traditional community banks, banks for your leverage or are you going into a different direction?
ABE: So we can, but let me tell you a little bit about our investor community. So, we raise tax equity and solar bonds directly from our community investors. And I wouldn’t say we’re crowd sourcing it, but it’s really as community sourcing it. We’re building a community of accredited investors, that either have the– much smaller percentage have the ability to invest in our tax equity products or as most or a larger number have the ability to invest in our solar bonds. And they are a combination of high net worth individuals, trusts, small institutions, wealth managers that believe in what we’re doing and our product and you know we’ve been working with them for years now to get them to funnel their client money into projects.
YANN: And the– so how does that look from a fund raising, but also from a project finance perspective, tax equity investors, K Ones and then the bonds is that equity or is that debt structures with interest coupons?
ABE: Yes, so technically to get into the details, we typically back lever our deals and so they have a membership interest in one of our LL C’s and they get a k1 as well, with interest–
YANN: So the solar bonds are actual equity investor?
ABE: Correct.
YANN: Understood. So, let’s jump over to the other side which is, you did an interesting corporate deal you know you what you– maybe you raise some seed money but you did a corporate deal with panel call. Describe why you did that, how did you do it? But also what were what was the decision-making process in terms of, does this make sense for us and this is what we would get in return for doing that?
ABE: Sure, and so from an early stage, what we wanted to do was assemble a board of directors and key investors that understands what we’re trying to do and have deep expertise in the component of what we’re doing. So, if you look on the project side, we wanted someone with market expertise. We wanted someone with technical expertise and we wanted someone with expertise on the built environment as well. So, when you look at the technical expertise and our desire to be in that space, panel claw is a perfect fit from our perspective. It was a real home run to get panel claw as a strategic investor.
There’s a couple reasons for that, when we work with developers and we try to be as agnostic as possible about equipment, choices, it doesn’t really make sense to get a panel company to be our strategic technical expert in that space. Because well for obvious reasons, there’s so many of them, it’s commoditized. It didn’t make sense for us to get an inverter company to be our technical strategic partner, for similar reasons though, perhaps not as extreme. And what really made sense from our perspective was to get someone who specialized in the same space we do.
Basically, flattop commercial, rooftop systems though we do pitchers and we do aggregations of low to moderate income residential and we have some ground mounts but they really focus in that area and understand it. They have 40% market share and when we talk to a developer that in the rare instance doesn’t know panel Claw, it’s still a plus that panel Claw is an investor in our company, as a partner.
YANN: But, I mean a) how hard is it to raise business model, venture investment and you know where else were you trying to get capital because there’s other people that are you know similar ideas right? I spent three years doing a pace PP A startup and, let’s just say I want three years of my life back[laughter], but you know leading question but I mean, how complicated is it to do what you did?
ABE: It is really hard. I think the interview process with panel Claw started over ten years ago and that’s when I was stuck into a cube when Next Amp and Panel Claw are bootstrapping in the same building next to Costa.
YANN: How do you scale from here you know, I mean maybe that’s a follow-on to how hard is it to get to get venture money. But how do you scale your business, where do you scale and to match on to the conversation I had with Daniel. What how does energy storage maybe help that?
ABE: And, I don’t be too coy about what I said about the relationship with panel Claws, because on the flip side our market, technical market investor is a company called Sky View. I don’t know if you’ve heard them. But they have one the largest that’s rack and rack positions in the entire country. And that was more of a deliberative four or five month discussion to get them on board. But they’re a company that sees downstream solar every day and they understand the problems.
The first meeting was fairly straightforward and then they just needed to understand the business model and why it was the best for trying to do, what we’re trying to do. And, the great thing about having them on board is that, they had some good ideas on how we would tweak to make things better. Now, in terms of scaling this business, I think you know we’re essentially a two sided market or a bridge between projects and investors. And on the project side I think it’s evident to a lot of people in this room but there’s a huge untapped opportunity around C&I, and it’s just a matter of cultivating and cost-effectively bringing those projects to the point they’re shovel-ready.
On the investor side, what we’re doing is we’re creating a new source of capital for solar. And it is challenging to do, but where we started was you know with a community our first project we did we had nine investors and there was 100% tax equity basically investment. And from there we now a community of 80 investors, but what has changed since then in the last two-and-a-half years, well we went from having a number of individuals to now we have several institutional investors. We have several foundations that invested in us and we have a number of wealth managers as well that are funneling clients to us as well. And then, the other thing that’s changes obviously, the transaction size has gone from 25– our average transaction size, has gone from 25,000 to over 50,000 per transaction.
YANN: And I mean, what kind of deals are you looking for, how many states are you active in, you know how many projects have you completed?
ABE: So, let’s see, so we’ve completed almost 30 projects and we have completed projects in Vermont, Massachusetts, Connecticut, New York State, Delaware, Pennsylvania, Maryland and DC. We have a California project in the pipeline, with our trusted development partner central plan as well and so we do see ourselves as relatively geographically agnostic. And, our goal is to really find projects that basically pencil have good IRS, not only do they have to have a good– a decent IRR for us to do the deal but in addition to that we have to make sure that the PP A is providing a value to the host and that we can underwrite the host and our development partner as well.
YANN: And where are you getting your deal flow from?
ABE: So, when we look at the market there are probably no more than a hundred to two hundred developers across the country that would make really good partners for us. So, at least initially we are talking to people one at a time and we’re trying to source a good partner, you know we have a great partner in Buffalo. We have a great partner in the Boston area we have a couple partners in the Boston area that we work with. One out in western mass, one in Connecticut, one in Vermont and what we are planning to do once we really want to grow our project pipeline as well, I mean we do have an investor that has 40% market share in the commercial rooftop racking system and deals with a hundreds of customers a number of which would be ideal partners with us and we haven’t even tapped into that faucet yet.
YANN: So, from a business perspective right I mean you know, I think we all recognize how difficult it is that you do you know as you’re talking about different geographies all I can think of is there’s so much regulatory and so many regulatory things that I don’t know about, that I would have for large projects hired a lawyer for, which sort of part of your original plan of not doing, so that you can routinely standardize. But, we live in a in an energy market where there are 200 markets it’s not one country it’s 200-300 energy–
ABE: At least.
YANN: At least, how do you keep your margin up, so that you can drive value back to your shareholders?
ABE: So, this is where tactically how we’ve built the team and basically when you talk about, well standardization is great but it only take you so far. And so, in addition to being you know, my role at next amp, I was also in charge of regulatory affairs. So, I have a decent amount of knowledge on each of the markets, the key ones, we’re not trying to do every market but, the ones we do you know the ten markets we have a pretty good understanding institutionalized within us.
One of my partners Omar, he comes from both Wall Street where he worked on fixed income, he worked at Cohn Reznick Capital Markets, where he structured deals and then he was CFO for green Scots as well. So, he brings not just deal experience and transaction experience, but he also understands four or five markets really, really well. Our other partner Ryan comes from the social impact investing space. So, he understands our investing community really well and the regulations around that as well. So, we focused on building the right team, not necessarily in an entrepreneurial way but in very functional way in order to get the job done, that we needed to do and to do it very cost-effectively.
YANN: So, from an exit standpoint, do you see kind of in a few years are you the mosaic- and I use mosaic in a broad term of residential loan provider- are you the mosaic of the C&I market, providing an ability for whether I’m a small you know maybe I’m a Sun Power dealer and all of a sudden the house– I install solar in a house and the guy owns, you know the family owns some business and I as a residential install all of a sudden find myself with a hundred kW and I need an investing source. And are you the provider of that capital to solar companies around the country?
ABE: Yes, recognizing that the developers as far as we work with, they are likely going to be small or medium sized players but we will pre qualify them.
YANN: Okay, and are there instances where someone would bring you a project, that you say, Listen, this isn’t your expertise but we have someone in that area that you can work with?
ABE: To help them with the development of the deal?
YANN: Sure.
ABE: Yes, that might be the case. However the C&I projects we tend to focus on, aren’t development intensive and so you know a lot of our partners they might not have developed a hundred kilowatt project before on their own and they but they’re used to selling them and building them. We are glad to work with them through the first couple ones to share our recipe with them, so that they can do it themselves and on the next deal, develop it on their own and bring it to us for financing.
YANN: What’s the best advice you’ve gotten in starting this business?
ABE: The best advice I’ve got on this, was that because we’re raising money and we’re raising money from a new source of capital that our business wasn’t going to grow at the speed of technology or how fast we could integrate and update our advancement platform that our business is going to grow at the speed of trust.
YANN: It’s good advice. What advice would you give to your competitor? Someone in this room is going to knock you off all point of this conversation.
ABE: So you know I think, we learned a lot from– before mosaic was a residential lending platform–
YANN: It was a crowd funding company.
ABE: It was a crowd funding company for C&I projects. So, we learned a lot from them and I think that what we’ve learned and this might change and maybe someone’s going to disagree with us and meet us in the middle, is that if you want to do what we’re doing in terms of accelerating the flow of capital and to undeserved commercial solar projects, you got to do it from the ground up, it’s not a top-down type of business.
YANN: Right, so you’ve got a regulatory background and we had Senator Boncore earlier, and we have Michael Judge, coming up tell Senator Boncore, why you need the net metering caps raised and ask Michael a question, no. You’re the regulatory guy.
ABE: That’s right, so you know one of the things I promised my investors being a former regulatory guy and knowing how wonky and times lucky that can be is, I wouldn’t do a lot of advocacy as CEO Son Watt Lee son for the first couple years. However, I’m going to take this opportunity to say a couple things. So, you know we need the nebular in caps and it in Massachusetts because, you have a lot of jobs and you have a lot of projects that are tied up in National Grid and a couple other service territories that won’t move forward until they’re done. And it’s not just having smart on but we need those to kind of fill the gap between now and that.
And so, if you’re interested in you know essentially reducing the cost of this business over time, one of the things you have to get rid of and smart program is going to help do that is, staying the course and smoothing over these stops and starts that we experience in the market because it’s really inefficient. It does spawn a little bit of creativity and ingenuity, but at the end of the day what it really does is it really hurts, local installation jobs across the board.
So, then what I would ask Michael is, to provide more transparency around and be more actively involved in developing some of the DPU related rules that need to be put in place before you know somewhat as a financier can really understand and start to underwrite the smart program. So, this has to do with the details around, where the utility meter is going to go? And how long is it going to take for that meter to be installed? And what happens if it doesn’t get installed in time? And what is really the definition of a bill credit in the smart program? And where is that going to show? And how does that differ from a net metering credit? And how are these programs going to interact?
I think they’ve done a great job, and they’ve passed the ball over the DPU, they still have to go through the option process as well but I’m confident that they’re going to get that done. But the DPU to me is a bit of a black hole in terms of what they’re going to do and how they’re going to ultimately carry the ball across the finish line and get this implemented.
YANN: Sure, before we take some questions, where is Sun wealth in two years?
ABE: So, Sun wealth in two years is based out of Davis Square and Somerville mass and–
JOHN: Is that close to your house?
ABE: It’s within four miles in my house yeah, it’s mile walk and two t-stops some it’s great. And we are– we basically in two years we have funded including our pipeline close to 100 million dollars of deals and these include commercial and seeing ideals that range from projects with– we just finished two fire departments in upstate New York to small municipalities. We did a water treatment plan people are like, wow! That must’ve been a big project 170 kilowatts cover the entire load for that water treatment plan. We continue to grow our portfolio of houses of worship we’re now at about seven that’s probably in the 20s or 30s by then, we have a great relationship with Boston Properties, where they’ve gotten tired of issuing RFPs for essentially 100, 150 kilowatt projects and as long as we can meet their numbers they’ll continue to work with us, they have some great tenants.
We just finished the project on the Clarke Shoes headquarters on 128, using Panel Claw racking system out there. And, we are also starting to do what we call solar access. So, you know when you dig a little deeper the undeserved commercial solar market, you really have an undeserved solar market. That if you spend a little time you can figure out ways to finance. So, we’re doing a lot of low to moderate income homeowners and the way we are doing it, is that we are leasing their roofs, we’re putting a separate meter on for the solar project and we are giving them a percentage of the net metering credits generated by the project.
So, it simplifies the underwriting process, it gives them a guaranteed benefit in the project. Probably much better than they would get through a standard power purchase agreement and then we aggregate all the remaining net metering credits and we sell it to a credit worthy entities, such as the city of Somerville or someone like that. So, it’s reverse community solar almost, where we’ll have 25 projects and then a single off taker for all the power from those deals.
YANN: Interesting, so I appreciate your time John, just so that everyone knows, because I do talk to a lot of people in the space. The reason I wanted John to tell the story is, even though he’s targeting the C&I space, he might have the best terms on tax equity in the entire solar space and that includes the really large-scale developers and I’m hearing– this is what I’m hearing directly from tax equity investors. So, you know just because the market says one thing, doesn’t mean that if you have a good idea you can’t execute in a different way. A lot of people don’t achieve it, but at the end of the day you have and for that congratulations.
ABE: Thank you everyone.
[Applause]
