Editor’s note: This is the fourth interview in the #Solar100 Thought Leaders series. More interviews can be found on the #Solar100 page.
#Solar100’s Jigar Shah: The Kanye West of Solar Finance
As the Founder and CEO of SunEdison, Jigar Shah pioneered “no money down solar” and unlocked a multi-billion-dollar solar market. He has become one of the leading voices on the solar stage, holding the top spot on #Solar100 for months on end.
And ‘meek’ is probably the last adjective a person could use to describe him. In this interview, Jigar talked about how, “It is the top 5 solar companies who are always on a death wish” and SunEdison’s later actions that make a person ask, “What the hell?” Needless to say, Jigar has controversial opinions, and he’s not afraid to state them.
Both are incredibly accomplished, uniquely famous or infamous depending on whom you ask, and the impacts they have had on their respective fields are undeniable.
Investing in Solar & Clean Energy
Richard Matsui: When I think about Generate Capital, the analogy that comes to mind is: What SunEdison did for solar (in terms of riding the wave of cost of capital reduction), Generate is doing for the rest of clean energy. As Generate’s co-founder, is that how you think about Generate?
Jigar Shah: Absolutely. When you think about clean energy, there have been hundreds of technologies, but what you find is that the vast majority of them are not yet blessed by the capital market. Not like solar, at least.
And now, the question becomes: How do we get that blessing for other technologies, like waste-to-value and energy storage technologies? There are so many sectors in which these technologies exist and the entrepreneurs in those sectors are generally experts in technology, not experts in business models.
RM: Given that backdrop, I was surprised to hear Generate started financing solar again, albeit projects that are more on the fringe of acceptability like community solar and small C&I solar. What was the lightbulb moment or the insight that drove you to say, “Despite the relative maturity of solar, there are still some great opportunities here in solar”?
JS: Our criteria is always the same: Is there a deal that is worth funding because it is simply misunderstood by the marketplace?
I didn’t think the answer to that question was going to be affirmative in the solar space, because I just figured that there are so many investors. Eventually one of them would actually get it, right? But we are finding that there are sectors within solar that are just not being covered, such as solar for Real Estate Investment Trusts (REITs).
For REITs, their biggest problem is vacancy risk. They are already taking vacancy risk with their real estate. If their properties are empty, they do not also want to pay electricity bills for electricity that no one is using. So, they want someone like us to take the vacancy risk. Now if the building is empty, then we stop charging them for the power. And we figured out how to get comfortable with that.
RM: That’s fascinating. What makes Generate uniquely positioned to underwrite those risks?
JS: Our company is structured as a “C Corporation.” All our investors own a share of Generate. So, we really look like a company whose job it is to invest in these assets, then operate these assets, and try to get the most out of the assets over time.
You find that the vast majority of investors, typically in solar but also in other industries, are trying to make money by flipping assets. They buy assets at 7.5%, use the data tools from kWh Analytics to prove asset quality, then sell them to somebody else at 7.1% and then they make a profit on that .4%.
So, you can imagine if they do not think they can immediately sell those assets to the person who is paying 7.1%, then they might be stuck owning the project at 7.5%.
RM: So it’s a straight cost of capital arbitrage.
JS: Yes, whereas for us, we are not looking to flip our assets. Now, in the future we may end up finding people who want to buy them at a low discount rate. But right now, when we underwrite our deals, we’re saying, “If we acquire 100 of these projects, what are the odds that the portfolio will generate a very nice return for us?” If the answer is, “Pretty high,” then we think, “Great. We’ll invest in it. We’ll hold it for the foreseeable future.”
RM: That makes sense. When you look at solar today, what else is being mispriced? You had mentioned Community Solar, C&I, solar for REITs.
JS: With Community Solar, the problem is that everyone is so risk-averse that they are saying, “You need to have 100% of the off-take secured before we actually jump into financing.” And then on top of that, they are saying, “Wouldn’t it be great if you had Walmart and Target as the off-taker? That would make our lives super easy.”
But then in Minnesota, residential rates are 13 cents a kilowatt hour and Target wants to pay seven cents. So, you’re giving up almost half of the revenue, just to satisfy some bank and some tax equity investor. That makes no sense. Why not sign up residential customers? Further, why not sign up LMI (Low to Medium Income) people? Why not sign up churches and bodegas? The beauty of Community Solar is if someone stops paying, you can immediately remove them from the stack and replace them with someone else.
It’s basically another vacancy risk calculation—what is the chance that you can replace somebody fast enough so that you don’t have unsold power for a long time?
RM: There’s a vibrant debate on whether CCAs or the merchant tail are being mispriced. Any thoughts?
JS: I don’t think they are being mispriced. I think that CCAs definitely have a lot of risk associated with them. If you are in Marin County and have been around for a long time, you might think, “Maybe I’m being mispriced because Marin County has shown a dedication to CCA.” The same is true with Sonoma.
But if you are a new CCA, it is entirely possible that it gets mismanaged in the first two years and the county says, “We are getting out of this—these guys don’t know what they’re doing, and they’re screwing around with everyone’s electricity bills.” And if it gets unwound, which they have the right to do, then what happens to your CCA contract?
From this perspective, I don’t think that CCAs are mispriced. If you think about the people who are paying the absolute lowest possible interest rate for utility scale assets, CCAs have some real risk. In fact, utilities have real risk.
For instance, if you think about Duke Energy over the last three years, Duke has taken debt to pay their dividends because they do not have enough cash flow for operations. Some of these utility companies have been showing a lot of underlying weaknesses. And that is a big deal.
So, when you are a rating agency like Moody’s or a buyer like Prudential, you want to know, “What is the likelihood I’m going to get paid back over twenty-five years?”
Opportunities in Solar & The “Top Five Companies Who are Always on a Death Wish”
RM: What under-the-radar solar or storage startup are you most bullish on?
JS: In solar, I’m most bullish on the small commercial market. I think that there are a tremendous number of people that can host 250 kW projects that we can very cost effectively install and maintain and compete favorably with their electricity rates. 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.
On the storage side, I think ‘resiliency’ is a buzzword we all use but do not actually understand what it means.
RM: Or how to value it.
JS: Fundamentally, there are a lot of people who do value it. When I talk to county administrators, they say, “Don’t get me wrong, solar is good. And I love the fact that we save 20% on the PPA, but that 20% is not a lot of money. Sure, you’re saving me $7.8 million over 20 years, which is great. But that’s only $390,000 a year, and my school budget alone is $100 million a year. So, you’re saving me $390,000 a year on $100 million. Now if I had batteries on all those solar projects then all of those schools can also serve as emergency shelters. In that case, I am more willing to trade some of the $390,000 of savings you are promising me for batteries.”
If I have a lot of battery storage capacity in there with less solar savings and I get all this resiliency benefit, that’s a good trade.
I think that solar people need to move away from savings and really start to focus on value to the customer, because the customer values a lot of things beyond dollars.
RM: Fascinating. Though if developers shouldn’t sell on savings, I doubt they should sell on resilience either, right?
JS: I don’t think leading developers are selling resilience—they are selling professionalism. They are saying, “Look, we’re better capitalized, we’re bonded, and when we have a contract with you, we will immediately construct this project.” I think that people are willing to pay a premium for quality and I also think that they are willing to pay a premium for resiliency.
RM: What is the next publicly traded solar company going to look like? Is it going to be something disruptive, like someone who has a killer residential storage technology and a new value proposition, or will it look more like an incremental iteration of business models we have seen before, like Cypress Creek?
JS: It is always what we have seen before. I have been in the solar energy industry since 1995—so 22 years. It has always been the case that the companies ranked 6 through 20 in the country are solidly profitable because they are really good business people, they never lose money, they give generously to their community and their local SEIA chapters, etc.
It is the top 5 solar companies who are always on a death wish.
Think back to AstroPower in the 90s. They made modules very profitably using discarded test wafers. But then they said, “We want to be much bigger.” And then, they bankrupted themselves.
The same thing is true with SolarCity. SolarCity is a really good model but then they said, “What if we spend $150m on marketing?” SolarCity never got that money back.
The same thing is true with a lot of other companies—they run on fumes in the tank and then you see that everyone wants to write about them because they are sort of a reality television show.
RM: I tell people a version of that same story: When you go to Solar Power International, look for the biggest booth at the conference. That is the company whose shares you need to sell short.
JS: Exactly. That is the company that is going out of business next year.
I do think that the solar industry has learned its lesson. When you look at Sunrun, a lot of people complain about the fact that Sunrun does not have a higher profile, that very few folks have met Lynn. But they are building a business. I think they are doing it the right way. They are not trying to hype themselves up. I think they are trying to be ‘slow and steady wins the race.’
Solar Financing & Optimizing a Project’s Capital Stack
RM: I’m a big believer that history has a lot to teach us. When we look at mature industries and how they finance assets, obviously the last “big idea” solar borrowed was the idea of YieldCos from the MLP industry, to mixed results. Is there another “big idea” that solar should consider borrowing?
JS: I think that the solar industry is intellectually dishonest about how they compare themselves to other industries.
For instance, solar companies often say, “We should be the same as REITs.” That is really dumb. Solar power plants and wind power plants depreciate in value. At the end of 20, 30, 40, 50 years, you really do need to replace all of that asset. Real estate is not the same. Yes, you have to refresh the building and put in a new lobby every once in a while. But fundamentally, the building has value and you will have that for a really long time. And that distinction matters.
I think that we have to be very honest with ourselves about what it is that we are doing. We are probably more like auto finance and less like real estate finance. But even in auto finance you find that, automobiles are much easier to repossess because they are already on wheels.
I think our business structure in the solar contractor community is pretty much the same as that of the roofing, plumbing, or electrician industry. There are very few dominant players in that space. The largest roofers in the United States have 1% market share. It is a very fragmented business. Success is about building trust locally in the community, and getting people to trust you with their roof, plumbing, or electrical work.
I think our business is a lot like that, where it is really about trust, bonding, and training. Everyone wants us to be a tech company, but we are not. We are really much more of a construction/service company.
RM: Yeah, SolarCity was obviously the biggest contrarian bet there. Back in 2007, there was a broad consensus that given that HVAC and other contractor trades are naturally fragmented, why would solar be different? Well, if there’s a multi-year period where VCs and the stock markets are willing give you, like you said, $150m to burn on marketing, you absolutely can defy the economic laws of gravity, but it lasts for only so long.
JS: Well and SunEdison did the same thing, right? That was after we sold it, but SunEdison borrowed $2 billion from people who thought they were going places, and then squandered it by overpaying for assets. The price that they paid for the Invenergy assets was like 25% more than the second bidder.
JS: Right? And you’re like, “What the hell?” But they were like, “Oh, our stock price just keeps going up.” Then, of course, eventually it stopped.
RM: As we think about the continued reduction in the cost of capital for solar, if it’s not YieldCos, then what will continue to drive down that cost?
JS: In general, I don’t really believe in reducing the cost of capital. I certainly understand that we should reduce risk. The thing that I find annoying is that there’s an extraordinary amount of opportunity and instead of focusing on value equation, everyone is focused on the cost of capital.
Now, of course, when it comes to optimizing a project’s capital stack, there’s space for the Solar Revenue Put product that you’re providing. It’s inevitable. But really, it’s the data that you are providing, that historical certainty that solar just works.
I think there are people who really want to own these kinds of assets. When we sold sPower to AES and AIMCo, we saw that these pension funds really want to own these assets. At the end of the day, that is the industry’s cost of capital: The rate of return that the insurance industry and pension funds are willing to accept for these assets.
What Data Can Solve for Our Industry
RM: As you know, we are building the “Experian” or “CoreLogic” for the solar industry, and while we are not yet at 99% of our asset class, we are now at 10-20% and growing. What are the most interesting problems in our industry you think we should be tackling as we grow?
JS: I think there is a real blind spot in the industry when it comes to Actual vs Projected energy generation, and you guys are tackling that. There should be a designation for solar projects, two years after they’re built, to fact-check the Projected numbers. Yes, developers tend to stretch the truth, that’s fine. But that should be corrected with Actuals, which would place greater reward on proper care for the operating assets. Once you solve that, then that will lead to far more change, specifically from management. Management teams today are all focused on cost reduction as opposed to increasing asset value.
So that’s one piece. And then the second piece is I think that there are a lot of projects that are just underperforming for a variety of reasons, from bad engineering to uneven module degradation. And I do think that there is value in buying up those projects and fixing them.
RM: I can think of a few firms that are actively pursuing that thesis.
JS: Yes, I think that that’s right. There is room for specialists that buy distressed assets, fix them up, and sell them off.
RM: We have seen an interesting problem where if a sponsor is buying and fixing up assets, they still need to convince the financiers that this asset is indeed fixed. And so, there is an opportunity for our insurer partners to insure that. By putting up a big investment-grade balance sheet that guarantees a certain level of energy production, a sponsor can say, “We can guarantee this asset is going to produce that amount of energy, which increases the asset’s value.”
JS: Right. I think that’s such a great product you’ve got there.
What’s Next for Solar?
RM: What is your biggest non-consensus bet for 2018?
JS: I think the U.S. market is going to grow substantially in 2018, and I think there are a lot of people who are down on the U.S. market right now. But, I think the U.S. solar market will be on a growth tear for at least the next 5 years.
RM: What’s the growth driver that people are underestimating? Because I agree with you, there’s a strong consensus that 2018 is going to be a rough year.
JS: There’s just persistent lack of understanding about how much business model innovation happens in the solar industry. I think my spreadsheet from 2008 is the only spreadsheet I know of that accurately forecasted where solar deployment numbers actually ended up. That’s because I believe in our solar developers to figure out how to grow the market.
RM: I built a similar model for McKinsey back in 2007. I think I was off by an order of magnitude.
JS: Yes, I think everyone, including Greenpeace, was too conservative. And I think the reason is that everyone bets against us. They’ll say, “Oh, you’ve already used up the available rooftops.” But there are a ton of open parking lots. Or, “Oh, you’ve used up all the FICO score customers above 720.” There are a lot of people below 720 that are worth chasing.
There is always another market for us to go after, like with the utility-scale project. Okay you’ve used up the RPS, but there are tons of rural electric co-ops and municipal utilities who want to do solar for their residents. The naysaying forecasters consistently underestimate the innovation in the industry, but solar is always finding more opportunity.
Interview conducted by Richard Matsui, KWh Analytics