As CFO of AES Distributed Energy, Brian Cassutt is a leading player on one of the best teams in the DG game. And DG is, as we all know, a tough game. Some have described DG as “the worst of both worlds,” combining the regulatory complexity of utility-scale projects with deal sizes measured in MW instead of hundreds of MW.
Still, within this competitive business, Cassutt has managed to churn out a steady flow of projects. And like Kawhi, Cassutt is quick to credit any wins to his team—a team that has stuck together from their early startup days five years ago.
In this interview, Cassutt discusses lessons from AES’ acquisition, sustainable competitive advantages, and the importance of “making solar boring.”
2008 and the path to AES
Richard Matsui: What drew you into renewables and how did you begin working at AES?
Brian Cassutt: I was finishing up my MBA in 2008 when the financial crisis occurred. I lost my job in real estate development and there was not a plethora of opportunity in finance. I thought about the nature of renewable energy investment and realized that solar is an asset that requires heavy upfront investment followed by a payback that stretches over an extended period of time. I went into solar because I knew that there would be a heavy need for financial expertise as that asset class grew. It became my career goal to figure out everything I could about the best way to finance renewable energy.
I got my start while working at a residential solar company and volunteering at the Renewable Energy Industry Association (REIA) in New Mexico. REIA had a seat at the table negotiating a stipulation with PNM that would determine which programs would be put in place to assist PNM to meet the RPS in New Mexico. The pro-renewables team needed help with the numbers, so I got involved with analyzing the proposals. Before I knew it, I was leading negotiations on behalf of REIA and became President of organization in 2010. During that time, I had the opportunity to help form the industry in New Mexico through a variety of regulatory and legislative efforts. Through this work, I became familiar with and eventually and joined Solar Power Partners, which was soon acquired by NRG to become NRG’s entry point into the distributed solar business. Five years later I joined Main Street Power. History repeats itself, and soon after, AES acquired Main Street Power. I’ve been with AES Distributed Energy for 5 years now and became the CFO in 2018.
Building an enduring franchise in a competitive market
Richard Matsui: The DG market segment is notoriously challenging. Nearly all DG developers either stay lean and local, or exit the market by transitioning to developing large utility-scale projects. I think of AES Distributed Energy as a notable counterexample. It’s a team that’s been together for a while, churns out a steady flow of projects, and pushes the envelope with projects like that high profile solar-plus-storage project in Hawaii. Is there such a thing as a sustainable competitive advantage as a solar developer?
Brian Cassutt: Two things come to mind. One is a good team. That’s the most important requirement for a DG business. By nature, you are completing a large number of projects to maintain growth. Each project must obtain financing and it takes a team of dedicated professionals who know the industry and how to develop projects.
Brian Cassutt: The second thing is being able to keep up with the cost of development and construction, and that’s where it really helps to have a company with a balance sheet like AES.
Richard Matsui: That’s surprising. I regularly hear that construction debt is plentiful and is incredibly cheap. Why is it so important to have a strong corporate balance sheet?
Brian Cassutt: I agree that construction debt is readily available, but the process of drawing on it is more challenging for companies without a balance sheet than for organizations like ours that can lever at a larger scale. To stay competitive, it’s vital to be able to move quickly throughout the development process. We take a lot of pride in our ability to work with our partners from early stage development through COD.
Richard Matsui: That comment helps to put a puzzle piece together for me, helping to explain the SoCore / ENGIE matchup and NextEra’s continued strength in DG. Can you talk a bit more about AES and the acquisition of Main Street Power?
Brian Cassutt: AES is focused on accelerating a safer and greener energy future. The company has a strong foundation in energy development and asset operation across the technology spectrum and is driven by talented people throughout the organization. The acquisition of Main Street by AES back in 2015 showed me how a large organization like AES can acquire a small and agile business and then add to its capabilities, so it can reach its full potential. We combined AES’ global reach with AES DE’s knowledge of the DG markets and processes. AES looks at our business as a portfolio and allows our team to drive development.
Making solar boring; storage is next
Richard Matsui: I attended SEIA’s Finance & Tax Conference, where the CFO of a prominent DG solar developer said, “Solar finance is so boring now, it’s just rinse and repeat.” What is your reaction to that?
Brian Cassutt: Oh man, I wish I could get it to be boring.
Richard Matsui: That’s how I felt, too.
Brian Cassutt: Here are the challenges of distributed generation: You’re operating in multiple markets with different revenue and regulatory structures, which leads to different commercial structures. To be competitive and scale, you need to figure out how to bring all those asset types together into a similar process and under the umbrella of a limited number of financial structures. In other words, you’re not financing project by project—you’re creating umbrella facilities and deploying it over portfolios of assets, all of which have different characteristics. This approach has challenges related to legal diligence and the internal resource constraints needed to run down all the deliverables that go into project financing for so many different types of projects. You do need to make tough decisions: We’re not operating in 50 states. We’re operating in states where we’re the most competitive, and we’re able to scale our business model.
Richard Matsui: This reminds me of the conversation with Ed Feo, where he described the need for “plate discipline.” Between rapid regulatory changes and intense competitive pressure, operational complexity has become a fact of life. In DG, you might be working through the nuances of the SREC program in Illinois one day and VDER in New York the next. In utility-scale, there’s the market forces that ruthlessly grind down profit margins, accompanied by various flavors of merchant risk. It seems to be getting much tougher out there, not easier. As you continue to scale the business, what do you focus on improving?
Brian Cassutt: From a finance perspective, much of our day-to-day work is looking at the commercial structures of the markets that we’re in, assessing the risks of each of those commercial structures, and balancing our portfolios to achieve the most competitive pricing through diversification. We’re figuring out the best ways to stabilize cash flows and achieve economies of scale.
The strategic priority is making these financial investments as stable as possible. A great thing about solar is how predictable its performance typically is, and with the Solar Revenue Put, we can get close to “boring” by adding an investment-grade assurance of stable cashflows. The Put is rapidly becoming the market standard. Any opportunity we have to mitigate risk, we take. It allows us to drive down our cost of capital and be on the cutting edge of the financial market.
Richard Matsui: That’s exactly how we talk about the Put at kWh Analytics, that our job is to “make solar as boring as possible,” though it lacks a certain “oomph” that you might want out of a rallying cry. But that really is what our team spends its days trying to do.
Brian Cassutt: You just want to make the investments predictable.
Richard Matsui: Agreed. Let’s talk about the unpredictable side—let’s talk about storage. The Lawai solar-plus-storage project grabbed a lot of headlines, supplying 10% of Kauai’s needs at just 11 cents per kilowatt hour. I’m from Hawaii myself, so I’m personally fascinated. From a finance perspective, what was interesting about doing this deal?
Brian Cassutt: There is more complexity in financing a technology like storage, as it brings new variables into the equation. But at the end of the day, we’re still financing after-tax cash flow. The heaviest lift, even on the financing side, is actually handled by the engineers.
The real challenge is explaining to our lenders, investors, and IE why it’s going to work the way we say it’s going to work and cost what we say it will cost. Because so many of the commercial questions about storage are technical in nature, I rely more heavily on engineering expertise in everyday conversations with investors than the finance team does typically. The full integration of solar power with battery-based energy storage turns intermittent renewable generation into safe, reliable and high-quality power. It allows for solar generation to supply the grid while charging the battery system, dispatches power stored in the battery system to the grid during peak demand periods and can dispatch solar and battery power simultaneously to answer spikes in demand. Our engineers did a remarkable job designing an innovative solution for Kaua’i Island Utility Collective, and they were able to explain it well and get sign-off from our independent engineer. I certainly wasn’t a bystander in the financing, but I did find that coordinating conversations between our engineers and investors was an important part of the process.
Richard Matsui: This is probably an oversimplification, though my understanding is that from the structuring standpoint, that solar-plus-storage is substantially the same as standalone solar deals. Is that right?
Brian Cassutt: Yes. In the case of the Lawai Project, we’re shifting a delivery of energy to meet Kauai’s peak demand profile, but at the end of the day, we’re selling kilowatt hours under PPAs and it’s being financed with tax equity and debt. Once the numbers are signed off on in an IE report, then it doesn’t look too dissimilar.
Richard Matsui: A smart storage investor once told me two gutsy predictions that I’d like to hear your thoughts on. One, that pure-play storage assets will be financed with 100% equity and zero debt. The theory there is that it will be impossible for lenders to underwrite these cashflows because of the multitude of current and future revenue streams that an equity investor envisions, and ultimately wants the operational flexibility to pursue. Second, that the long-term cost of equity for storage will be cheaper than the cost of equity for solar. The theory there is that when you think about cellphones and EVs, that batteries are actually a mature technology, relative to solar. What do you think?
Brian Cassutt: Both predictions are fascinating. On the first, my impression is that if equity can underwrite the value, then debt will find a way to underwrite at least a portion of it. The fact of the matter is, whether through debt or equity, you’re investing in a project. The only difference between debt and equity is that debt gets paid first. If equity is comfortable that it’s going to return 11%, then debt may be able to get comfortable that the asset will return at least 6%, and that’s the basis for your debt/equity mix.
On the second, I don’t necessarily agree that the cost of equity could get cheaper for storage than solar, but I hope he’s right. Equity costs can only go so low, there will always need to be a premium over the risk-free rate to account for commercial risk and technology performance. , I would bet on continued maturation of the solar industry and a corresponding reduction in the spread between our equity cost of capital and the risk-free rate, but at this point we are likely talking about very small changes I don’t see why investments in stand-alone storage would result in a further reduction to that spread.
Richard Matsui: Do you have a non-consensus bet for the upcoming year?
Brian Cassutt: This is perhaps a longer-term trend prediction, but it’s my belief that as the ITC recapture period expires on a greater number of assets, and as the ITC becomes a smaller proportion of value, a market for used equipment will develop in a way that will provide liquidity and potentially allow for more diverse commercial structures.