Solar investing across all market segments: An interview with Marc Pangburn of Hannon Armstrong

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pv magazine: So, for our readers, can you give me an overview of Hannon Armstrong’s participation in the renewable energy, energy storage, and energy efficiency spaces, and what it is that you do?

Marc Pangburn: Hannon Armstrong has been in business for 38 years, and we went public six years ago. We focus on three asset classes: behind-the-meter, grid-connected, and other sustainable infrastructure investments. Those are primarily composed of energy efficiency, renewables and resiliency plays, including water and transmission lines. We are a financial investor with two core aspects to our strategy I would highlight for your readers. One is that we invest in climate change solutions – and we’re proud to be the first U.S. public company solely dedicated to this kind of investment approach. Every investment we make has some sort of carbon offset, sustainability, or resiliency play.

The second is that we have a vendor finance model. I always like to tell people we seek partners, not projects. We build relationships with top-tier clients and then provide any sort of financial products they need within our mandate. That could be common equity, preferred equity, senior debt, subordinated debt, or even somewhat esoteric products like our land investments. We’ve been successful because we’ve been able to establish trusted and programmatic relationships with the premier renewable energy developers and engineering companies, helping them grow and allowing us to earn more of business over time. That approach provides the scale and higher-quality investments for our clients as well as our shareholders.

The press release we issued at ACORE REFF-Wall Street about a follow-on investment with SunPower is an excellent example of our partners, not projects approach. We initiated a relationship with SunPower five and a half years ago, and since then have funded a range of diverse projects under all of their major business lines and employing varied financial products. That culminated in the creation of a joint venture called Sunstrong that occurred in the fourth quarter of last year. And then we have been expanding that joint venture through financing both their projects and third-party investments as well.

 

pv magazine: Very nice. So, in doing this and providing equity, debt – like you said, whatever financing solutions that fit – this makes you very different than other capital providers. Why this unique approach?

Pangburn: At the risk of belaboring the point, I really do think it comes back to our experienced team and unique vendor finance approach. We have multiple market niches that we compete in, and we have competitors in all of them. However, we don’t have very many competitors that are across all our market niches. Also, many of our competitors are transactional and finance oriented, as opposed to Hannon Armstrong, where the focus is on the client and investing solely in climate change solutions. I believe that, combined with our permanent capital, differentiates us in the marketplace in a way that adds value for both our clients and our shareholders.

 

pv magazine: So, one of the other unique aspects to Hannon Armstrong is that you’re a Real Estate Investment Trust (REIT). REITs are something that’s been a sort of Holy Grail of solar investing. Everyone would like to set up a solar REIT, but it isn’t so easy. What does this mean for you as a finance provider?

Pangburn: We have observed the same thing about around the Holy Grail for solar REITs. One of the reasons we’re a REIT is not because of solar, but because of our energy efficiency investments.

We’re a REIT because of the diverse nature of our investments across the spectrum, not just solar generation. It’s primarily useful for tax efficiency, and it provides us the flexibility needed to achieve some of the goals that we talked earlier in delivering an array of financial products to serve our client needs. Beyond that, we manage the REIT and the REIT status internally.

As it relates to solar, we believe were the largest private landowner under solar products in the U.S. And that is a great example of something that we can provide: Very long-term low-cost financings to our clients. We’re able to do that because of our REIT status.

 

pv magazine: So another thing that I’ve noticed about Hannon Armstrong is that while a lot of capital providers for the solar industry seem to focus on large-scale solar, you guys have not shied away from distributed generation per the partnership with SunPower and a lot of the things that you’ve done. What are your thoughts about investing in renewable energy at the distributed scale versus the grid scale?

Pangburn: We like both utility-scale and distributed renewable energy across both our grid-connected and behind-the-meter asset classes. We have focused a lot behind-the-meter sector of late, and the primary driver for that is the locational value that’s embedded in these distributed assets. The wholesale cost of power is relatively compressed, and there are different views on what will happen in the future, but nevertheless, the cost to deliver that power is significantly higher.

I think it’s generally agreed upon notion that amount of infrastructure improvements that are necessary to continue to provide safe, clean and reliable power to consumers across the country is going to require major investment across the entire U.S. And that will only continue to drive up, or at least maintain the cost of fully delivered power. So that’s the synopsis of what that locational value of these distributed assets as we see them.

Again, I should stress that our land investments are almost exclusively under grid-scale solar assets – which is why we continue to support solar power in both asset classes. That being said, we tend to agree with the worldview first expressed by Isabelle Kocher of ENGIE, which our CEO, Jeff Eckel, references quite a bit. Very simply, it’s a belief that the future of energy is decarbonized, digitized, and decentralized.

 

pv magazine: You know when you talk about the locational value that distributed generation brings, the first thing that comes to my mind is that that value is often not reflected in current policies which take a rather blunt approach to valuing distributed generation, and what it brings. What does that mean for an investor? When you have something that has inherent value, but that isn’t necessarily reflected in current policies or pricing structures?

Pangburn: California is a great example where policy has not kept up with the market. You have many regulators, utilities and private sector participants in California looking at what the future of these markets is going to be, and we know that to date policy has not kept up with the amount of solar that’s been added in California.

That’s just one example of what’s coming across the U.S. We invest and make investments based on regulations that exist today. We do not take regulatory bets. If the regulation catches up to the market and continues to facilitate the market growth in the distributed energy sector, we will of course see that as a benefit to Hannon Armstrong – though not because it’s somehow unlocking the unrealized value in our current investments, but how it will enable us to continue to make investments and grow in the sector.

 

pv magazine: So, in terms of policy, I’ve noted that your firm while like many firms you’re not going to get into the weeds of arguing about a lot of policies, but you do take a position on pricing carbon. Can you tell me about that?

Pangburn: The range of enabling legislation that spurring renewable energy development and investment that have occurred or are occurring are important stepping-stones, but we think the goal for where policy should be is to start pricing that unrealized cost of carbon emissions at a federal level. The unrealized cost of thermal energy is something that is not taken into account today and could be the largest driver of sustainable investments in the future.

 

pv magazine: Anything that I haven’t asked you that you think is important for our readers to know about Hannon Armstrong and your participation, particularly in solar and storage?

Pangburn: Sure. When we went public in 2013, one of the reasons that we went public in the form that we did is to secure permanent capital and to expand our ability to invest in these renewable asset classes. As you know, that’s primarily comprised of wind and solar. Of late, we have focused a tremendous amount of efforts in the solar space and expanding that now to solar plus storage.

We’re already making investments in storage. We think that it adds incremental value to the underlying assets and projects themselves. And we have expanded from our IPO with effectively no solar investments at all to focusing on land and utility-scale debt and equity investments in traditional behind the meters C&I projects. Last month, we announced that we’re moving into the community solar space in force. And then, of course, we have our residential solar investments, which we have publicly announced with SunPower and Vivint, and we are continuing to grow across all of these segments.

 

Interview conducted by Christian Roselund