Thought leadership and opinions

Why Diversify? It Reduces Our Risk

Clearway Energy announced today that it will significantly reduce its quarterly dividend “to proactively maintain balance sheet and capital allocation flexibility during this period of uncertainty with one of Clearway’s largest customers.”

The customer in question is PG&E, which declared bankruptcy on January 29. The uncertainty is regarding the status of its long-term power purchase agreement (PPA) contracts. PG&E’s bankruptcy filing automatically triggered default, and the long-term fate of those contracts is an open question. Jarring events like bankruptcy happen from time to time in every industry, but today’s news underscores the risk sometimes associated with concentrated investments.

While the ultimate financial impact of PG&E’s bankruptcy on Clearway Energy and other PPA counterparties—if it impacts those companies at all—will not be known for some time, the magnitude of exposure to risk here is clear. At CleanCapital, a highly diversified acquisition strategy is our way of ensuring that we’re insulated from all types of “event risk”. We own and manage a broad spectrum of small-scale solar projects representing a wide range of geographies, a multitude of off-takers, and various types of contracted revenue. This diversification gives debt and equity providers comfort that the negative impact of any solitary issue will be limited and contained.

Diversification is a tactic designed to minimize risk and optimize returns; investing in distributed assets is one strategy to achieve that objective in renewable energy markets. I guess we’re putting a slight twist on the old adage: ”Don’t put all your electrons in one basket.”

For more insight on how PG&E’s bankruptcy is changing the energy investment landscape, read Four Challenges that will Shape Electric Utilities this Decade from Derek Daly, Director of Investments & Capital Markets for CleanCapital.

Four Challenges that will Shape Electric Utilities this Decade

Derek Daly is Director of Investments & Capital Markets for CleanCapital.

Electric utilities, traditionally known as defensive investments with below average market volatility, are dealing with several new challenges that not only add risk and uncertainty to the sector, but will dramatically change their business model over the next decade.

As shown below, for the past 20 years, total returns from utility companies in the S&P 500 have exceeded those of the entire S&P 500 for all periods except the 10-year mark. Despite rapid growth in the technology sector, driven by titans such as Apple, Amazon, Alphabet, Microsoft, and Facebook, utilities have dominated the index based on total returns.

Today, utilities continue to maintain their reputation for reduced risk. Leading investors and publications have reported about the “stability that comes from a highly regulated industry,” that “utilities are among the lowest-risk securities available,” and are “companies offering an essential service on an exclusive basis”.

While historically valid, supportive statements like these ignore or significantly underplay four major challenges electric utilities are facing today.

1. Declining Energy Consumption

Over the last decade, the U.S. reduced its energy consumption by 2% while population grew 6% (306.8M to 325.7M) and GDP grew 15%. We are clearly doing more with less energy.

This divergence of energy use from population and economic growth reflects improvements in both energy efficiency and productivity. The ratio of GDP to energy consumed grew 17% over the last decade, a major shift for an industry founded on the assumption of ever-rising energy demand.

BNEF 2018 Sustainable Energy in America Factbook graphs showing energy consumption, GDP, and energy productivity.

2. Expense of Repairing and Replacing Infrastructure

Even as  energy consumption declines, a record amount of new capital has been earmarked to replace aging equipment, improve reliability, and deliver renewable generation. In 2017, Bloomberg New Energy Finance reported that investor-owned utilities and independent transmission developers increased investment to an estimated $22.9B. This is 10% more than 2016 levels and 91% over 2011.

Josh D. Rhodes with the University of Texas estimates the average age of power lines and transformers is 28 years old and the average age of generation assets is 30 years old. The cost of replacing these assets is $4.8 Trillion. To put that into perspective, using non-inflation adjusted numbers, if electric utilities continued pace with 2016 spending, it would take just under 231 years to complete.

3. Mounting Costs & Liabilities from Climate-Related Disasters

PG&E filing for chapter 11 is being called the first climate change related bankruptcy, with recent announcements coming as a shock to many in the energy and investment communities. The company faces enormous potential liabilities from accusations that safety lapses and inadequate maintenance caused a string of disasters in California. While Cal Fire reported last Thursday that a private electricity system was to blame for the 2017 Tubbs Fire, investigations of at least a dozen other fires in 2017 and the Camp Fire in 2018, are still ongoing.

The risk of property damage and personal injury or death from fires tied to utility equipment has been exacerbated by prolonged droughts fed by climate change. While the company asserts that it has increased efforts in recent years to maintain equipment and perform preventative action, especially tree trimming and brush removal in areas that are at high risk for fires, the company has also repeatedly been cited by state auditors for completing work behind schedule.

PG&E’s situation, while extreme, is not unique. For example, in 2012, Hurricane Sandy cost New Jersey utilities $1.8 billion in repair and response costs. As climate change continues to impact the  environment, utilities will be forced to react to a world in which extreme weather is the new normal: a costly proposition.

4. Rapid Growth of Distributed Energy Resources

GTM Research in a 2018 report highlighted the “explosive growth” of distributed energy resources and the specific technologies behind the disruption: distributed solar, energy storage, smart thermostats, electric vehicles, and small-scale combined heat and power (below 50 MW). In 2017, these five classes contributed 46.4 GW to the U.S. summer peak, or about 6%, researchers noted. GTM anticipates this will more than double by 2023, to 104.2 GW of flexible capacity.

As the trade journal Transmission & Distribution World describes: “The century-old, one-way electricity delivery model that has been serving the utility industry traditionally, is proving to be inadequate to support the rising demand and diverse energy options being explored by today’s consumers.”

Time for U.S. Utilities to Transform

Together, these four challenges have compounded to drive energy prices higher. Over the last decade, some states experienced increases as high as 40% in both residential and commercial prices. Additionally, these rates are likely low given this past decade’s commodity prices

From an investor’s perspective, this is a sector that is facing unprecedented challenges. How does a utility forecast climate-related disasters, especially in states like California with such strict liability laws? Can we simply pass these costs onto the customer rate base? If so, how do we think about the substantial growth of cheaper alternatives coming in the form of distributed resources? If “utilities in general are as safe if not safer than they’ve ever been”, investors need to ensure these challenges are being addressed through diligent resource planning and creative solutions that don’t immediately seek to pass costs on to the consumer.

Breakout Year Shows CleanCapital’s Model is Working

CleanCapital Solar Investment 3-2

Earlier this week, we announced our first acquisition of 2019: two solar projects in Indiana and Ohio totalling 13.2MW. This closing comes as I celebrate one year as CleanCapital’s Head of Acquisitions and General Counsel, which has me reflecting on the company’s growth and many successes over the past 12 months. It’s been a breakout year, made possible in large part by the technology platform that enables our investments and operations.

Accelerating the pace of acquisitions.

Our acquisitions last year totaled 71MW, or $130M, more than tripling the capacity of the assets that CleanCapital owns and operates. Among our 2018 closings was the acquisition of our largest portfolio to date, comprised of 60 individual projects in three states. And we announced partnerships with CarVal Investors and BlackRock, enabling us to swiftly connect institutional capital to attractive opportunities. Our team hit its stride and continues to prove its ability to close deals in record time.

Using technology to build efficiency.

Perhaps even more significant than our public achievements were the many behind-the-scenes wins that made them possible. One of the most exciting things about the past year was the full-scale launch of CleanCapital’s technology platform. That technology has become an integral part of the transaction process, not just for our team but for our partners as well, including the sellers and investors we work with and our myriad advisors on these transactions. The platform organizes information, communication, and process flow to dramatically increase the speed and efficiency with which we are able to close deals.

Growing our assets.

We kicked off 2019 with the acquisition of a portfolio that includes our largest single asset to date: a 12.6MW solar array at the Indianapolis International Airport. We took that deal from initial evaluation to closing in seven weeks (less, if you consider the impact of the winter holidays). Our technology has grown and adapted to serve our needs along with those of our partners — CarVal Investors, BlackRock, KPMG, Ernst & Young, CIT, Santander, DuFour Conapinski, and Akin Gump, to name a few — as we underwrite, diligence, and manage our portfolio. We now rely on it to manage the operations of 108 solar projects in 11 states.

Proving out the model.

CleanCapital is still a young company, but as I look at our recent record I believe we’re achieving what we set out to do: accelerate the flow of capital into clean energy. The pace of recent acquisitions and speed with which we closed them shows that we’ve got the tools, relationships, and expertise to respond to investor demand for these assets, and we are ready to launch into new areas of renewable energy in the coming year. Our technology is conquering the complexities that used to make renewable energy investment so challenging, and the industry is taking notice.

CleanCapital 2018 Impact Report

We continued our growth as a company in 2018. At CleanCapital, we are working to revolutionize the clean energy market through simpler finance.

This year demonstrated our ability to execute on large, complex deals in the distributed clean energy space. Our technology-driven approach, coupled with access to dedicated capital, streamlines and expedites the due diligence and analysis, required for complex deals to close efficiently. We’re looking forward to continuing to develop a robust clean energy marketplace that provides opportunities for investors and access to capital for developers, through a platform that identifies, screens, and manages clean energy projects.

Financing clean energy to tackle climate change

The International Energy Agency (IEA) published its latest World Energy Outlook this week and the outlook is promising for clean energy. They project clean energy to account for 40% of global energy demand by 2040! Unfortunately, projections simultaneously show a steady increase in CO2 emissions which is “far out of step with [what] scientific knowledge tells us is required to tackle climate change.”

CleanCapital is taking bold steps to make capital investments more efficient to accelerate clean energy technologies that limit global warming. Our team has now acquired nearly $250m of operating solar assets in the United States, with our recent acquisition of a 46.9 MW portfolio of solar assets from ATN International, Inc. subsidiary, Ahana Renewables.

As the electricity market experiences its “most dramatic transformation since its creation more than a century ago”, the report acknowledges the “huge investment requirement” needed to meet these demands. A sentiment echoed by last month’s report from the Intergovernmental Panel on Climate Change (IPCC), the world will have to invest an average of around $3 trillion a year over the next three decades in transforming its energy supply systems. Accelerating and exceeding these clean energy projections becomes possible as we address many of the inefficiencies inhibiting investments in clean energy markets.

Our team at CleanCapital is leveraging technology to address many of the inefficiencies plaguing the fragmented distributed energy financing market. Pairing our technology with dedicated capital from leading global investors like BlackRock and CarVal streamlines and expedites due diligence, allowing complex deals to close efficiently. This enables new capital to flow more freely throughout the distributed energy markets helping it to scale.

The distributed energy market is key to helping limit warming to 1.5c as outlined by the IPCC. We need more innovations like what we are doing at CleanCapital to help deliver these investment-ready assets and bring the much needed capital to the market.

A rollercoaster week for the broader markets, but business as usual for clean energy assets

It has been a tumultuous week in the financial markets. It’s not the first time, and most certainly not the last time, that risky assets such as global public equities have seen such extreme short-term volatility. But it also serves as a reminder that asset classes such as renewable energy infrastructure are insulated from whipsaw action. At CleanCapital, we own and manage projects that deliver steady cash flows, underpinned by the long-term contracted sale of a basic necessity to our customers. We’ve known for some time that cumulative default rates for Infrastructure and Project Finance are significantly lower than for NFC (non-financial corporates); 1.83% vs 3.45% in the 2006-2016 period according to S&P Global Fixed Income Research. However even equity investment delivers highly predictable cash flow with annualized distributions usually within 1-2% of expected projections.

These assets have proven technology, limited operational risk, long-term residual value upside and  broad-based political and regulatory support, particularly at the state level. This week has been business as usual for CleanCapital—we’re paying attention to the broader markets but marching along to deliver steady value for our investor base.

Working with innovators at CleanCapital

I’m excited to announce the selection of my co-founders Thomas Byrne and Jon Powers to the inaugural Solar 40 under 40 list from Renewable Energy World. We founded CleanCapital in 2015 to make it easy to invest in clean energy. Since then we’ve built a proprietary technology platform that identifies, screens, and manages clean energy projects, enabling project owners an opportunity to exit their portfolios while providing accredited investors—including institutional investors, family offices, and investment funds—unique access to the clean energy investment market.

Be excited and inspired by your fellow co-founders

Having worked with Thomas Byrne and Jon Powers for nearly three years, I’m proud of the company and team we’ve built together at CleanCapital. Their passion and commitment to the clean energy industry remains a driving force for our company.


Thomas Byrne   Jon Powers
Thom and Jon are leading voices in expanding and improving solar industry and they are joined by a talented and inspiring group who I’m sure will continue to drive this industry forward.

Their leadership is an inspiration to our whole team and you don’t have to take my word for it.

I’ve known Jon since his days working in the White House for the Obama administration. His ability to bring synergies to the market, understand and overcome the barriers facing clean energy and sustainability is exceptional. His background in the military and passion for finding solutions to climate change resonate through his work everyday. Thom’s innovative approach and outlook to clean energy finance will help expand the clean energy marketplace as whole and drive more capital to the clean energy technologies that help the economy as well as the climate. This inspiring vision is what pushed me to join the team at CleanCapital and I’ve enjoyed every minute of it.

Zoe Berkery, Vice President, CleanCapital

 

I’ve known Thom for over a decade and continue to admire his clear commitment to the advancement of solar energy and his ability to develop innovative solutions to industry challenges. When it comes to executing on the most complicated transactions and leveraging partnerships, there is no one better to lead the charge than Jon.  Working together, Thom and Jon continue to make unparalleled contributions to the clean energy space and I’m honored to work beside them.

Melinda Baglio, Head of Acquisitions and General Counsel, CleanCapital

Believe in your solution

Our company was founded on the idea that investing in clean energy doesn’t have to be so hard. We’ve celebrated major milestones in the development of our proprietary technology platform to streamline the project acquisition and investment process. Last month, we celebrated another milestone: two of our projects were ranked as top performing assets by kWh Analytics in the industry’s first “Asset League Table.”

Addressing the climate crisis requires a significant increase in both public and private capital investments in clean energy. Some estimates are as high as $90 trillion over the next 15 years. The reality is that despite the historic growth clean energy is seeing, investment in the sector remains largely stagnant. By leveraging technology to streamline the entire financing process from facilitating data transfer and diligence from the sellers, to comprehensive and ease of underwriting by our investor partners. This efficient use of technology helps us to close transactions quickly and reduces many of the points of friction inhibiting broader investment in clean energy.

Looking to the future

I’m excited about the work we do at CleanCapital. In the last few months, our team has leveraged our new partnership with CarVal Investors to acquire new assets and bring our total to nearly $150 mil in operating solar assets. Through our proprietary platform and capital partnerships, the CleanCapital team continues to bring liquidity to a historically capital inefficient clean energy marketplace.

The evolving art of the clean energy deal

When I joined CleanCapital as the Head of Origination, I was excited about the company’s approach to leveraging technology and data to streamline the clean energy finance process. I have spent most of my career navigating the cumbersome transaction process of structuring and cobbling together financing sources across a variety of renewable energy asset classes including wind, solar, biomass and fuel cells. The opportunity to adapt FinTech tools and skills to the renewable energy market is an obvious and natural progression for the industry. CleanCapital demonstrated that they are ahead of the pack and I am pleased to be part of it.

I joined the CleanCapital team to head up their effort with the identification of solar power acquisitions and help expand market opportunities in projects that are under development as well as additional renewable energy and clean infrastructure asset classes.

Solar Portfolio 3.1

New assets in MA.

Leveraging technology and data to identify assets

Last week we announced the acquisition of our second solar portfolio in just 30 days. The portfolio of two operating solar projects, acquired from G&S Solar, are located in Massachusetts and leverage the $250 million equity partnership with CarVal Investors. Earlier in May, we announced the acquisition of  a 14.23MW portfolio of solar assets from X-Elio. In addition to working with terrific developer partners, these purchases are significant. They demonstrate our team’s ability to leverage our proprietary technology to implement an efficient diligence process to underwrite complex opportunities and turn them into investment ready assets.

Two examples of where CleanCapital leveraged FinTech tools in these transactions include, the use of our proprietary platform that BOTH facilitated data transfer and diligence from the sellers, as we well as comprehensive and ease of underwriting by our investor partners. This efficient use of technology is helping us to close transactions quickly and thereby drive down the cost of capital.

This competitive advantage will continue to work for us. We look forward to talking with you about how we can work together and apply that to more opportunities.

The next phase of clean energy origination

This is a marked departure from the status quo when it comes to origination.  This latest announcement brings CleanCapital’s total to nearly $150m of acquired operating solar assets. It’s an exciting year for our team as we continue to change the paradigm for clean energy finance. Despite the historic growth across the industry, the flow of capital within the space remains largely stagnant. In the last 30 days I’ve been able to witness just how significantly technology solutions can address these challenges.

Growing our partnership with Carval Investors

The acquisition of this portfolio continues to leverage our new partnership with CarVal Investors. Leveraging our proprietary platform and capital partnerships, the CleanCapital team continues to bring liquidity to a historically capital inefficient clean energy marketplace.

Learn more about the new partnership to acquire up to $1 billion in clean energy assets

 

Leveraging Technology to Finance Clean Energy

In February, I joined CleanCapital as the Head of Acquisition because I was excited about the company’s approach to utilizing technology to transform the way clean energy projects are financed. On April 30th, CleanCapital acquired a 14.23MW portfolio of solar assets from X-Elio. The purchase was significant for us in many ways. It was our largest acquisition to date, our first acquisition with our new partner, CarVal Investors, the first to utilize our proprietary technology platform, and on a personal level, it was the first deal to close since I joined the team.

The Ability to Close Complex Deals

This portfolio is a perfect case study of the complex market of small scale solar assets. The portfolio is comprised of 8 projects in two states (California and Vermont), and includes ground-mount, rooftop and carport facilities; and municipal, corporate and utility offtakers. We’re able to navigate these complexities with ease. Through our underwriting process, we drill down to the fundamental features of the assets we’re seeking to acquire, increasing efficiency in the sale process.

Streamlining Diligence by Leveraging Technology

Not only are we able to underwrite even the most complex portfolios of assets, we have developed a proprietary technology platform to streamline review by interested investors. We launched the platform for both seller and investor with the acquisition of this portfolio. The platform gives us the tools to package the diligence of a complex portfolio into an easily digestible format.

Smooth Closing Process

As with many of the assets we screen, this portfolio had existing financing in place that was repaid concurrently with our acquisition. Our team has deep industry experience, enabling us to facilitate a smooth closing process on deals of all shapes and sizes, and this was no exception. By coordinating expertly with the various stakeholders and through the regulatory regimes of two states, all parties enjoyed a smooth closing process.

Growing Our Partnership with Carval Investors

The acquisition of this portfolio marks the beginning of our new partnership with CarVal Investors. We look forward to continuing to build our portfolio with CarVal as we find new ways to leverage the $250 million partnership.

Learn more about the new partnership to acquire up to $1 billion in clean energy assets>

This Earth Day, let’s celebrate corporate leadership on clean energy

You might be surprised by who’s currently leading the charge in the commercial solar market.

As we head into Earth Day weekend, it’s easy to get caught up in the attacks on clean energy. There is no question that federal tax reform, the International Trade Case and withdrawing from the Paris Climate Treaty created a year of uncertainty for the U.S. solar industry. Despite these obstacles, there are a lot reasons to remain optimistic regarding our clean energy future. I continue to be inspired by the leadership of major corporations like Google, Apple and Microsoft, who according to latest Solar Means Business report from the Solar Energy Industry Association are major contributors to 3 Gigawatts of installed solar in 2017.

Earth Day was founded nearly 50 years ago, and within the first decade President Carter put solar panels on the White House roof. But for nearly 3 decades following that the industry barely grew. Now, the latest Market Insights Report released last month continues to demonstrate the resiliency of the industry as costs continue to decline and investments continue to rise. It should come as no surprise that the industry continues to grow. We need to be celebrating this for Earth Day!

SEIA Solar Means Business

As of the end of 2015, there was nearly 25 GW of solar PV installed in the United States. In the last two years, the solar industry has more than doubled its total installed capacity to 53.3 GW. And the industry is on track to more than double over the next five years. That means an average of over 15 GW of PV capacity will be installed annually in the U.S. between now and 2023.

A changing financial landscape

The Commercial and Industrial (C&I) solar markets (representing 80% of non-residential pv) remain a still untapped opportunity for continued market growth. While, the non-residential sector grew 28% year-over-year, this was primarily driven by regulatory demand pull-in from looming policy deadlines in California and the Northeast, in addition to the continued build-out of a robust community solar pipeline in Minnesota.

Unfortunately, project finance remains a challenge for the C&I market, but there continues to be innovations addressing these soft costs. Last fall, SEIA released a white paper examining Commercial Property Assessed Clean Energy (C-PACE). C-PACE a allows a property owner to finance 100 percent of the cost of solar and/or energy efficiency upgrades as a voluntary property tax assessment on a commercial building for 10-30 years.

In addition to new C-PACE opportunities, the financial landscape continues to evolve to bring new capital into the market. CleanCapital is at the forefront of this financial revolution. We are changing the paradigm by bringing liquidity to a historically capital inefficient clean energy marketplace. To date, we’ve acquired nearly $100 million in operating solar assets across ten US states consisting of high-quality school, universities, and government facilities.

CleanCapital Acquisitions Through 2017

Will investors join corporations and pave the road to 100+ GW of U.S. solar?

As demonstrated in the latest Solar Means Business Report, the private sector remains committed to a clean energy future, but very few institutions have invested. To ensure that we remain on track, we need to empower institutional investors with information that helps them understand clean energy investments and the underlying risk. Earlier this month, CarVal Investors partnered with CleanCapital to pursue $1 billion in clean energy investments. CarVal is forging the path for other investors to tap into the distributed energy markets.

Our proprietary technology platform identifies, screens, and manages clean energy projects enabling project owners an opportunity to exit their portfolios while providing investors unique access to the clean energy investment market. We’re excited to provide capital to cash strapped project and cash flowing assets to potential investors and in the process fund the journey to 100+ GW of U.S. solar.

Interested in learning more? Let us know.