In this week’s “Commodity-In-Chief” on “Bloomberg Commodities Edge”, Alix Steel talks with Thomas Byrne, co-founder and CEO of CleanCapital. The New York-based company owns and operates 180 megawatts of renewables and manages $465 million worth in assets. It aims to buy as much as $1 billion of additional assets by the end of next year, said Byrne.
Thought leadership and opinions
A seminal financing advances CleanCapital’s long-term goal of securitizing distributed renewable energy portfolios to attract institutional investors.
A 75 megawatt acquisition along with a landmark financing solidify CleanCapital’s position as one of the leading owner-operators of C&I solar in the U.S. and a pioneer in clean energy finance.
Since the first Earth Day nearly 50 years ago, this day has served as a celebration of the environment and a reminder of our shared responsibility to protect it. Working in sustainability and clean energy for the past decade, I’ve seen how awareness of our collective environmental impact has dramatically grown. Action, however, has been slower to come. Today, we are already witnessing the impacts of climate change and live under the increasingly ominous cloud of predictions coming from scientists like those at the Intergovernmental Panel on Climate Change, who warn of disaster as early as 2040 if our inaction continues.
Whether it’s because people are growing frustrated with the baffling lack of action on the federal level, or because more of us are seeing the impacts of climate change firsthand, Americans are signaling that they’re ready to do battle to protect the planet. A recent study by the Yale Climate Communications program found that the proportion of Americans who are alarmed by global warming and would place it among the country’s highest priorities has increased dramatically in the last five years.
Listen to our podcast with Anthony Leiserowitz, Director of the Yale Program on Climate Change Communication.
On the positive side, consequential initiatives are underway at the state and local level to curb emissions and encourage clean energy innovation. Eleven states, plus Washington D.C. and Puerto Rico, have introduced or enacted 100% renewable energy targets; more than 100 U.S. cities, including Chicago, are also answering the call. And just last week, CleanCapital’s home base of New York City passed a Green New Deal package that “aims to enact the largest carbon reduction measures of any city globally”.
Taking the initiative
Progress is happening, but we must truly step up and scale solutions to set a path towards a sustainable future. On this Earth Day, please consider what actions you can take on a personal, professional, and political level to combat climate change. To help support policy initiatives that will speed our national transition to clean energy, consider a donation to our friends at Vote Solar, a non-profit that defends and expands solar progress for families, businesses, & communities across the country.
Reposted from FinTek News, published 4/4/19.
CleanCapital is sometimes described as a fintech company. While I’m not sure that label really suits us, it’s certainly true that my experience with fintech provided the ‘light bulb’ moment that led to founding CleanCapital. Today, technology underpins all that we do.
Clean energy assets present enormous opportunity.
Renewable energy is at a ‘hockey stick’ moment for worldwide growth. Bloomberg New Energy Finance projects that $11.5 trillion will be invested in new power generation capacity between 2018 and 2050, with $8.4 trillion of that going to wind and solar and another $1.5 trillion to other zero-carbon technologies like hydro and nuclear.
Why are investors so bullish on renewable energy? Clean energy sources will make up 80% of the world’s new energy capacity through 2050, with renewables providing at least 50% of the world’s electricity that year. That creates enormous opportunity for infrastructure investment. Investors looking to add real assets to their portfolios are drawn to solar, wind, and storage generation for a number of attractive attributes. Renewable power infrastructure portfolios boast stable cash flows, low volatility, diversification of risk, and alignment with investors’ ESG goals.
But barriers to entry pose challenges for investors.
Despite growing demand for these investment opportunities, the complexity of clean energy deals has historically kept investors away.
As an attorney working on landmark clean energy financing deals, I saw how the lack of standardization in contracting, regulations, and diligence made it near-impossible to invest in distributed clean energy assets at scale. Having seen how fintech was streamlining other industries, like student loans, I sensed an opportunity to leverage technology to simplify the process and enable more investors to buy in.
Any given clean energy acquisition is comprised of close to a hundred documents; multiply that by the ten, 20, or 60 projects that make up a single portfolio and you’ll get a sense of the organizational issue at hand. A buyer often works with five to ten parties in addition to the seller to close an acquisition, so project management and communication are also a challenge. We envisioned a technology-based solution that would organize information and process flow.
Our tech-based solution will power the transition to a clean energy economy.
Today, our leading edge platform enables us to underwrite, diligence, and manage renewable energy portfolios efficiently. The response from the market has been robust; industry leaders, including BlackRock, rely on our platform capabilities to meet the demand for clean energy investment and deliver value to clients. Going forward, I envision greater adoption of technology, including data analytics, in all facets of clean energy investment to underpin the dramatic growth of these resources around the world.
Today we announced that BlackRock’s Renewable Power Group took a stake in CleanCapital. Their investment fuels the continued growth of our company and provides capital to accelerate our clean energy acquisitions.
For CleanCapital, this marks a kind of end to the beginning of our company story. Marc Garrett, Jon Powers, and I launched CleanCapital with a clear vision: to attract institutional capital to clean energy investment. Not only have we achieved that founding goal, we’ve done it by earning the trust of the world’s largest asset manager.
Expanding our partnership
We’re thrilled to expand our partnership with the team at BlackRock. Led by David Giordano globally and Martin Torres here in the Americas, the partnership gives institutional investors—who are showing increasing interest in real assets—access to the growing renewables market. Their investment empowers us to grow our solar portfolio and also pursue opportunities in new geographies and new clean energy asset classes, like energy storage.
Last year, we partnered with BlackRock on our largest acquisition to date. It was no small feat; the 47 megawatt portfolio, comprised of 60 solar projects in three states, was one of the largest independent C&I solar portfolios in the U.S. A complicated deal like that turned out to be the perfect opportunity to show the team at BlackRock the value of the CleanCapital platform. Using our technology to perform detailed underwriting, our seasoned investment team provided BlackRock with a clear understanding of the opportunity at hand. And we closed the deal with speed and certainty.
Driven by a common mission
BlackRock Chairman & CEO Larry Fink has been outspoken in his belief that the best returns come when you invest with purpose. We believe that by providing access to the growing opportunities in renewable energy we can deliver value to investors and do good for the planet. Through this partnership, we will acquire more high-quality solar and storage projects to build superior portfolios for our investors.
I look forward to sharing more milestones with you as we put this capital to work.
CleanCapital is actively seeking to acquire solar and storage projects. Interested in selling your project? We should talk.
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.
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
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.
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.
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.
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.