Jon Powers:

Welcome to Experts Only podcasts. Sponsored by CleanCapital. You can learn more at cleancapital.com. I’m your host, Jon Powers. Each week, we explore the intersection of energy, innovation, and finance with leaders across the industry. Thank you so much for joining us.

Thomas Byrne:

Welcome to this week’s episode of the Experts Only podcast. I am Thomas Byrne, co-founder of CleanCapital, guest hosting this week’s podcast. I’m thrilled to welcome of Varun Sivaram, a thought leader in the clean energy space. We discuss his exceptional new book, Taming the Sun, which outlines the current clean energy landscape and the advances that we need to make to unleash it. It’s a thought provoking book, and we encourage all listeners to grab copy. We hope you enjoy the conversation. Varun, great to have you on Experts Only podcast. Thanks very much for joining us.

Varun Sivaram:

Thanks for having me, Tom.

Thomas Byrne:

So, you wrote a great book, Taming the Sun, which really gets into the challenges that we face as a solar industry. Interested to first start with where you grew up, how did you get end up getting into solar?

Varun Sivaram:

Absolutely. I grew up in Silicon Valley. And I was surrounded by innovation. My dad was in the semiconductor industry. He was at Intel. He had the office next to Gordon Moore. So, that’s of Moore’s Law fame. So, I grew up thinking we did invent our way out of anything. My first job was to work at Nanosolar. Nanosolar was this innovative Silicon Valley startup. It raised more money than any startup except for Facebook.

Thomas Byrne:

Wow.

Varun Sivaram:

And I later would study new solar technologies in a laboratory at Oxford University as a graduate student. But I also had various other experiences that were outside of science and innovation. I worked in city government in the City of Los Angeles to install more solar than any other city in the country. I worked at McKinsey with large utilities that were wondering, what does this wave of solar mean for us? And now, I work as an analyst at a public policy think tank, The Council on Foreign Relations. And I think about US policy as well as other countries’ policy.

Varun Sivaram:

And so, I found that there are a lot of different perspectives being thrown around when it comes to solar. And the innovation-only perspective probably is incomplete. So, I wrote the book to tread this even-handed path among many different perspectives. Those that say that we have revolutionary new technologies around the world, and those that say that, “Hey, we have great bankable technologies right now.”

Thomas Byrne:

Right.

Varun Sivaram:

Those that say that we need a lot more subsidies, and those that say that solar is a boondoggle and deserves no subsidies. I think there’s a middle path. And that’s what the book is trying to do.

Thomas Byrne:

So, looking back at that experience with Nanosolar, what was going on then? What went wrong? And what happened to get us to where we are today, especially when you think of solar panel manufacturers?

Varun Sivaram:

Yeah. That time, 2006, was this season of hope for solar. First Solar had just gone public to a resounding IPO, stock price soared. Everybody said, “You know what? Let’s pile into solar.” Silicon Valley investors invested in a raft of solar startups. And many of these startups actually did have remarkable technologies. Nanosolar was a great company.

Thomas Byrne:

Yep.

Varun Sivaram:

Great engineers.

Thomas Byrne:

Yep.

Varun Sivaram:

Solyndra, which also is quite notorious, also had a great team, and great engineers, and a great technology. Nanosolar’s technology as well as Solyndra’s was a material called CIGs copper indium gallium selenium. That’s not important. The important thing is it’s a different material from the dominant one, silicon, which has dominated the solar industry for several decades. CIGs was going to be thinner. It was going to be cheaper. It was going to be flexible. Literally, you could curl up this roll of aluminum foil with CIGs on top of it.

Varun Sivaram:

And you could roll it up. And you could ship it easily. You could plaster it all over the place. This is a remarkable product. And unfortunately, all of these, or many of these innovative companies from Germany to the United States all went bankrupt when China flooded the market with super cheap silicon solar panels, largely thanks to the help of the state. State aid enabled them to dump low cost, often below cost, solar panels on global markets.

Thomas Byrne:

And was that a bad thing?

Varun Sivaram:

In the short run, it may not have been. Thanks to China, we now have extremely cheap solar panels. Manufacturers in China, and now in Asia, have scaled up. They no longer need government subsidies. But they needed them right at the beginning to get started.

Thomas Byrne:

Yeah.

Varun Sivaram:

And now, we have really cheap solar panels that are made by low cost producers. That’s fantastic, right. But the bad part is when you look at the long-term consequences. In the long run, because silicon becomes so dominant in the short run, it may be the case that silicon’s locking out new possibly superior technologies. But there are really cool technologies out there.

Varun Sivaram:

I’ve seen many of them. They could not only be more efficient and cheaper than silicon, they could enable a whole range of new applications in versatility. The problem is we may never get to them because silicon is so dominant now that any other technology faces a steep uphill climb to enter this market that’s currently dominated by an incumbent.

Thomas Byrne:

And then I want to get into some of those technologies later and how we can catapult them as an industry. I think that’s a perpetual challenge, how we deploy technologies. Let’s dive into the book. And you start the book off with two futures. A bleak one where climate change overtakes us, and we do not efficiently deploy clean energy. And one in which we smartly implement clean energy, and climate change while not solved is mitigated. So, let’s start with the first future. Maybe you could describe that for our listeners.

Varun Sivaram:

Absolutely. In the first future, I envision a world where mega cities from Mexico City, Lagos, New Delhi, are choked by smog where inequality is still rampant. Over a billion people lack access to electricity. And where the world is pretty dangerous because climate change is serving up floods, droughts, and heat waves. That world remarkably, in my opinion, is a result of the solar power revolution sputtering out.

Varun Sivaram:

More than almost any other cause, solar in particular, has this transformative ability to either put us in that world if solar stalls, or take us out of that world. In that world, because solar was supposed to anchor a clean energy revolution and didn’t, it started rising and then stopped sometime in the 2030s. It halted. As a result, you see that fossil fuels continued to exert a stranglehold on the economy.

Varun Sivaram:

They account for most of the electric power production. Oil, fuels almost every single car, ship, truck, and plane on the planet. Industry is almost entirely fueled by fossil fuels. All of this has resulted in just absolutely miserable living conditions. That’s a future that I actually don’t think is the straw man. It’s the future we’re on track for by mid century, if solar stalls. And I think that’s a very real risk.

Thomas Byrne:

Already in California, you’re seeing some of the challenges of having a substantial amount of solar and renewable intermittent renewable energy as part of the overall portfolio. Look at California. And look at the duck curve. What’s that reality? What is the duck curve?

Varun Sivaram:

The duck curve is a fantastic marketing tool invented by the California independent system operator. And they have had more success explaining why intermittent renewable energy causes problems to the grid than anybody else because of this cute duck curve.

Thomas Byrne:

All right.

Varun Sivaram:

So, here’s what the duck curve is. Initially, when you put the first solar panel on a grid, that solar panel is actually really useful because, especially in California, in the middle of the day on a hot day, for example, there’s a lot of air conditioning demand that that solar panel helps you meet. So, that’s fantastic. The first few solar panels help to decrease your midday demand peak.

Varun Sivaram:

The problem is not when you have the first couple solar panels, but when you have a lot of solar panels on the grid. After you’ve met the peak, and so you’ve basically smoothed out the demand profile, the profile of how much electricity consumers are using over the course of a day, the additional solar panels now cause that profile to become unsmooth. They cause the demand in the middle of the day to fall after you’ve met their demand from your increasing amount of solar panels. It falls so much that it’s called the belly of the duck.

Thomas Byrne:

Yeah.

Varun Sivaram:

And so, at the belly of the duck in the middle of the day when you have a lot of solar panels, your customers no longer need other power plants to meet very much of their electricity. This sounds great, right. The problem is when the sunsets. So, when you get to evening time, starting 5:00 PM, you see the spike in the need for electricity from other generators as solar power plants all go offline across the board. And that’s known as the neck, or I don’t know, the beak of the duck.

Varun Sivaram:

And so, because of this duck curve, you have a belly where you don’t need power plants to do very much. And then you have a neck or a beak where you absolutely need power plants to rapidly ramp up and make up for disappearing solar output. The grid is suddenly under enormous strain. And the addition of another solar power plant does not help that. It only hurts that process. It deepens the belly and it makes the neck even taller.

Thomas Byrne:

What was the tipping point effectively?

Varun Sivaram:

Oh, we’ve been there for years.

Thomas Byrne:

Yeah.

Varun Sivaram:

It’s been very clear. I mean, even last year in 2017, on a day in March, for example, the price of power went negative in the middle of the day. That means that there’s so much solar power, that the grid is paying everybody else to turn off.

Thomas Byrne:

Is any other energy going into the grid at that point, or in California? Is California during midday on a sunny day all wind and solar?

Varun Sivaram:

No. It’s not true. About 50% of California’s demand on a spring day, a March date, could be met by solar.

Thomas Byrne:

Okay.

Varun Sivaram:

But there are other sources. It’s not all wind and solar. For example, you’ll have plenty of natural gas power. But that doesn’t mean that the price is going to be positive. At that point, you’re actually paying power plants to shut down.

Thomas Byrne:

Right.

Varun Sivaram:

You’ve got to pay them because in many cases, the power plant will prefer not to shut down. It will prefer to keep spinning because it’s costly to shut down. In California, we’ve already recognized that solar has caused serious problems because it’s causing negative pricing. And that negative pricing is a signal of what I call value deflation. The phenomenon that as more solar comes on the grid, it cannibalizes its own value.

Varun Sivaram:

It becomes less valuable. And so, the next solar panel is close to worthless. And around the world, value deflation could cause the rise of solar to stall. Because even though solar is cost competitive today, when there’s no solar on the grid, when it’s quite a useful thing to add to the grid, well, if you add a lot of it around the world, and I’m telling you have to get to 33% electricity by 2050 globally, you’re going to run into this value deflation wall everywhere. We’re already seeing it in California. And I expect we will see it in many, many other jurisdictions.

Thomas Byrne:

One of the things you point out in your book is that you start to run into curtailment as a result of some of the effects of the duck curve of having too much solar in the grid. Curtailment is obviously a substantial issue potentially for anyone building a power plant and relying on those revenues. Is that playing out yet in California? And what do you foresee in other jurisdictions as the risk with curtailment?

Varun Sivaram:

Yeah, absolutely. Just to get everyone on the same page. Curtailment is when a wind or solar plant is asked not to supply its power to the grid. That power is thrown away. It’s excess. In California, we are seeing curtailment. Last year, it was a particularly wet winter. And so, your hydro reservoirs ended up being entirely full.

Thomas Byrne:

Yeah.

Varun Sivaram:

And so, they had to run. They were in what’s called spill mode. They weren’t very flexible, which they normally are, they had to run. And so, you had this glut of excess-

Thomas Byrne:

Just to literally empty the reservoir?

Varun Sivaram:

Exactly.

Thomas Byrne:

Yeah.

Varun Sivaram:

You had this glut of excess power on the markets. And so, curtailment hit all time highs of wind and solar. What does that mean? Well, in many cases, a solar plant will, in its contract with a utility, for example, it’ll have a clause that says that the utility must pay it up to a certain number of hours of production. So, for the first few hours of curtailment, that solar plant will probably get paid. But depending on the contractual terms, the next several hours of curtailment, it may not get paid. Everybody feels the cost here.

Varun Sivaram:

The grid feels a cost because sometimes they have to pay for power they don’t use. The solar plant sometimes feels a cost because after a certain number of contracted hours, they also will suffer the consequences. And going forward as curtailment rises, I expect contract terms to become even harsher for solar power plants. Now, you asked about other jurisdictions around the world.

Thomas Byrne:

Yeah.

Varun Sivaram:

I actually do see some improving trends. It’s not all bleak. In China, for example, in 2016, they had a law passed that makes it harder to curtail solar and wind. As you know, in China, they really have a curtailment problem, especially out in the far, far flung provinces in the west where there’s a ton of renewable energy, and often not enough transmission capacity to evacuate it.

Varun Sivaram:

But they do have these priority dispatch laws now in China that hopefully will start to reduce the amount of curtailment and require payment to renewable energy generators, even if there is curtailment. In Europe, very recently, February, regulators, lawmakers in Europe, decided that they weren’t going to scrap priority dispatch for renewables as we feared might happen. So, this is great. What this means is renewable energy will be the last to be curtailed. So, it can still get curtailed. But it’s harder to curtail it than if it’s first on the chopping block.

Thomas Byrne:

Sure.

Varun Sivaram:

So to speak.

Thomas Byrne:

So, we’ve talked about the bleak future. Let’s talk about your second future that you get into in your book. What does that look like?

Varun Sivaram:

So, the second future is not the shining utopia. It’s not a carbon inverse of the first future. And I want to say, the first future as I wrote it, sounded like science fiction. And what really scared me was I based it on pretty solid research. There’s peer-reviewed research for most of the claims I make in that first future. So, it’s not science fiction. The second future I also tried-

Thomas Byrne:

So, current trends, current forecasts, are showing a future in which sold the value of solar diminishes to a substantial amount outweighing the cost of solar effectively, right?

Varun Sivaram:

Exactly. And if we don’t have a clean energy transition because solar is one of the front runner technologies and it drops off, well, you have a host of bad implications. Now-

Thomas Byrne:

As I was reading your book, I was thinking there is the bleak future of that’s consistent with solar being a small part of total energy deployment. And perhaps we’ve gotten to a point as we’re starting to think of a more positive future, that you’re going to communicate, where we’re in this weird adjustment phase, where we need to be making decisions for how we’re going to adjust to a clean energy future. And now is sort of the time that we have to really make important decisions, whether it’s on the grid, and the different sources of power, and how we’re going to smooth out some of these concerns that you have. I feel like right now is this adjustment period.

Varun Sivaram:

I agree 100%. Right now is when we make decisions that determine if in 2050 we’re seeing the second future. Let me tell you what that second future looks like. Second future is you still have climate change. You still have unsavory decisions like how do we suck carbon out of the atmosphere? Because it’s not good enough to just transition largely to clean energy in the power sector. But at least we’ve bought ourselves the time to do that.

Varun Sivaram:

And the way we’ve done that is solar power kept rising. Solar now accounts in 2050 for 32% of global electricity. And even more importantly, solar is being used in other sectors. Solar fuels are starting to take off. Solar is generating hydrogen or even liquid carbon containing fuels. And it’s starting to challenge oils dominance. And that transition is going to happen in the second half of the century.

Varun Sivaram:

So, we’ve laid the groundwork through decades of long-term investments. In that brighter future, I believe that in addition to keeping climate change at bay, we’ve lifted hundreds of millions of people out of poverty because there’s ubiquitous low cost solar that enables electricity access, even in places where the grid does not reach.

Varun Sivaram:

And I believe that we’ve largely started to solve discourage of air pollution because finally, fossil fuel use is on the wane. So, there are a lot of positive things in this future. I don’t think the problems of the world go away. But at the very least, the world is in control of its destiny.

Thomas Byrne:

So what part does solar, as we know it, or even wind as we know it today, play in the 2050 future that you’re envisioning?

Varun Sivaram:

Hard to tell. One way of looking at this is in the future of 2050 there’s this whole panoply of different solar products. There’s not just one single solar panel that shows up in every different setting, whether it’s a rooftop solar panel, or a Walmart roof, or a ground-mounted installation out in the Mojave Desert. You actually have the stunning range of diverse products.

Varun Sivaram:

You have solar coatings for windows. You have a different type of solar coating for weak roofs in slums in the developing world. You have a different kind of solar product for the Mojave Desert. You have a different kind of solar product, whether you’re in urban or rural settings, et cetera, et cetera. I think that range of technological diversity exists in laboratories today. It doesn’t exist in the commercial markets.

Thomas Byrne:

And why is that technology important to solving this challenge? Why is the new technology that you speak of an important component of solving that challenge versus what we have today?

Varun Sivaram:

When we talk about value deflation, we say that solar’s value could fall below its cost. Well, if we want to fix that, if we want solar to stay economical, which means it’s delivering value above its cost, we’ve got two options. I think we should pursue both of them. The first is reduce solar’s cost faster. And the second is slow the fall of solar’s value. So, the first, reduce solar’s cost faster, in my mind, is let’s go invest in revolutionary technologies that get even cheaper, even faster.

Thomas Byrne:

Yeah.

Varun Sivaram:

And the second, let’s slow the decline of solar’s value, that to me, is let’s go and build these remarkable systems that are really good at using solar energy no matter when it’s produced or how much it fluctuates. That’s systemic innovation.

Thomas Byrne:

So, you talk about a lot of these technologies. And I was going to get it to it later. But let’s start hitting on some of these technologies that you’re thinking about already. There’s one that you discussed in your book that I’m going to butcher, Perovskite.

Varun Sivaram:

Oh, you nailed it.

Thomas Byrne:

Nailed it. Okay. Good. First time for everything. This is a really cool technology. You were actually at the ground floor of this when this was discovered, or more specifically, when the utility of it was discovered. So, what is this?

Varun Sivaram:

Yeah. I had the very good fortune of becoming a graduate student for Dr. Henry Snaith in the Oxford Physics Department two months before this discovery got made in that lab of the invention of the Perovskite solar cell, modern Perovskite solar cell. This is a solar cell made out of a material that’s different than silicon. It’s quite a dirt-cheap material. Perovskite, by the way, refers to not the material, but the crystal structure.

Varun Sivaram:

So, many different materials with this crystal structure exist. The most common is actually the most common element of the Earth’s crust. Anyway. Perovskite is this remarkable material when used in solar cells that allows us to make dirt-cheap, highly-efficient, flexible, colorful, and semi-transparent solar coatings. So, you can imagine a coating that makes your window look like stained glass. You can imagine-

Thomas Byrne:

That’s also producing?

Varun Sivaram:

That’s also producing electricity.

Thomas Byrne:

Electricity.

Varun Sivaram:

It’s blocking unwanted sunlight. It’s reducing the carbon footprint of your building space. And it’s aesthetic. It’s pretty.

Thomas Byrne:

You can imagine churches with their glass windows, right?

Varun Sivaram:

Exactly.

Thomas Byrne:

Just producing energy the entire time.

Varun Sivaram:

Exactly. And you can imagine printing this out of an industrial size ink jet printer. And that is a far less capital intensive proposition than the enormous factories needed to make silicon solar panels today.

Thomas Byrne:

And what’s the cost of that today? And where does it need to be in 20 years so this is commercially deployable?

Varun Sivaram:

This could be pennies per watt of solar.

Thomas Byrne:

Yeah.

Varun Sivaram:

Just to give you a sense. Solar in the United States today is about a dollar a watt, fully installed systems are about a dollar a watt or less. So, if we got to pennies per watt, that’s an order of magnitude improvement. And folks in Silicon valley will tell you, “If you have a startup and you want to go up against an incumbent, you better have an order of magnitude improvement. Otherwise, you don’t have a value proposition.”

Varun Sivaram:

It doesn’t help you to shave 10% or 20% of the cost. So, down the road I really see remarkable revolutionary value propositions from new technologies. Not just that they’re more efficient or cheaper on a materials’ perspective, but they change the entire system architecture, right. We’re comparing apples and oranges, if we’re comparing the cost of a solar window to the cost of a ground-mounted solar panel.

Thomas Byrne:

So, let’s talk about hydrogen. You talk about hydrogen cars quite a bit. And hydrogen cars, I’m friends with a gentleman named, Terry Tamminen, from California, who has been not just a huge proponent of the environment, but in the early 2000s was a huge proponent of hydrogen cars. But they stalled in favor of electric vehicles. What role do hydrogen cars play? How are you imagining that?

Varun Sivaram:

We don’t know how this is going to play out. You may say, “Oh, the great battle between hydrogen and electric has led to the victory of electric vehicles.” But really, hydrogen and electric right now are playing around at the very margins of an internal combustion engine dominated vehicle scene, right?

Thomas Byrne:

Sure.

Varun Sivaram:

So, there’s a long time to go before we figure out which of the alternative fuels-

Thomas Byrne:

Because there’s a lot of signals, right? Volvo.

Varun Sivaram:

Plenty of-

Thomas Byrne:

Tesla, is obviously still selling a lot of cars.

Varun Sivaram:

Plenty of great signals that electric vehicles are the front runner among alternative vehicles. The advantage of the hydrogen fueled vehicle is refueling time. An electric vehicle takes a long time to charge. But if you’re used to filling up at a gas station really fast, you can do basically the same thing at a hydrogen fuel station, if of course, there are enough hydrogen fuel stations.

Thomas Byrne:

Right.

Varun Sivaram:

So, I think that hydrogen vehicles are only one of a range of compelling applications of hydrogen the energy carrier. I think hydrogen the energy carrier is this remarkable way of storing solar energy, right. This is batteries are often considered the intuitive way to source solar energy. But hydrogen is actually a very compelling proposition. If we could harness sunshine, which is intermittent, and then convert it into hydrogen, which is a store of energy, it’s portable.

Thomas Byrne:

Yeah.

Varun Sivaram:

Well, you could power not only cars, but hydrogen can be used to power a range of industries. You can use hydrogen, for example, combine it with waste carbon dioxide from an industrial smoke stack, a coal power plant, and you can use that to produce a range of products that currently petroleum meets, whether it’s plastics, to other kinds of petrochemicals. I think that using hydrogen as a store of energy, that is then a feedstock for many different sources of economic value, whether it’s used as a transport fuel, or as an industrial fuel, I think it’s a compelling way to store solar energy.

Thomas Byrne:

The next technology outer space solar stations.

Varun Sivaram:

Really, really cool. It doesn’t get enough air time. Look, out in outer space, you get 10 times as much solar radiation as you do here on the Earth’s surface when you account for no atmospheric losses, no day and night, et cetera. So, because of that, it makes a ton of sense. If you can make a really lightweight solar coating to send up a whole fleet of these up in space, maybe self-assemble them using robots, create this enormous array out in outer space of solar panels. And then beam the energy back to Earth in the form of microwaves. On Earth, you’ll have to have a rectifier receiving station that converts the microwaves back into electricity. And then you’ve got this source of 24/7 non-intermittent solar electricity coming from space.

Thomas Byrne:

Now, it sounds very futuristic. But there are some folks working on this right now?

Varun Sivaram:

Exactly. Japan is working on it. They actually want to build a prototype. NASA has a study ongoing. I think I am a reviewer for the study. So, serious people, serious scientists, serious governments around the world are putting money behind this. It is a cool proposition. And it is far more realistic than say fusion.

Thomas Byrne:

And so, all of these different technologies have to be deployed in order for us to meet that second future that you are envisioning, right, where the status quo right now runs us the risk of the first future in which we do not adequately because of the value of solar achieve substantial climate mitigation. Whereas, in order for us to meet that second future, it’s going to require us to elevate our thinking a little bit and innovate even more so than we had envisioned.

Varun Sivaram:

Hey, I couldn’t have said it better. All I’ll say is that second future may or may not require us to deploy all of these cool new technologies. But it at least requires us to make substantial investments in all of them.

Thomas Byrne:

And what kind of investments are being made now?

Varun Sivaram:

Well, around the world, countries invest on the order of 15 billion dollars in research and development in energy technologies. And the goal under Mission Innovation, which is a pact made at the Paris Climate Change Accords, the goal was for countries to double that to 30 billion dollars by 2021. Now, initially when President Trump took office, it didn’t look like the United States was going to meet its own target. And the US is the biggest funder of energy R&D around the world.

Varun Sivaram:

But remarkably, just last week, Congress passed the ominbus spending bill, which actually increases US funding for energy innovation. So, we’re probably a couple years behind our commitment. But we are actually increasing our energy R&D. And around the world, other countries that signed up to Mission Innovation appear to be on track. So, we could actually see substantial investments in energy innovation. Maybe we won’t hit the 30 billion number. We’re probably going to break 20 billion.

Thomas Byrne:

How do you get the capital, or maybe not the capital markets, but the private investors? Is this mostly the realm of governments to fund some of the more cutting edge innovation? Or, you communicated the story of Nanosolar attracting millions of dollars back in the day, which has probably now made Silicon Valley skittish on making these types of investments. Is this just for the governments to fund?

Varun Sivaram:

You’re absolutely right. The private investors are definitely skittish about funding breakthrough energy technologies, whether it’s solar, or other fields, be it advanced nuclear. But that’s not to say that that makes this entirely the realm of the government. Because if the government’s the only funder here, you’re not going to have breakthrough energy technologies.

Varun Sivaram:

The government’s got to do a great job of intelligently mobilizing its own resources to encourage private capital to flow. And so, that means yes, ramping up government research development and demonstration. But it also means doing much more than just basic research, right. If you want to embolden private investors, it’s helpful if the government helps fund the first-of-a-kind field demonstration project of a new technology.

Thomas Byrne:

Sure.

Varun Sivaram:

It’s helpful if the government provides shared resources that help to de-risk particular investments. So, Cyclotron Road out in Lawrence Berkeley National Laboratory, your old stomping grounds.

Thomas Byrne:

Yes.

Varun Sivaram:

Cyclotron Road offers entrepreneurs these shared facilities. They can use LBNL’s lab resources. And a VC might not have to go and fund all of their independent lab space. So, there are many ways that you can basically make clean energy investing a more attractive proposition to investors. And by the way, we probably want a wider range than just VCs.

Thomas Byrne:

Yeah.

Varun Sivaram:

VC model might not work for-

Thomas Byrne:

I mean, corporates seem to be, some of the more manufacturing or industry based corporate, seem to be a logical partner for a lot of this technology.

Varun Sivaram:

Absolutely. Corporates, as well as folks who have a longer time horizon, folks who can write bigger checks. Bill Gates is trying to solve this problem with his breakthrough energy fund, which aims to be a long-term patient capital investor.

Thomas Byrne:

Do you know if they’ve made investments out of that yet?

Varun Sivaram:

We’ll see.

Thomas Byrne:

Yeah.

Varun Sivaram:

They’re still setting up their team. I think we’ll need many more investors of that build.

Thomas Byrne:

Speaking of investors, you go into some of the financing structures. So, I want to talk about a few of those. For us, at CleanCapital, this is where we focus a lot of our attention on how we unlock institutional capital. The statistic we often cite is only 0.4% of institutional capital is currently in anything resembling clean energy. That’s a World Economic Forum study. So, there’s a lot on the sidelines right now that needs to come in. You start by talking about yieldcos. Let’s talk about quickly what a yieldco is, and then get into why it makes sense?

Varun Sivaram:

Or, why it didn’t make sense originally.

Thomas Byrne:

Yeah. Let’s start with why it didn’t make sense for it to start.

Varun Sivaram:

Yeah. So, the yieldco at its core is actually quite a good idea. And I remain committed to that proposition that the yieldco correctly structured, in my opinion, is simply a holding vehicle that allows you to bundle together a lot of different renewable energy assets, creates a diversified portfolio, and it’s easily tradable. It’s a vehicle listed on a public stock market, for example.

Varun Sivaram:

And so, investors can buy and sell shares of it. This solves two important problems for large institutional investors, who you mentioned only 0.4% of their capital is invested in anything resembling this stuff. But a whole lot more should be because the return profile of a renewable energy project, it’s just ideal from their perspective. It’s a long-term, low risk, high-yield investment. That’s wonderful. A solar power plant just sits there and produces electricity-

Thomas Byrne:

For someone like a pension fund or an insurance company who basically has to just pay almost fixed liabilities year, after year, after year. The cash flows from the solar facilities produce that, match that liability.

Varun Sivaram:

Exactly. So, the yieldco solves two problems, two barriers for institutional investors to invest in this stuff. First, institutional investors just don’t have the manpower to diligence each project, right. A yieldco offers them a diversified portfolio. And second, institutional investors far more comfortable buying and trading publicly-traded securities than buying and trading projects which have serious liquidity risks. So, by solving those two problems, this basically connects an investor who would want to be invested in this asset class with an opportunity to do so. Now, the first incarnation of yieldcos crashed and burned.

Thomas Byrne:

Sure. We all remember it.

Varun Sivaram:

We all remember it. The model was-

Thomas Byrne:

Here in the United States.

Varun Sivaram:

Here in the United States. Exactly. The model was for a parent company, a developer. The most infamous was SunEdison to have a trial yieldco. And parent developer would develop projects, and then drop those down or sell them into the yieldco. This creates a lot of different conflicts of interest, for example. There were some governance issues. Allegedly SunEdison had some meddling in the internal affairs of what’s supposed to be an independent, publicly-traded company.

Thomas Byrne:

Yeah.

Varun Sivaram:

The yieldco. They were majority shareholders, they could do that. And the yieldco was structured in a way that it was greedy. It needed growth in order to keep its shareholders happy. And I don’t think that fundamentally we should think of these vehicles as growth vehicles. Look, this vehicle is supposed to be exactly what we want it to be, which is boring.

Thomas Byrne:

Yeah.

Varun Sivaram:

It’s meant to be boring for boring investors, right?

Thomas Byrne:

Yes.

Varun Sivaram:

Who want predictability. We want the yieldco to be divorced from market risk. The market goes up and down, but the yieldco just has a bunch of stable, underlying cash flows. Let’s not make it dependent on the market. So, I think that was a mistake that was made with that first incarnation.

Thomas Byrne:

Yep.

Varun Sivaram:

So, there was a confluence of events sometime in the summer of 2015, and a bull market turned bear, and suddenly these yieldcos just were sold off, and spiraled downwards, and lost folks a lot of money. Going forward, I don’t think that has to be the case. I think you correctly pointed out the US yieldcos were the ones to burn out. Well, the European yieldcos are doing just fine. The European yieldcos are structured in that much more safe, boring way.

Varun Sivaram:

I think going forward, once investors get over the scars of the yieldco crash, the next generation, whatever it’s called, it may not be a yieldco, the next generation that bundles together solar assets into a diversified pool that can be bought and sold as securities, that’s going to offer institutional investors a way to invest more of their capital in this attractive asset class.

Thomas Byrne:

I’ve looked at the historical stock price of the Renewable Energy Infrastructure Group, which is listed on the London Stock Exchange. The European yieldco. From 2013 to today in preparation with the podcast. And with the exception of Brexit in July of 2016, the stock price moved basically 5%.

Varun Sivaram:

Yeah.

Thomas Byrne:

One way, or mostly trickled up. Compare that to what TERP, SunEdison’s yieldco go did from 2014 through 2015 when it crashed, right. It was a much more volatile, much more big swing. So, it’s supposed to be boring like an MLP, or like REIT in real estate, right?

Varun Sivaram:

Exactly. Exactly. Those were the original inspirations. Look, if the solar industry is going to have the kind of success as other parts of the industry, and SunEdison inspired to be the next energy super major, right?

Thomas Byrne:

Sure.

Varun Sivaram:

Well, they’re going to have to use some of the financial tricks that other folks use. Oil and gas industry can fund its pipelines, thanks to MLPs.

Thomas Byrne:

Yep.

Varun Sivaram:

You mentioned Real Estate Investment Trust in the real estate sector. And the one thing you and I haven’t mentioned yet is how the auto or mortgage industries fund auto loans and mortgages.

Thomas Byrne:

So, talk about that a little bit.

Varun Sivaram:

So, that’s securitization.

Thomas Byrne:

Yeah.

Varun Sivaram:

It’s asset-backed securities that enable those industries to source enormous amounts of capital. And institutional investors are very comfortable with asset-backed securities. And I think securitization is starting to take off here in the United States. I think in 2017, we saw over a billion dollars of securitizations done. So, securitization works beautifully for these distributed assets. You’ve got a lot of rooftop solar panels, for example.

Varun Sivaram:

You may not want to invest in any one of them because you have credit risk or production risk. But if you aggregate a whole lot of them into a portfolio, you can smooth out some of those risks. And you have a pretty attractive portfolio, attractive recurring cash flows. Well, if you pull that into a portfolio, you can bundle, and slice, and dice it into securities. And sell them on market just the same way as you would for auto loans, for example.

Thomas Byrne:

Sure.

Varun Sivaram:

So, this is a way for us to speed the deployment of distributed solar assets because you’ll have a much more, a much deeper pool of capital available.

Thomas Byrne:

What we love about it at CleanCapital is that it ultimately unlocks, some of these developers are holding onto these assets. What they really want to do, the best use of capital, is to sell it down to a long-term pension fund, whether it’s the equity of a yieldco, or the debt, or securitization. So, they then have that money back in their pockets to recycle into new development, right. So, you just get that cycle like you have with MLPs and REITs.

Varun Sivaram:

Exactly. And I think you guys play an extremely important role in the ecosystem because as we get this market started, we’re going to need those intermediaries. And I think you guys exemplify this. CleanCapital is going to connect an institutional investor, a pension fund, that’s unfamiliar with the space with this portfolio of distributed assets. And in doing that, the first time, or the second time, or the third time, you then unlock capital that can then be recycled to do even more developments. And you get the ball rolling.

Thomas Byrne:

Yeah.

Varun Sivaram:

And once the ball’s rolling, this becomes a self-sustaining ecosystem, right, where institutional investors consistently give capital. That capital then enables the developer to recycle his warehouse loans, and go into even more distributed solar deployment. I think your role right now as an intermediary, a conduit, is super important.

Thomas Byrne:

We think you’re right. We think you’re right. All right. So, as we start to wrap up, we’ve hit a lot of different points here. Maybe you could crystallize where we need to get to over the next five years? I think there’s a lot of steps to be taken. And what you think is what’s the urgency? Is it urgent? Or, is this a long path to 2050? And what do we have to do near-term to adjust our mindsets?

Varun Sivaram:

Before I answer that, let me just say the stuff we were talking about just now, the financial innovation, you might say, “Why am I talking about financial innovation for existing technologies?” And then I’m talking about new technologies.

Thomas Byrne:

Sure.

Varun Sivaram:

Well, I actually think of this as happening in parallel. I think that in the near-term, we have a great technology. And we’d like to deploy as much of it as possible. And that’s where financial innovation can help us. And down the road, new technologies will take over. And they’ll benefit from the financial innovations that we’ve been developing. And so, down the road, they’re going to emerge into a very sophisticated marketplace if we invest in parallel in these brand new technologies. So, I think all of this happens in parallel.

Thomas Byrne:

I think that’s right. And I don’t think it’s mutually exclusive that a pension fund can invest in a 20-year asset right now, and simultaneously we can be advancing innovation on many other fronts.

Varun Sivaram:

I think that’s exactly right now. Now, your question was, “Hey, what’s the urgency here?” And it doesn’t really look like there’s much urgency, right. Look, we’ve got something that works. Solar is the fastest growing energy source on the planet. It attracted 160 billion dollars in investment last year. These are all great signs.

Thomas Byrne:

Yeah.

Varun Sivaram:

The auction prices are coming in around the world at 2 cents per kilowatt hour. This is unbelievable. But by the way, those are for projects that will be built in a couple years. We don’t actually know what subsidies are bundled. But still, remarkable. What on earth is the urgency? What I argue in the book, why I wrote it, is this is a slow moving train wreck. It’s urgent because if we don’t make the investments now, we’ll rue the day we didn’t make the investments, call it 10 years down the line.

Thomas Byrne:

Yeah.

Varun Sivaram:

Yeah. And if we hit that wall, it’ll then be too late for us to say, “Ought oh, we didn’t invest in innovation. Time to do it now.” Because some of these types of innovations have long lead times. So, in parallel, I think we urgently got to invest in all three kinds of innovation. The financial stuff is doing very well. And we’re thankful for CleanCapital’s role in the ecosystem. The technological stuff, that’s where governments have to be strongly supporting new technologies. And then on systems, look, we’re already seeing in some frontier markets, whether it’s California or Germany, we are seeing markets where solar has achieved a large penetration.

Varun Sivaram:

And it’s now time to make your grids flexible enough to handle that. In California, we’ve realized that because of value deflation, as soon as the mandate is no longer protecting solar’s growth, in California we have a grace period now because we’re pretty close to our 2020 mandate. We’ll easily hit it. Solar’s growth is stalled. The economic reality has emerged from that veil of mandates. And it’s clear now that solar has no economic path forward without further mandates and subsidies. Well, we better make our system far more flexible. And I think California is actually doing good work.

Thomas Byrne:

California will lead the way again on this?

Varun Sivaram:

I really think it’s got to. It’s got to be the jurisdictions that have achieved high penetrations, have to show the rest of the world how you integrate a lot of solar. And there’s so much to do. California 100% should be joining a larger Western energy market. It started to do this with the energy imbalance market. But it’s entire wholesale power market ought to be integrated with Western states.

Varun Sivaram:

You need to build a lot more transmission links both here in the Western United States and across the US to make it easier to aggregate renewable energy. And I think California and states like New York are leading the way on making their utilities service platforms for a smarter grid that enables demand response and flexibility. Storage is another key component. So, there’s so much that happens now to prove to the world, “Hey, we’ve got a ton of solar. Here’s how we integrate.”

Thomas Byrne:

And we didn’t even get into the revamping of the grid. So, there’s a lot more. But I encourage everyone who listens to this podcast to go out and buy, Taming the Sun. It is sort of an anthropology of where we’ve been and a mandate for, or a recommendation for, where we have to get to. It’s a great contribution to the space. Varun, thanks very much for joining Experts Only podcast.

Varun Sivaram:

Tom, thanks so much for having me.

Thomas Byrne:

Thank you too, Varun, for joining us this week. I hope you all enjoyed the conversation, and get a copy of his book. Of course, thank you to our producers, Lauren Glickman and Emily Connor. Please visit cleancapital.com for more information about CleanCapital and to listen to prior podcasts.

Jon Powers:

Thanks for listening in today’s conversation. Find more episodes on cleancapital.com iTunes or wherever you get your podcasts. If you like what you hear, be sure to subscribe and leave us a five star review. We look forward to continuing our conversation on energy, innovation, and finance with you.