Episode 59: Live at the NYSERDA Green Innovation Showcase

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Episode 59: Live at the NYSERDA Green Innovation Showcase

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On this special episode of the Experts Only podcast, CleanCapital CEO Thomas Byrne hosts a conversation at the 2019 NYSERDA Green Innovation Showcase (New York City, 11/6/19). Our guest is John Santoleri, partner and board member at Clean Energy Venture Group and Innovation Advisor for the NYSERDA Investor Advisory Board. Hear John’s insights on the state of cleantech investing and why NYSERDA is “the largest cleantech investor you never heard of”.
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Listen now:

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Full Transcript:

Jon Powers:

Welcome to Experts Only Podcast, 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.

Jon Powers:

Welcome back to Experts Only. This week’s episode is actually hosted by my partner Tom Byrne, CEO of CleanCapital. It was a live interview at NYSERDA’s Green Innovation Summit, that took place November 6th in New York City. The topic of conversation is in clean energy tech, the New York advantage.

Jon Powers:

Tom had a conversation with John Santoleri, who’s been a professional investor for the last 25 years. He’s focused on early stage investments in clean tech and fintech, serves as an innovation advisor for NYSERDA. For those that don’t know NYSERDA, it’s the New York State Energy Research and Development Authority. He helps bring an investment lens to the agency’s Cleantech Grant Program, which puts out about 80 million annually.

Jon Powers:

John also has an extensive background in the space, and his career includes 15 years at Warburg Pincus, where he invested over 800 million in equity and helped raise a further billion in third party financing. It would be a fascinating conversation, a lot happening here in New York, you can learn about through this dialogue. And as always, you can go to cleancapital.com to get more episodes. I hope you enjoy the conversation.

Thom Byrne:

Thanks, everyone. It’s great to be here with my friend John to have a nice conversation about clean energy investing, broadly, and certainly how it pertains to New York and NYSERDA, and the work that John’s doing with NYSERDA.

Thom Byrne:

We did this last year. My co-founder, Jon, interviewed Alicia and we put it on our podcast as well. We have more than 3,000 listeners across the country for CleanCapital’s Experts Only Podcast. And it got really rave reviews, so we’re very fortunate to be invited back to do it again. And it’s great to be here with John to get some of his insights on the market, given his wealth of experience and expertise in clean energy.

Thom Byrne:

So I want to start it off discussing some of your background in investing, and then start tying it to what you’re doing now at NYSERDA. You started your career at Warburg Pincus. What kind of stuff were you doing there when you were there?

John Santoleri:

Yeah, so first of all, thanks Steve, and thanks NYSERDA for sponsoring this. Yeah, I started my career in investing 30 years ago this year at Warburg Pincus, where I was fortunate enough to land a spot. Warburg, for those of you who don’t know, is a diversified private equity firm, although that term has evolved over the last couple of decades. And my experience there was in growth and venture-related investing.

John Santoleri:

The other thing that is unique about the platform is, they’ve got a diversified group of industries and geographies all rolled into one fund. So as a neophyte investor, I was able to see multiple economies, multiple businesses, and each of their business cycles, and lots of different business models.

John Santoleri:

That experience really informs what I’m doing in cleantech today. For example, Warburg was unique back then in doing a series of project-based businesses, some of which were clean energy-related, or at least sustainability-related. For example, we did early water development businesses, early code gen, I was involved in, along with more traditional real estate and other project-based businesses, which are not typical for the venture capital business.

Thom Byrne:

It’s interesting because, I recall back in the mid 2000s, there was tons of venture capital flooding into renewables. And it took a lot of setbacks from those investors to realize that venture capital, in asset level investments, was not the right source of capital.

John Santoleri:

Yeah, and that was a model that, for many years, Warburg exploited. In traditional energy, but like I said, we had a water developer that we founded on the back of the Clean Water Act. And their goal was really just to develop water projects for municipalities.

Thom Byrne:

To what, cloud? Just make it compliant with the Clean Water Act?

John Santoleri:

Right.

Thom Byrne:

Water treatment.

John Santoleri:

Basically, bring together the capital so that the municipality could upgrade its facilities, deliver clean water, and basically arrange for the financing of that asset, arrange for the construction of that asset. And ultimately, refinance that asset, once you had a series of those contracts in place. And what happened with that was, it was sold to Vivendi, or whoever… this General Daiso, whoever.

Thom Byrne:

Very early stage sustainable investing.

John Santoleri:

That’s right.

Thom Byrne:

How did that end up? So you spent a number of years there, and working in the hedge fund industry. When did you first start to dabble in impact investing and clean energy investing?

John Santoleri:

I like to think that, Lionel Pincus, who is one of the founders of Warburg, was, in his own way, an early impact investor. I say that because, in the early days at Warburg, Lionel would emphasize that the investments that we were making were intended to be additive. So, create growth in the economy, create jobs and livelihoods for folks, as opposed to purely financial engineering. And that was really the roots of the firm.

John Santoleri:

A number of the investments that I worked on would be characterized today as sustainability. I mentioned the water developer, but we also invested in industrial water purification. We had an early industrial recycling company. So there were a number of things that had… we had a focus in that area, would be called environmental. I left Warburg about 15 years ago and created an impact-oriented long/short hedge fund, private equity in the public markets, with some of my former colleagues from Warburg.

Thom Byrne:

Cool.

John Santoleri:

We were not a strict ESG fund. We really had a ethical mandate. And what that meant was, we thought about the ethics of the businesses we were investing in, and figured that if a company was willing to shortchange its employees or the environment, they might get around to doing that to their shareholders. And so tried to avoid that. And the way that-

Thom Byrne:

Did you look at the underlying investments? Whether it was coal, or tobacco, or firearms, the traditional things in ESG now? Were those red flags for you?

John Santoleri:

We avoided the obvious bad stuff, but the challenge… And for those of you who are experienced in ESG reporting and metrics, that business has evolved a lot over the years, and even in the last five or 10 years. It’s still a challenge, however, to get good quantitative metrics on ESG characteristics for small and mid cap companies. So we had to sort of do it the old fashioned way and just talk to management and try to make an assessment.

John Santoleri:

But for me, that manifested itself as investments in clean tech, that ethical mandate. And for most of that fund’s life, which was really 2008 for six or seven years, it was better to be short than long, for the most part, in the clean energy world, sadly. We did make investments in things like SunPower. When Total invested, that turned out to be a fantastic opportunity.

Thom Byrne:

Did you invest in the point that Total came in, or?

John Santoleri:

Well, if you remember back then, Total made an investment, a small, I forget the percentage, but a small equity investment, but it committed a massive amount of debt support to SunPower. The wheels were coming off the solar market at that point.

Thom Byrne:

That’s when First Solar and SunPower stocks went from… I remember First Solar at 400 or something crazy.

John Santoleri:

All of them down 80%. We had the flexibility to be able to invest in a bond traunch that was small, that none of the other big players could invest in. My assessment was that, Total had committed a few billion dollars of credit support, and a few tens of millions to equity support. That’s what I think folks missed was that, it was unlikely that they were going to let this company go, just because the stock price had gone down. And they ended up-

Thom Byrne:

Doing fine.

John Santoleri:

Doing fine. And obviously, increasing their investment significantly.

Thom Byrne:

So in your hedge fund, you’re starting to do some things related to ESG. How does that fast-forward into sort of.

John Santoleri:

NYSERDA and focus on clean energy.

Thom Byrne:

In the last few years, yeah.

John Santoleri:

Well, like I said, it was better to be short than long in many cases. So we started to invest in more opportunistic private market areas. So for example, Solar eX, some solar financing. That led me to conclude that it was really… If I was going to be effective in having an impact, it really made sense to return to the private markets from the public markets. There really wasn’t any opportunity out there in the public markets.

John Santoleri:

Around the same time, I was introduced to to John Rhodes, who was Alicia Barton’s predecessor at NYSERDA. What’s fascinating about NYSERDA, for the folks who are listening to the podcast, many of you know this, but started in the ’70s in response to the oil crisis back then, really, as the name implies, as a research and development outfit. And the mission has evolved substantially.

John Santoleri:

A lot of people don’t really have a sense of what NYSERDA is. But today it spends $800 million a year supporting clean energy initiatives in New York State. And the group that is sponsoring this event today, and that I’ve worked closely with, The Innovation Group, what used to be called the R and D group, is about a 10th of that budget. But still, $80 million a year invested in stuff that looks very much like early stage clean tech.

John Santoleri:

We’ve said this at these kinds of events before, but the innovation group at 80 million bucks a year is the sort of biggest clean tech venture capital firm that you’ve never heard of, is the way I like to think about it. I sort of made a transition from a research-focused effort to a commercialization-focused effort in their innovation effort over the last five to seven years.

John Santoleri:

What I was pleased to find when I got to NYSERDA is, there’s a incredibly deep bench of technical talent. NYSERDA is a authority, not an agency. So this is a different kind of an animal. The people there are extremely well educated, and very deep on the technical sides of the business. And they were evolving that practice to assess and figure out the best investments that would have commercial outcomes.

Thom Byrne:

Why is that so important?

John Santoleri:

Well, if you look at the goals of NYSERDA, particularly in the innovation side, they need to help fulfill the aggressive policy agenda that has just been enacted most recently with the climate leadership and Community Protection Act. Net zero by 2050. And it is not going to happen if we sponsor a lot of research papers, right?

Thom Byrne:

Sure.

John Santoleri:

What needs to happen is, solutions need to be deployed scale. NYSERDA spends a lot of money deploying established solutions. But I think we all know that’s not going to be enough, right? We don’t yet have all the technology that is needed. So innovation plays a critical role in funding those technologies that can get to market and can get commercialized. I think the challenge is, to figure out how you apply that money in the best way so that it does indeed result in impact.

Thom Byrne:

It’s interesting, do you think that there’s a lack of capital in the breakthrough technologies, whether it’s public money or private money? Or, are we suffering from a lack of capital in known technologies? Do we need more money coming into solar and wind, as opposed to the breakthrough technology that we don’t even know what it is yet? Or, both?

John Santoleri:

Well, there’s a lot of work out there. Morgan Stanley just published a paper that said, we need, what, $50 trillion of investment globally to-

Thom Byrne:

I’ve seen many estimates, and they’re all in the trillions. Two trillion a year is what we at CleanCapital always say. Some people say 50 trillion over the next 30 years.

John Santoleri:

Right.

Thom Byrne:

Either way, it’s a large number.

John Santoleri:

It’s a large number. What’s not in those numbers necessarily is what it’s going to cost us if we don’t do it. There’s certainly a lot of estimates of that. Although, up until recently, I think those were hard for people to get their arms around. Today, if your fire insurance policy in California went up from $600 a month to $2,000 a month, you might be more willing to pay an extra 20 bucks for renewable energy as an alternative to paying thousands of dollars per year.

Thom Byrne:

Or, if you’re a shareholder of any of the utilities in California these days as well, you start to notice some of the climate impacts a little bit more acutely.

John Santoleri:

Yeah. But to get back to your question, I think there are gaps at a number of levels, certainly. Some of my colleagues at Clean Energy Ventures have done a recent paper looking at the mismatch in early stage funding. That’s a frequent conversation topic at these kinds of events. So that is still there. I also think that-

Thom Byrne:

Mismatch? Can you clarify that a little bit?

John Santoleri:

If you look at the amount of capital that is coming into the market, or is in the market for various phases, you play in an area where it’s a commercially deployed, and it’s got a warranty on the piece of equipment that is generating whatever the revenue is, there’s still a need there. Folks like the Green Bank are helping fill that gap.

John Santoleri:

But on the early end, there’s still a mismatch in terms of the amount of funding that’s going towards that early commercialization effort. I don’t think we have all the answers today. If you look at the projections that are out there, there are still breakthroughs that are required, particularly around, say, carbon capture. That’s an area where, even over the last couple of years, it’s gone from, I think, much more theoretical, to things that are on the cusp of being commercial businesses.

Thom Byrne:

And there’s very few investors that are putting money into… Breakthrough Ventures, which is that large, I believe, $2 billion group, is doing a whole bunch of interesting things in storage and nuclear. But there’s not a ton of money going into those breakthrough opportunities.

John Santoleri:

There are a handful of folks, many of whom are here in the room, that are putting money into this sector. Certainly, where NYSERDA plays is in that area. What I’ve learned, I’ve been with NYSERDA now for two years as a consultant working with their innovation group, and in many ways it mirrors the efforts that a venture capital firm goes through, in terms of figuring out where to invest its money.

John Santoleri:

They’ve really got to look at a landscape, identify gaps, figure out which gaps can be addressed with the application of money. Then, go out there and find deals, or attract deals in their case, attract companies to apply for grants, select those grants, diligence those grants, and then manage them. That lines up pretty closely with the efforts that a venture player goes through in this area. As I said, NYSERDA, at $80 million a year in innovation alone is supporting that early stage effort.

John Santoleri:

I won’t go into all the details. There’s a map over here to my right, and folks on the podcast can find this information at NYSERDA. But that innovation budget, that $80 million a year is spent both in direct support, in terms of grants for companies, and indirect support for events like this, and through the network of incubators and accelerators, and the EIR program, as well, to support companies.

John Santoleri:

So as an example, I was in a meeting recently, and I think Ray is here, but with a really innovative company in the bioremediation business. And we were sitting around the table with a seasoned industry expert from Columbia, and his right-hand person who is helping on the business side. But also at the table, was a very experienced chemical industry executive, who knows this market 40 years.

John Santoleri:

Our friend Heidi from C-BIP, who is skilled at helping companies eat their broccoli, so to speak. Do all that work that needs to be done, in order to create a viable business. And myself. And as I thought about it, this is exactly what I would have done at Warburg, if I were in the same boat. I would have brought these kinds of resources to there. And you couldn’t pay for those resources. I think that I’m doing it, and the other people around the table are doing it because of a concern about climate change. And NYSERDA is the one making that happen. That’s the kind of support that they’re giving to companies. And it’s really a venture creation kind of process.

Thom Byrne:

Is NYSERDA, or, in other states, the equivalent, is that a critical piece to unlocking some of the innovation? Would private investment not otherwise be there?

John Santoleri:

My view on clean energy investing and the need for capital is that, the challenges, while they’re significant, I think, are… I think the issues are as much cyclical as they are secular. There are plenty of industries that have very difficult sales cycles, long sales cycles, and very challenging customers, and very hard technology problems and scale-up.

John Santoleri:

What I’ve seen over my career is, we’ve seen cycles in every single growth industry that there is. Going back to Warburg Pincus, the benefit of growing up there was, although I wasn’t investing in biotech, I saw the cycle and got to see when my partners in biotech basically… the peak when everybody was investing, they were going home early. And hopefully, after the crash, they were headlining themselves up to make those investments. The same thing really has gone on in clean tech. Well, trying to find investments in the public markets, you’re really making venture investments in Kior, or any of these companies that were really a science experiment, that have gotten funded in the public markets. I think NYSERDA plays a critical role.

John Santoleri:

For the folks on the podcast, the aggregate budget, as I said, $800 million a year, the balance of the budget beyond innovation supports all sorts of deployment of existing assets in New York State. Green Bank is part of that. The Green Bank has financed early stage companies who are aggregating assets. I’ve got an efficiency finance company for example, that we chatted about, which is…

John Santoleri:

At the end of the day it’s a specialty finance originator, and they just happen to be originating contracts that are backed by the savings that are generated through efficiency. And the Green Bank was willing to underwrite that. I hope we grow out of the Green Bank very soon and can underwrite that with just a more traditional source of financing, and ultimately securitize those contracts.

Thom Byrne:

That tracks the history of clean energy and the public partnership aspect of growing clean energy. I think back to ’08. As we came out of the recession from that, Obama passed the American Recovery Act with cash grant, the 1603 Cash Grant, the Department of Energy loan guarantees, a whole bunch of other incentives.

Thom Byrne:

And that’s really what sprung solar and wind into where it is now. That gave it the wind at its back, pardon the pun, to get it to a critical mass. I think there is this public need to really get the commercialization that you’re discussing, to get that going, to get momentum behind it, for sure.

John Santoleri:

Yeah. And build enough scale so that it becomes something that that the traditional finance markets can get their arms around. At some level, my efficiency company just has a series of contracts from consumers that have FICO scores. And it really doesn’t matter whether that contract is a auto loan, or a solar loan, or a credit card loan, or an efficiency loan. It’s really just a consumer loan. And the sooner that becomes mainstream, the better we all off will be, I think.

Thom Byrne:

Any hesitation that the capital markets has to it is that it’s just, they’re so familiar with auto loans? And it’s now familiarizing themselves with something that just looks or feels a little different?

John Santoleri:

I don’t know what your experience has been here. My experience is that, capital markets, they don’t really care. If the money is green, so to speak, it doesn’t matter. So we’ve seen all sorts of innovations and plenty of disasters in financial products. Everything from subprime mortgages… Subprime auto loans were a challenge, but they didn’t bring down the financial system. But they are still there. So there are plenty of subprime car laons that are our issue. That’s become a mainstream asset class, if you will. But if you go back 15 years, it was a unique asset class that people didn’t understand. And therefore, it was much more expensive to finance it, and you couldn’t finance it at scale. Much like solar. You’ve been through the challenges there, and ultimately-

Thom Byrne:

It appears risky for the early investors 10 years ago. And then gradually, people are wandering wondering how this has all of a sudden become a relatively low yield investment now. And you’ve got private equity investors, we talked about this, who no longer really have a place in solar, or not the place that they think they did, because it’s no longer a 12% returning asset class. It’s looking more like the debt, or lower yielding investments that are out there, infrastructure assets.

John Santoleri:

In a way it should be, because it’s very predictable. And ultimately, that should drive a low cost of capital.

Thom Byrne:

It’s relatively predictable.

John Santoleri:

Right. And there’s where some innovations can come in. So another company that, helped by NYSERDA, but that we’ve got investment in is, looking at insurance solutions to mitigate that variability that you’re talking about.

Thom Byrne:

Yeah, and that’s Energetic. Am I correct? They’re a great company. We’ve spoken to a bunch. And again, creating a product that the capital markets will find attractive. Which is, how do you ensure the production of these assets, the revenue of these assets at the end of the day? That’s such a novel, but important maturation of the industry, to create something for the capital markets.

Thom Byrne:

Going back to your clean energy investing, through the lens of NYSERDA, what kind of stuff are we seeing out there, that’s interesting, that is more forward-thinking than, it’s funny to say, the boring solar and wind stuff, that we’ve been doing for the last decade?

John Santoleri:

Right. No. It’s extraordinary to look back at the evolution, the cost curve in those markets. So clearly, in terms of climate impact, offshore wind is clearly a big area. Less a place for early stage investors to play. But certainly, in terms of NYSERDA’s efforts, a big deal. One of the benefits that I’ve been able to have from my perch at NYSERDA is really, to see a broad range of very early stage ideas that are getting to market. I would say that, there is a whole sector of, what I’ll call incremental types of improvements.

John Santoleri:

So components that will be more efficient, that will enable, whether it’s storage or electrolysis or carbon capture. There’s a wealth of ideas coming out of the universities. Clearly, storage is a problem that must be solved, in order for this system to work. All sorts of efforts going on there. I’m actively engaged with a nice upported company that’s developing a alternative to lithium in a sort of short and medium-term storage, and is making great progress in advancing a roadmap there.

Thom Byrne:

What’s the technology? Can you disclose it, or?

John Santoleri:

Sure. This is a company working on zinc-manganese dioxide. It’s basically the same technology that is in, and has been for years, in an alkaline battery, that today powers your remote, or smoke detector, perhaps. But the trick is making that recyclable, and then being able to manufacture it at scale. Even in the last couple of years, I think there was a perception that it was game over with lithium.

John Santoleri:

But as that market has expanded, some of the problems have surfaced, in terms of both costs and safety. They’re both related. In order to make it safe, it adds a layer of costs that is a challenge. So there’s a lot of vectors to try to solve that problem, but it’s going to take some time to get them implemented. And it’s not clear they fit into the existing manufacturing pathway, which then creates pathways for other solutions.

John Santoleri:

So clearly, storage. Carbon capture, I think, is early in its development.

Thom Byrne:

Are you thinking carbon capture, sticking some sort of device on a coal plant and making it clean?

John Santoleri:

It’s a little bit all the above. I think it’s going to be very hard to pull the carbon out of the air, but that may happen.

Thom Byrne:

I have heard some crazy stories or business models, where they’re actually trying to send something up into the atmosphere and literally draw down carbon. Are you investing in that yet?

John Santoleri:

Well, there’s all sorts of efforts. No, no. The things that interests me in terms of investing, and we haven’t talked much about clean energy ventures, and I’ll spend a few minutes on that if I can. We’re interested in solutions that it can have a big impact on CO2 reduction, much like… Very lined with NYSERDA’s goals. For that you really need science that’s advanced to the point where, customers can validate it, or at least are starting to validate it. So storage is clearly an area of interest. I think software to manage the complexity of a grid that is distributed is a huge area of opportunity.

Thom Byrne:

Great, yeah. And there’s a lot of companies out there, who are now focusing on everything from front-of-the-meter to behind-the-meter grid management through software.

John Santoleri:

And that’s a big focus at NYSERDA as well. NYSERDA, as I said, they go through a process where, they’re looking at, where are the gaps? There are folks here today from buildings and from storage efforts. And cutting across all that is their tech-to-market group, which is sponsoring this event here. That’s really modeled after ARPA-E. And the focus of that group is, to ensure that commercialization is a priority.

Thom Byrne:

Tell us a little bit about your investing in Clean Energy Venture Group.

John Santoleri:

Yeah. Clean Energy Ventures is a somewhat unique animal, if you will. It combines both, a committed capital fund, along with an angel group, and has the distinction of 30 experienced operators, primarily. And also, some financiers like myself. A decade, plus track record of success in clean energy, which is somewhat unique.

John Santoleri:

That was the catalyst to be able to raise a hundred million dollar committed capital fund for series A and seed stage investments in clean energy. I got to them, actually, was initiated, in a way, by NYSERDA, through Pat Sapinsley at the Urban Future Labs, who introduced me and a few of my colleagues… Today, colleagues, but folks that I’d met, to create a New York office for the Clean Energy Venture Group.

John Santoleri:

So I met Dave Miller and Dan Goldman back in 2016, 2017. They were, at that time, working to raise their fund. I launched the New York office with a Jean-Noel Poirier, who is here today, and Tom Blum. Today, we’ve got seven or eight members in New York going to 10 or 12, and 25 members in Boston. And we invest as one group, although we’ve got, like I said, two sides. We’ve got experienced angel group and a committed capital fund that gives us the fire power to sort of stay the course.

John Santoleri:

That was something I didn’t have to worry about back in the Warburg days. But it’s a critical challenge, particularly in clean energy today, having the capital to get to at least break even.

Thom Byrne:

Which is why it’s nice that NYSERDA is a pocket of cash to put into the startups. Just as we wrap it up, if you had to cast a wand at the different offerings that a NYSERDA can provide, what do you think is the important types of capital that are needed in the marketplace? For our podcast listeners in particular, what opportunities do they have from NYSERDA?

John Santoleri:

That’s a tough question to answer, because NYSERDA supports such a broad range of activities. And in fact, I often get questioned from folks like, I don’t know what it is. Help me out, help me figure it out. I think that’s an opportunity and a challenge for NYSERDA. Like I said, there is 700 or so million dollars a year spent deploying clean energy technologies in New York State. That’s established products, but which need to get out there in the market.

John Santoleri:

On the innovation side, if you’re innovating, you ought to be in New York State. Because, New York State has, arguably, the most aggressive climate agenda of all the states. Policy is perhaps world-leading. So if you want to be in storage, you ought to be in New York State. If you have grid solutions, you need to be in New York State. I’ve actually been encouraged that, both through my CBG seat, as well as my seat here at NYSERDA, the amount of inbound traffic from folks in other jurisdictions and other states has really exploded over the last six or so months.

Thom Byrne:

I agree with that.

John Santoleri:

I think it’s partly due to the policy initiatives, and partly just people starting to understand the amount of support that NYSERDA provides.

Thom Byrne:

Agree. Over the last few years, I just think of, like I said to you earlier, where New York’s come over just the last five years. From being behind the curve on renewables and state support, to now being a leader. It’s really come a long way. John, thank you very much for your time. It’s been a pleasure. Thanks, John.

Jon Powers:

I hope you enjoyed the conversation and learned a lot about what’s happening here in New York. The New York State Energy and Research Development Authority is doing some really cutting-edge work to help drive New York’s clean economy. We’ve had other members of the team on, here at Experts Only, and hope to have some more on in the future.

Jon Powers:

Again, you can learn more about some of our episodes at cleancapital.com. As always, we’re looking for good folks to interview, so please feel free to send them my way. And as always, I look forward to continuing the conversation.

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.
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Tell Congress to extend the ITC

Episode 58: Live at Solar & Storage Finance 2019

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Episode 58: Live at Solar & Storage Finance 2019

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On this special episode of the Experts Only podcast, Jon Powers moderates the keynote panel at Solar Storage & Finance 2019 (New York City, 10/29/19). “Terawatts & Trillions” explores the need for
trillions of dollars in investment if we are to hit our climate change mitigation goals. At the same time, the power sector is undergoing a fundamental shift as generation becomes more decentralized, storage matures and comes down in cost and more technologies hit the sector. These factors create a huge opportunity for investors but the industry needs to provide comfort that the risks are low to attract more institutional funds.

The panel discussion features:

Mona E. Dajani, Global Head of Energy and Infrastructure, Pillsbury Winthrop Shaw Pittman LLP
Rael McNally, Director of Real Assets, Infrastructure, & Renewable Power, BlackRock Alternative Investments
Simms Duncan, Senior Director of Project Finance and M&A, Lightsource BP

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Listen now

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Full Transcript:

Jon Powers:

Welcome to Experts Only Podcast 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. Welcome back. This is your host Jon Powers. Today we have a special episode live from the Solar Storage and Finance USA forum in New York City. We had a panel discussion on terawatts and trillions. The focus was this on how do we get to the trillions of dollars we need to hit our climate change mitigation goals. We have a really top tier panel and I hope you enjoy the conversation.

Jon Powers:

My name is Jon Powers. I am the co-founder of CleanCapital. And at CleanCapital we are working to accelerate investment into the clean energy space by bringing efficiency into the market. Over the last 15 months, we’ve gone from having, we’re on 50 million under management to half a billion because we have a platform is helping us to screen, acquire and then manage distributed generation assets. So we’ve gone from about eight megawatts to about 200 megawatts and are continuing to grow with partners like BlackRock and CarVal Investors and other institutional investors. But I’m also the host of a podcast called Experts Only and Experts Only focuses on the intersection of energy, innovation and finance. That’s what I’m here to talk about today. We have a phenomenal set of speakers, which I’ll get to in a second and allow them to sort of introduce themselves as we get through the questions.

Jon Powers:

But really the mission we have today at the Solar Storage and Finance USA conference is to set the stage for the conversations later. We were specifically even challenged to really talk about how we can start to think big about this market. That’s why it’s called terawatts and trillions. But before we think big, I do want to challenge us to step back a decade. And first there’s a poll, a first poll if you can pull up, ask you to take a look. And the question for the poll is, were you in the solar energy storage or clean energy industry 10 years ago? I certainly was not as our crew to raise their hand if they were 10 years ago. So let’s look back a decade in 2008, the total capacity of solar grew 17%. It grew by 1.265 megawatts the entire year. In Q1 of 2019 we grew by 2.7 gigawatts in solar PV just in the first quarter alone. So what does that mean as the market has evolved?

Jon Powers:

I wrote an article a few years ago in the evolution of solar finance. Looking back at sort of 2000, 2008, 2009 when you just had the energy security act passed by president Bush in a Democratic House and Senate and establishing investment tax credit. You had the influx of capital around the financial crisis, the government capital that helped move the reinvestment act, to help move shovel ready projects forward. And you had a very inefficient market for things like solar. One people didn’t know these panels worked. They didn’t know if there was enough sun in New York to make them work. Very few people had heard of a Power Purchase Agreement and you’re trying to convince a CFO of a big box store that they should put this on their rooftop. Flash forward, and the investors in that space are high risk, high reward, meaning high cost of capital.

Jon Powers:

But to continue to see this market scale, we needed to bring down that cost of capital and really scale in the capital that’s going to drive us to the solutions we need to face regarding climate change. And the timing couldn’t be any more critical. We’re continuing to make greenhouse gases at a rate that’ll result in $54 trillion in damage by early 2040. There are deep capital resource needs and institutional investors are just beginning to move into the space. Some of the investors on this stage today have been doing this for a while, but there’s others that have been talking about, for instance, divesting from fossil fuels but not many are taking that next step. For instance, the Harvard endowment announced earlier this year, they’re going to invest in cryptocurrency, but they think clean energy is still too risky of a bet, but that’s what we face.

Jon Powers:

Series put out a report a few years ago. It’s going to take us $1 trillion in investment a year to help keep ourselves below two degrees. That’s a significant uptick from where we are today. But we are going to talk today about how we get there because the global trends are really clear. The technology is proven. Unicorns like energy storage are following in the path that solar head set moving us to distributed generation with certain policies that are in place and helping it scale. By 2035 more than 50% of global power generation is expected to be renewables. Solar and wind are the cheapest forms of power in two thirds of the world today. This April for the first time ever, renewable energy supplied more power to America’s grid than coal. Amazing transformations that are happening both here in the US but also globally.

Jon Powers:

Thanks to leaders like Alicia and others setting the policy stage. But thanks to many folks in the room who are helping to break these deals apart and bring in the capital and to move it forward. So the opportunities are immense. The challenges are immense. So we’re going to start to talk through those today and I’m going to open up with our first speaker and I’m going to have each of the speakers introduce themselves through a question. That way I’m not just going to sit here and read bios for you, but you can find their bio’s in your book. Mona is the head of a global head of energy and infrastructure for Pillsbury, Winthrop, Sean Pittman, one of our sponsors today. So Mona, we’re seeing tremendous in the space as well as a cultural awakening around climate change. You’re a really well-respected voice in the marketplace as well as the media being on CNN and Bloomberg and other places. Can you discuss a little bit of the macro trends you’re seeing in the market and maybe set the stage of where the market is today?

Mona E. Dajani:

Sure. Delighted to. Good morning everyone. How are you doing? We’re lucky that we don’t have the torrential rains that were predicted this morning. I want to talk just globally on a macro level. Obviously the emphasis today is going to be on solar and storage, but I’m going to go even more macro and just talk about, just briefly about renewable energy. As Alicia and Jon have emphasized, we’ve seen a real big just sea growth of change in renewable energy investments. There was 350 billion. This was one of the numbers that was quoted to me in 2018 just in renewable energy. We’re seeing the entrance of more strategic investors in the space and for example in Europe, Engie has announced that they’re going to be investing between 12.5 billion and 13.5 billion in renewables and behind the meter solutions. And now is saying that they’re going to be developing 11.6 gigawatts of solar capacity in 2021.

Mona E. Dajani:

Meanwhile, here in the US there has been what has been reported as 12.5 billion just in the solar space with their strategic investors. We’re also seeing a lot more financial sponsors entering the space. KKR agreed to make a 900 million energy investment in NextEra. We also have governments that are actively becoming more involved. Such as in Europe, we have Greece and France have announced new energy plans to promote renewables, while in the US we have local government and States have continued to drive the renewable progress with RPS and CPS standards. We have States such as New Mexico, California, Hawaii, Washington, Puerto Rico that have 100% carbon-free goals. Here in the US we also have a lot more corporations that are entering into this space. We have over 200 Fortune 500 companies that have launched renewable and sustainable programs and impact investing.

Mona E. Dajani:

Then while we’re also seeing that the growth in this space has created some challenges for the legacy fossil fuel industry. The Norwegian government has proposed a phase out of certain oil and gas exploration and production and the German government has announced plans to shut all 84 of its coal power plants by 2038. From just to speak a little bit about the energy storage space that has… Forbes was quoted as saying that they expect this to be $150 billion industry by 2023. This was in an article today by Forbes. The two drivers that we’re seeing for storage are the mobility market and also the cost declines in the space. We’re seeing real leadership in four distinct countries. The first one is China. The second one is India. The third is the US and the last we’re just combining all the European countries, EU.

Jon Powers:

That’s an interesting ranking.

Mona E. Dajani:

Yeah. So I think that’s a kind of an overview of both the space just to set the stage a little bit. Jon, if that’s okay.

Jon Powers:

No, that’s great. It’s really helpful. I think one of the untold stories here domestically is what’s happening in China. 40% of all panels deployed last year were deployed in China. They’re growing at a phenomenal rates. I’m going to transition now to Rael who’s the director of real assets and infrastructure and renewable power at BlackRock. BlackRock in full disclosure is an investor of CleanCapital. So as we read you some of these numbers, some of those numbers are coming to us into our projects. Keep them coming. BlackRock’s the world’s largest money manager with over 6 trillion in assets under management and boasts more than 5 billion in asset under management in renewables. There were 250 wind and solar projects both domestically and globally. Rael, can you give some history on BlackRock’s involvement in the space and why is one of the leading asset managers taking such a progressive view on renewables?

Rael McNally:

Sure. Happy to. And thanks everyone for having me this morning. I think if you look at Larry when he’s on his pulpit, he’s a very vocal advocate for the pricing of carbon, externalities. So it’s something that’s close to his heart and it goes beyond just pricing carbon externalities. When you think about the DNA of BlackRock is primarily a risk shop. So the first thing they think about when they think about any kind of investments is downside risks. They’re not thinking about knocking it out of the park. Their orientation as kind of a bond house is always to the downside. So across our client business, which obviously is huge in the insurance universe and the pension universe with long dated asset liability matches, they’re very focused on the impacts of carbon. Thinking about kind of the increased, I guess volatility in weather environments, weather patterns. So it’s pretty natural when you take that kind of top down view that they’re as big as they are in renewables.

Rael McNally:

But they took the plunge over eight years ago, back in 2010, ’11 to start the infrastructure business at BlackRock by taking a team out of a kind of a private equity family office that had its roots in core infrastructure but had over time migrated to clean energy and renewables. So I guess I’m one of the people that’s just about being in solar for 10 years. But at BlackRock that’s the way they wanted to start the infrastructure business. I guess if you objectively think about BlackRock is just six plus trillion, nearly 7 trillion now, you would think a big generalist fund is what makes sense. But for them they wanted to do something that was sector specific, that targeted kind of a growth area and that build an expert in industry team of folks from the space around it. So we’ve got technical folks, we’ve got developer owner operators on our team globally and there’s 45 of us just dedicated to deploying that 5 billion.

Rael McNally:

We’re in the market raising our fifth global product, targeting the space. And it really is for them, it’s that just longer term view. They don’t think three years, five years, they think 20 years. They think about what’s coming down the track and they’re trying to plow a furrow that they felt it wasn’t adequately addressed. I think if you look at any infrastructure manager now, they don’t need to be renewable specialist. Renewables additions for the last five years, year over year have been North of 50%. So if you’re in any generous infrastructure or power fund, you’re in renewables. That was the narrative around where the market was going and they wanted to build a dedicated team. We’ve obviously supplemented that group. We now have 25 billion in infrastructure across debt and equity, across power more broadly, but certain regional strategies, but we’re going to continue to grow. But equally we’re staying strong in the renewables dedicated space.

Jon Powers:

Just a quick followup. You guys are at your fifth raise in the structure and is there any clear… I mean, raising money is never easy, first of all, but is there any clear momentum building after fund in this space?

Rael McNally:

Yeah, there is. I think it’s always, the market is not saying still. So what worked in 2011 doesn’t work in 2019 from a cost of capital perspective, from a risk perspective. Back then it was taking construction risk was a differentiator. That’s not enough anymore. Understanding solar was a nuance that we had that others didn’t have. That’s not enough anymore. So for us it’s now moving closer to the customer. It’s moving to the distributed model. It’s thinking about solar plus storage, standalone storage offshore as kind of the next wave of things. And again, we’ve dipped our toe in most of these things over the last eight years. But we’re constantly looking at three to five years to try and stay relevant. So our first fund was kind of the rise of renewables. Second was probably mainstreaming and this global fund is really about climate infrastructure. So it’s the broader transition of the energy mix, not just in generation, but the overall consumption towards electrification.

Jon Powers:

That’s really fascinating frame. It sort of maps the growth of the industry. So Simms Duncan is a senior director in project finance in M&A at Lightsource BP. First of all, he’s a Navy guy, so I’m not going to hold that against you, Simms. But I will say go army in a month. You’ve got incredible chops in the project finance space and we’ll talk about some more of that later. But first of all, how is BP in oil and gas super majors sort of approaching the solar market and how does that approach differ from others in the space?

Simms Duncan:

So I guess I’d start out by saying that what we observe is a real dichotomy between some of the European sort of super major oil companies and the American oil major companies. So if you think about Total and Shell and BP, all of them going back some number of years have taken pretty proactive steps into the renewable space. ConocoPhillips, Exxon, not quite so much. I think a lot of that is probably driven by their shareholder basis, which are quite different in the pressure that they feel and the sensitivity to the climate change issue perhaps being a little bit more, a little heightened in Europe as compared to the US. So we’re seeing those companies and certainly BP, this is BP’s kind of second trip to the plate with solar for those who have been around. I was one who voted yes in the poll. I have been in the industry for more than 10 years and I have been around to see BP play at this game once before.

Jon Powers:

We own some of those original BP solar pannels.

Simms Duncan:

So I guess that would be my first comment, my second comment would be that there are different approaches to playing in this space and I’m very happy to be affiliated with BP in this regard. You see some of the majors take kind of a venture capital approach, make acquisitions or small investments in a number of different companies to just kind of see what works and what floats. BP has taken the opposite approach really, which is to select a platform in the solar industry on a global basis, lend its brand to that platform, that being Lightsource, now Lightsource BP and really pour a lot of support into that platform. So we at Lightsource BP or are pleased to be one of the very few companies in the BP umbrella that is actually branded with BP on a global basis. And we are their exclusive solar provider globally. BP doesn’t have quite the balance sheet maybe of a BlackRock, but I think it’ll take some big oil and gas balance sheets and other balance sheets coming into the space to advance the industry.

Jon Powers:

So unique focus coming into BP second round, where how has that experience from the previous time BP was playing in solar affects your day to day now?

Simms Duncan:

Well, I guess you could look at it in… Well, the first BP’s first approach to the solar industry was of course a manufacturing approach. That didn’t work out so well when the Chinese kind of took over a huge market share of manufacturing. They’re taking a development approach, which I do think is kind of closer to home for an energy development company that has 100 year history in the industry. That’s one thing I’ll say and then secondly, what we feel every day of course is a tremendous amount of support, balance sheet support, introductions in the marketplace. Just a lot of support coming to us from BP. And there’s just no question that they’re committed to the industry for the longterm. That BP is not going to fail a second time in this industry.

Jon Powers:

Well, that’s great. So we’re going to do another round of questions and I’m going to open it up to the audience. If you’ve got questions hopefully more active in the last open session, please think about them and I’ll open back up to the audience. But I do want to go back to that series study and the fact that we need to get to $1 trillion of investment to hit our climate goals and ask just to poll the audience, how long will it take for us to reach $1 trillion in investment in clean energy? Less than five years, five to 10 years, or more than 10 years. So there’s continued momentum in the space. We’re seeing new players each quarter, bringing down the cost of capital.

Jon Powers:

Mona, my first question is for you with, I mean, you’re seeing so many transactions and the deal ecosystem has really grown in scale over the last decade. But now we’re talking about a need to even triple that. If we’ve got 350 billion this year or last year, if we’re going to get to a trillion a year, is the ecosystem ready for that? What’s got to happen to really scale the deal side of this to be able to get that much capital out the door?

Mona E. Dajani:

Well, I think that from, there’s going to be more… I also have been one of those people that’s been in the industry for more than 10 years. When I first started doing deals in the space, it was over 20 years ago and there were very few specialists in the space. So there are very few like third party, like accountants and engineers, IEs, of course law firms. As I’ve seen this space mature, we’re seeing more proliferation of these third party like support providers. I’m seeing a massive shakeout too because those law firms and those accounting firms and those IEs that are really top of their game are the ones that are doing like us at Pillsbury, soup to nuts everything. And we know everything in this space. We’ve seen it all. We don’t have to ask someone to help us, accounting firm or whatever to understand what for example the tax credits.

Mona E. Dajani:

So you’re seeing a shakeout, there’s a massive shakeout right now. There’s a lot of movements and the stronger players are the ones that are known and that are succeeding and that really do everything soup to nuts in the space. So that’s kind of what we’re seeing. So to answer your question, are we ready? Yes. It’s already there. It’s proliferating. All the stronger players are moving and consolidating with other stronger players.

Jon Powers:

Is that consolidation? So I think about some of the growing markets in the space in general, right? The utility scale spaces is there and grown and a pretty mature, residential solar is happening at sort of a rapid space where policy supports it. But that sort of middle sweet spot of distributed generation, commercial, industrial, the deals aren’t that thick to begin with. So there’s a consolidation of these services and sometimes the cost of that consolidation. How’s that going to affect the ability to really scale up a space like that where you need really almost every piece of the capital sector?

Mona E. Dajani:

Well, I’ll just say how we work at Pillsbury, because we have the expertise and it’s very deep, we can do things more efficiently and faster. So that I think speed and efficiency are very important in this space and you have to be able to react very quickly or else you can lose a deal, you lose your snooze. So that’s really what we’re seeing more of. And you just really, you’re seeing a lot more expertise that can deploy many different work streams all at once.

Jon Powers:

Yeah. Rael. I want to go, you guys are looking not just domestic US but globally, but you mentioned some of the trends of those five different funds and sort of where you guys are today. How is BlackRock beginning to manage moving out of, I think what have traditionally been sort of the utility scale stuff into that mid range distributed sector?

Rael McNally:

Yeah, I think we’re still playing in both to be clear. So I think we just trying to say with the evolution of where the market’s going. Fundraising is slow and tough and the idea that you have marketing and strategy that works now, you find out the markets move by the time, which is what happened, essentially with our first fund. The market was moving as we were a capital raising and by the time we were in the deployment window. Return expectations that tightened, we had to work harder to find the right product and kind of middle of the fairway deal, which is what we sold with that first fund. For us being been global is increasingly important to get that relative value picture because you will always have some issue, be it expiration of tax credits, tariffs, the impact on domestic markets and congestion or concentration risks in any particular market. So for us trying to deploy one in this fund will be two and a half billion of cash equity, we need alternate avenues.

Rael McNally:

We can’t just be kind of banging our head down a single channel. In terms of the different markets like the US is many, many different markets. I actually think in the context of where other markets that historically have been much more straight forward, European markets with feed in tariffs, busbar plug and play a price you get day one, it’s pretty de-risked and very straight forward. The US has always been a more competitive environment with the RFPs and that’s where the rest of the world is going. So understanding that we’ve obviously got a much bigger, deeper liquid power markets, that’s now proliferating. As you look at RFPs that the Iberian peninsula is essentially liquid wholesale power market, the Nord pool or the Nordic countries are another liquid power market. They are starting to mirror what we’re seeing in the US in terms of big commercial and industrial consumers that demand clean energy going direct buy or to partner with projects.

Rael McNally:

So I think a lot of the learnings that we’ve had from being here the last eight years and we have a global team but are now starting to… The scars we have on our back is probably a better way of putting it from the last eight years are now starting to bear fruit in terms of how we think about international markets and opportunities. We’re really excited about APAC because it still has that long dated investment grade busbar off take and it’s got other challenges that need to be worked through. But in terms of the relatively low risk, easy access, opportunities, there are markets you can participate earlier in and kind of disintermediate local pools of capital that ultimately are cheaper. And they were the right buyer and holder for a core asset in that domestic currency. Then the other markets were pretty judicious in how we’re going to target and capital deployments in spite of trying to deploy two and a half billion.

Rael McNally:

But we’re trying to find good partners. So across the 5 billion we’ve got 27 partners that we’ve invested with. So we’ve got more than 260 projects now. So it’s more than 10 projects and partners. We want to find relationships with people that are like-minded, that understand the asset class and that aren’t necessarily looking for that kind of immediate quick book but want to build a book and build business and build capital and value creation for themselves and we’re happy to share that, but we want to participate in that kind of environment. And particularly as you get into the smaller scale stuff and energy storage, which is much more nascent, that mindset is really important to us to find a partner that wants to kind of be in it for the longer term, create value and be a leader and a player in the space. If that isn’t necessarily thinking about how to flip this one five megawatt project and maximize the last dollar.

Rael McNally:

There’s give and take in a broader relationship where the suboptimal deal gets done because some good deals are getting done and we’re all making money in the longterm when it’s much more kind of last dollar or last cent. That’s a really tough place to pay on a case by case basis.

Jon Powers:

Yeah, it’s interesting. And with CleanCapital we are a longterm player and I think what’s interesting is we’ve had these… we’re buying up assets from folks that were buying and flipping. The relationships with the off takers and many times are challenging because of that. You have to go back and rebuild the trust of the facility manager at a university or the school superintendent where you may have 15 different systems and that takes efforts because the previous owner never returned their phone calls and were only interested in holding on long enough to flip out.

Rael McNally:

Yeah, that’s huge for us. The ESG and community engagement piece is massive because that’s over 20 years, you’re going to need to go back and you’re going to need to work with you.

Jon Powers:

Absolutely. We’ve seen obviously solar rise, standalone storage is really on the move and the next phase that everyone continues to talk about is solar plus storage. You’ve got a unique background in this space and led one of the industry’s first financings of the integrated solar plus storage PPA with an infrastructure investor. Can you paint a picture of what that deal look like in some of the challenges you had sort of explaining that new approach to an institutional investor?

Simms Duncan:

So I guess the first thing I’d say about solar plus storage is that it’s not just twice as complicated as solar. It’s like an order of magnitude more complicated than solar. When you think about the power flows, there’s just a lot more places the electrons can go and a lot more losses they can experience along the way. It’s not a single product or value proposition you’re making to the customer. You’re making two or three and stacking them together in terms of energy price arbitrage, backup resilience services, as well as trying to provide a price of energy that’s cheaper than retail grid price. Then of course, all of that is manifested in a contract that is quite a bit more complex than your standard solar PPA. So it’s a complicated business.

Simms Duncan:

But I think part of the question was, is the market ripe? Is the time for the market now? I guess, I would tell you that my first grader yesterday in a little town, a few miles North of Palo Alto where I live, his school had no power because of the PG&E outages of course that we’re reading about in the newspapers. But school was open, so he went to school all day long, indoors in the classroom without any power. The ironic thing is that just this past summer, the school on a hillside, kind of on the backside of the campus, installed quite a large, behind the meter solar system. So it would have been and not that there’s not complexity involved and it would have required a decent size battery system to power a whole school for a whole day.

Simms Duncan:

But you can imagine that there could have been an interim solutions there. What a missed opportunity to power that school? And quite a few parents kept their kids home from school that day and that ripples through of course, but what a missed opportunity to install a battery and keep that school going with power during the day? Obviously 10 years of power outages in the state of California while we fix the system is not a good solution.

Jon Powers:

Yeah, that’s an interesting. We are actually living that situation right now, some of our portfolio, we have… I won’t name the school, the school is in the district. They are being affected by the PG outage. And it was amazing the response we got when we reached out to those superintendents and said, “Would you consider adding storage?” And they said, “Let’s talk tomorrow.” And they didn’t even really know what storage was, but they said, “I have the solar panels sound helping me today. PG is not there.” So I have a theory that the PG&E crisis is going to help us leap frog and transition more efficiently if we can get to not just new solar plus storage, but retrofitting solar plus storage.

Simms Duncan:

I couldn’t agree more. But I’ll tell you that the vendors of generators, diesel generators are out there chasing the same business.

Jon Powers:

Exactly.

Simms Duncan:

You’ve got to be aggressive to get it.

Jon Powers:

So I’m going to open it up to the audience. First off, if there are any questions, please use the mic and any questions for the audience. I’m over here is where we wait for a mic.

Sangeeta R.:

Good morning. My name is Sangeeta Ranade. I’m with the New York Power Authority and we are doing lots of projects with the governmental sector on the solar and the storage side. But we’re able to do that because we’re a state agency. So there’s a level of risk that we can adopt. I was just curious what you would need to see in the storage market to feel like those contracts are bankable, just to get a sense of where you need the market to go to make that more scalable.

Rael McNally:

So yeah, look, I think it’s a nascent market. I think what really helps solar accelerate the way it did apart from the cost savings is the fact that they were getting long dated low risk contracts. I think if you really want to spur growth capital investors with low costs, particularly low cost of capital, to avoid that, to skip the VC phase and the PE phase and to get the infrastructure capital, you want to see high quality investment grade contracts with duration. Batteries generally speaking at the moment anyway, are assumed to have about a 10 year use for life. So at least if you can match that and provide some economic return above kind of the cost of the facility, that’s essentially what people are looking for. The challenge from one of the questions whenever they get them back up is around merchants, standalone storage and that’s a really attractive notional market opportunity.

Rael McNally:

We saw the PJM Reg D market, which is a really shallow high value market. They’re completely saturated. Then they also changed the kind of the signal or the shape of construct that they wanted for the battery, that configuration, which essentially meant that newer technology was already going to make the existing infrastructure obsolete. And that’s the real risk with being merchant in an asset class where the technology is improving so fast and getting cheaper so quickly. But we all see how our iPhones perform when we use and abuse them. I’m probably most guilty of that, given that mine smashed. But if you do that with a battery, we don’t know the use case, we don’t know the opex, they’re all interrelated. There’s a lot of complexity to Duncan’s point. So straight forward homogenous contracts with a decent piece of duration is what’s going to get you the most capital flows that are at a cost of capital that makes it efficient.

Jon Powers:

Any other comments on… Oh, go ahead.

Simms Duncan:

In the CNI space I would certainly agree with you and when I was developing solar plus storage projects a few years ago, we took the [inaudible 00:34:00] sort of standard CNI contract, kind of downloaded it from the website and tried to make as few changes as possible in order to have it look and feel as similar to a standard CNI contract as possible. In the utility space of course the contracts are all custom regardless and that’s not something you’re going to change anytime soon. So I think as long as there is a good solid value proposition to the utility, along with the a credit worthy counterparty, you’re going to be able to get through it.

Rael McNally:

Actually that’s a really good point. The one thing I would say as well, the use case for batteries is so broad. So you’re going to need a contract that matches the use case otherwise that mismatch again impacts useful life cost opex like functionality.

Jon Powers:

Any other comments on the merchant associated question?

Mona E. Dajani:

I’ll just say we’re seeing merchant a lot with a spec-data centers and this solar and storage. I’ve seeing an uptick on that.

Jon Powers:

In the back.

Emily E.:

Emily Easily, with Novus Clean Energy. Jon, this one’s for you, especially since you’re sitting next to your lovely partner there. I recently sat in a room with $72 billion of capital that they wanted to deploy in energy space and they don’t know where to put it. And its endowments, it’s family offices, they’re scared of oil and gas and they’re scared of the returns for clean energy. So from your perspective of CleanCapital, how do you continue to compete knowing that you’re probably not the cheapest capital in the room and drive those returns for your investors?

Jon Powers:

That’s a good question. So at CleanCapital, what we do is focus on that distributed generation space. One thing I didn’t talk about during the introduction is we’ve actually built a technology platform that we use to underwrite those deals really efficiently. I’m going to use a live example of a deal we did almost a year ago. It was 46 megawatts. It was 60 different assets in that transaction. These are all operating solar projects and it got repeatedly passed over by a lot of the institutional investors because it was just too much to due diligence. We’re able to take that technology… our technology allows us to see into those deals in a way that others can’t and quickly and efficiently underwrite them and then come back and say, “Look, understandable, this is a lot easier to do one big deal that’s utility, but look at all the value opportunities across this portfolio that you can optimize and drive future value.”

Jon Powers:

So you’d have a great base case here, but look at what you can do by tweaking this and tweaking that. Great example, people had been owning this thing. We’re paying tens of thousands of dollars a year, almost 100 thousand dollars a year to mow the lawn and one of the solar systems that was in the desert. And we called the OEM company the next day, we’re like, “Hey, that contract is done. Thank you.” But it takes that level of in the weeds and not everyone can do that. And that’s our value proposition at CleanCapitals. We can get in the weeds, not just when we buy the projects, because as we talked about earlier, we are longterm owners. All of us represent any other capital, but we take a really active asset optimization example. So the school’s superintendent and PG&E that we called last week, it wasn’t the first time he heard it from us.

Jon Powers:

The previous owner, this is a system that was all tilt access to solar and all the accesses were different directions when we bought it. And he said, I’m not an engineer, but I know that’s not the way it’s supposed to work. We actually got in, fix the system and then continue to build a relationship, providing for instance, curriculum to the schools that they can use for educating folks on solar. Nothing we developed stuff that we have sort of found it online, built that longterm relationship. So when we called him up, he answers our call and is willing to sort of work with us. So that that is our strategic advantage in this space. Other questions? I’m going to go to the second question here, which I think is interesting. Are we in danger of building too much, too early? Other industries especially telecoms did this and caused sort of the.com bubble. I’m going to first turn to a Mona who’s been in the industry for a while and get your thoughts on that.

Mona E. Dajani:

I think it’s certainly true that we’re moving faster than expected, but we’re seeing both the… there’s drivers that are pushing this to go forward. I mean what I was, the EV market is huge. What I was talking about earlier with mobility is really a driver in this. So there’s this, with the cost of declines together with the demand in energy and mobility is really driving this. Do I think that we’re in danger of building too much, too early? I don’t think so because they still need to be bankable and we still need certainty and good money is not going to go after bad money and it’s very difficult from my perspective. I’m not going to work on a deal that I know is not going to happen. So I don’t think it’s the exuberance that we saw during the.com crisis at all.

Simms Duncan:

To the best of my knowledge, the vast majority of energy storage contracts or integrated solar plus storage contracts are fully contracted off-take. I’m not aware of very many projects that are pure merchant players, so I don’t see there being a risk of an overbuild in the near term.

Jon Powers:

Yeah. Interesting. So I do want to end, we’re a little bit over time. But I do want to just put one last sort of challenge out to the panelist and if you look back, again going back to the series study, we need to get to $1 trillion, folks that you think you saw in the poll, see that as possible in the next five years but there’s a lot of barriers to get there. Just quickly, one, what’s the sort of unspoken challenge that you sort of see in the market that’s not talked about at a conference like these to get there? Then, two give us some hope on why we can get there. I’ll start with Rael.

Rael McNally:

The challenge is vested interests. So it’s the incumbents basing what’s already been approved, maybe it’s no longer efficient. It’s struggled to deal with the intermittency of on-grade renewables. Obviously storage has a role to play in helping mitigate that. I think more diversified generation or consumption moving to kind of a co-location model has a role to play in modifying that. But it’s hard for folks to let go. Like you’ve seen FPL resists incredibly strongly in their footprint, having renewables in spite of being one of the biggest renewables developers to their unregulated arm. But now that they’re activity moving in and building things to go to clients and say you want renewables, we’re building renewables, buy from us. So I think there are lots of ways to facilitate it. I think that the biggest challenge… mostly growth through 2050 is coming in emerging markets in renewables.

Rael McNally:

So as we talk about OECD markets and our market here in North America, it’s dealing with the incumbents and the fact that it is legacy sunk costs that either needs to be recovered or written off. That’s a difficult ask in political cycles, for regulators for lots of different reasons. But I do think the narrative from States, from cities, from commercial industrial off takers and from the consumer base, people are just starting to really push and demand accountability and demand that people take steps on this front. So I think that’s the positive. I think government organizations are starting to open the checkbook for the asset class to try and solve solutions. That could be big bank stopping buying bonds of banks or other companies and starting to focus on green bond procurement to change the orientation around how people are thinking and they think the more of a sustainable kind of longterm mindset.

Jon Powers:

Thank you. Mona.

Mona E. Dajani:

I think that we want to have bankable deals and we want longterm certainty in the space. I think one of the challenges that we have is that we have here in the US mixed policy signals from the federal level and from the state level. And you’ll see certain States that have really, really advanced the cause and they’re attracting a lot more clean energy projects. And there’s other States that have not, but I’m hopeful that based on the demand from consumers, from corporations on the hill that we will change our longterm federal policy for carbon free electricity. That we will also see the need on a more global basis for grid modernization, which is also going to propel the policy and also expansion of RPS and CPS together with reforms that have already been discussed and already both at the federal and state level on permitting and citing.

Jon Powers:

Interesting. One just follow up to that. As someone who’s been in the policy space and worked in the advocacy space, I challenged the audience. One of things we did at CleanCapital is we tagged an intern to go through all of our projects and identify which congressional district it is in. And it was amazing to see the spread of districts, both democratic and Republican. Then we sent a letter recently to those members advocating for the ITC. It’s very simple job, literally driven by an intern. It’s something that has a great voice to say, “Hey, we are providing jobs and support in your hometown, please support this credit that’s going to make a difference.” It’s on all of us to make that fight and make the case to… the policies are in place for us to get there. I’m not sure it’s going to happen before 2020, but we should be advocating for it anyways. So Simms.

Simms Duncan:

So a short time ago we signed a 130 megawatt PPA in the state of Alabama. And Alabama has no renewable portfolio standards. It really has no renewable energy incentives at the state level at all. And we won that contract because in Alabama, solar is the cheapest priced new form of energy. And as a relative Lightsource and Lightsource BP have been around for eight or 10 years, but in the US we’re a relatively new player. We’ve been in existence in the US for two or two and a half years. But with a strong balance sheet and a strong brand, we’re seeing tremendous growth. So I’m not really worried about the growth opportunities. I think certainly policy with the ITC and with tariffs and all that sort of stuff is disruptive and presents a challenge to the industry. But I just hope that some of the exogenous factors like support for coal and nuclear doesn’t sort of take root and cause the problem for us.

Jon Powers:

Well, I ask for a round of applause for our panelists. Thank you so much. You can see the kind of conversations we have at Experts Only. So I sort of challenge you to go to our website at cleancapital.com. You can get more episodes. Just recently had on the CEO of Proterra Bus, have the chief environmental officer of Microsoft talking about some of the interesting trends that they’re seeing in the space. I want to thank you for the audience. Thanks.

Jon Powers:

Want to thank the team for Solar Storage and Finance USA for letting us be part of this conference. It’s a great conference of transactional focused individuals. Look forward to being part of it next year and want to thank our team and Carly Battin our producer. You can always get more episodes at cleancapital.com. I look forward to continuing the conversation.

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.
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Experts Only Podcast #57: With the Expert in Electrifying Mass Transit, Ryan Popple

Let’s use PG&E to leapfrog the clean energy transition forward

Episode 56: Jamie Redford

Episode 55: Live at Solar Power International 2019

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Episode 55: Live at SPI 2019

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In this very special live episode of Experts Only, Jon Powers of CleanCapital hosts a panel of guests at the Solar Power International convention in Salt Lake City, Utah. Guests include:

Bill Bush | CFO, STEM
Bill drives project financing efforts and corporate funding initiatives at Stem, which builds and operates the largest digitally connected energy storage network.

Adam Browning | Executive Director, Vote Solar
Vote Solar’s mission is to make solar a mainstream energy resource across the U.S. Adam co-founded the organization in 2002 and leads Vote Solar’s team of advocates, experts and staff working to bring solar to the mainstream across the U.S.

Emily Fritze | Director of Strategy & Business Development, Powerhouse
Emily manages strategic partnerships, programming, and business development at Powerhouse, a network-driven venture fund that backs entrepreneurs building the future of energy and mobility.

Jon and the panel discuss some of the exciting milestones the clean energy industry reached in 2019 and what’s on the horizon in 2020.

Appreciation to Nico Johnson of Suncast for hosting us at the North America Smart Energy Week Podcast Lounge.
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Listen now

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Full Transcript:

Jon Powers:

Welcome to Experts Only Podcast sponsored by CleanCapital. Learn more 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.

Jon Powers:

This is Jon Powers, the host of Experts Only Podcast. We’re here at Solar Power International doing a live recording of this week’s episode and for those in the audience that are not familiar with Experts Only, we focus on the intersection of energy, innovation and finance. And for those in the audience that are online, the Solar Power International is also lovingly known here as SPI. It’s now part of North America Smart Energy Week and for those unfamiliar it’s put on by the Smart Electric Power Alliance and Solar Energy Industry Association. It’s the largest gathering of solar smart energy, micro grid and energy storage efforts and professionals in North America.

Jon Powers:

We’re recording live in the podcast lounge, which was put together by my good friend Nico, who you heard from earlier. You probably recognize him from his podcast Suncast. CleanCapital is honored to be sponsoring the podcast lounge this year and look to be involved in it again in the future. Our theme at CleanCapital this year along with both Vote Solar at SPI is about changemakers, highlighting the people and organizations that are driving America’s shift to the clean energy economy. Earlier this month, our team at CleanCapital put out its first annual changemakers report, highlighting the growth. We don’t often talk about CleanCapital here on this podcast. I’m going to do it for a second because we are sponsoring today. You can find more information about CleanCapital and our other episodes of Experts Only at cleancapital.com.

Jon Powers:

What we did at CleanCapital this year is really focus on growth and we’ve seen our hockey stick of growth in 2019 quadrupling our assets under management to nearly half a billion. And since last year is SPI, our megawatts under management grew 390%. We’re going to keep this momentum. We’ve got another a hundred billion we’re trying to put out the door, 100 million by the end of the year. We’d love to put 100 billion out, but 100 million by the end of the fiscal year. And we’re looking for both operating assets, storage, and new build within the distributed market.

Jon Powers:

So we came up with the changemakers theme because we recognize that our company’s growth is part of in some ways helping to drive a much larger wave of momentum in the clean energy industry. And on our show today, we’ve got some returning guests and some new guests that are really making a big difference in the industry. We’ve got Bill Bush, the CFO of STEM, Adam Browning, the CEO of Vote Solar, and Emily Fritze, the Director in Strategy and Business Development at Powerhouse Ventures. So our show is going to take a look back at what’s happened since last year’s conference and how we see the market continue to evolve in the future.

Jon Powers:

So the first round of questions while we’re recording here live, if you look back specifically over the last few weeks, this summer, we’ve not just witnessed the first ever international climate strike where millions of people came out in London and Melbourne, New York and Buffalo where I am. We had two presidential forums on climate. Here we are with 20,000 of our closest friends in Utah talking about the future of the clean energy industry. At the same time there’s a Climate Summit happening in New York City. This moment is I think relatively unique and hopefully helping to drive the transition to a clean energy future that we all work at. So what I want to do is talk a little bit about the way your organizations view this and view how this moment is helping to drive the future of the industry.

Jon Powers:

So Adam, can you talk a little bit about, first of all, what Vote Solar does and what the role that you sort of see this broader cultural moment having is setting the stage for policy changes of the last year. And if it’s helpful to put on the headphones, feel free to do so.

Adam Browning:

Sure thing. First, thanks for having me. I’m really excited to be a part of this group of awesome change makers. So Vote Solar, we’re a nonprofit public advocacy organization focused on state level policy change to really supercharge this transition to renewable energy. Solar in specific, but in a collaboration with the full suite of clean energy solutions. We’ve been doing this since 2002. I think my first SPI was in a dingy ballroom in Reno. Really, we’ve made a huge amount of difference and growth over the years. So you asked about like-

Jon Powers:

Wait, the first one you went to was in Reno?

Adam Browning:

That’s my memory.

Jon Powers:

Yeah, that’s probably true. It sounds dingy. Nothing against Reno, but it was Reno.

Adam Browning:

As this industry has grown, and that’s part of my point that I’d like to make here, is we are at a point right now where there is a trifecta of really compelling economics, good politics and winnable venues that’s really driving this growth. And so when I think of like the first 10 years that I worked on solar policy, it was about how do we make solar cheap? And that was through economies of scale. We had a theory of change that what you needed to do is incentivize the industry, build the economies of scale in order to bring down the cost. That worked. Now we’re at a situation where we’re able to have a much larger conversation around how do we deploy this at such massive scale in order to completely solve much larger problems like climate?

Adam Browning:

So one thing that has been unique about solar in specific and renewable energy as opposed to climate is that we have super majorities of Americans that really want to see this transition to renewable energy happen on both sides of the aisle.

Jon Powers:

Right.

Adam Browning:

Climate continues to be a really divisive issue in this country. And so what I’m seeing right now is you have this convening of really compelling economics combined with some examples of real success and what this transition looks like and so that it’s not so scary and it’s really about something that is making your life better rather than having to go through sacrifices in order to have success with climate. And I think that that really is at the root of a lot of the energy of this moment right now. At the same time, we also have a situation where we’re feeling the impacts of climate in ways that we haven’t ever before.

Adam Browning:

So I just want to take a moment to talk about the fact that right now one in four people in this country live in a state where 100% clean electricity is the law. Six states have passed that requirement and of those six, five came in the last 13 months.

Jon Powers:

Wow.

Adam Browning:

So while things in DC are really depressant on the federal level, I think what we’ve-

Jon Powers:

It’s a good way of putting it.

Adam Browning:

What we’ve achieved over the past year is really focusing on state level policy is really the biggest, most important string of climate successes that this country has ever seen. And it’s really been focused around this transition to 100% clean energy.

Jon Powers:

That’s fascinating. Bill, to turn into storage for a second. So Bill Bush is the CFO of STEM. The last time we talked, it was almost a year ago, I think you said very wisely that storage was sort of solar in 2000, 2008 right? But what storage didn’t have at the time was someone sort of plowing through, putting in place these state level initiatives that could really accelerate it that we’re seeing today. How is that helping what you guys are doing on the storage front? And have you guys seen a leap of storage in 2009 to maybe or solar in 2009 to storage to maybe we’re caught up to 2012 or where do you see the industry today?

Bill Bush:

Yeah, no, I think where storage is right now is that it’s becoming a strong partner to solve it. And so I think what’s happened generally storage on a standalone basis only works in a relatively small number of states, particularly when you compare it to the number of states that solar works. And I think in pretty much all of the cases that we see storage is additive economics to essentially an industry which has seen declining gross margins at the project level. And storage gives a solar developer really a path through to be able really to develop a project which they might not have been able to do in the past. And I think there’s plenty of examples of that on the social storage front. I mean I think there’s been a lot of work that done in Massachusetts as an example. You’re seeing a lot of that in California.

Bill Bush:

And so to me, I think that’s really where you’re going to start seeing… And I think those aren’t, well certainly California was the first solar state. Massachusetts wasn’t, but certainly has been historically one of the most aggressive in terms of rolling out incentive programs that allow the development of really renewable energy. Certainly, there’s other states that have been active. New Jersey now you certainly to see Maine, Rhode Island, a whole bunch of States on the Northeast. And of course there’s a lot of solar stuff happening in the Southwest and the Southeast.

Bill Bush:

But I think the biggest difference to me is not so much that storage is becoming more predominant. I think it’s that the, and this is maybe where my focus is in some ways, is that the financeability of storage has increased dramatically. And I think you kind of see that… I don’t remember, I have to admit, I didn’t look back and see when we talked, but certainly within the last year or so we had an investment from a Canadian pension fund, both on the equity side and on the project side. And I think it took years for that to happen in solar. I mean I think I started in solar in 2007 or 2008, I’m not sure. And we didn’t start seeing pension money until like 13, 14 kind of time period.

Jon Powers:

Right. It’s game changing.

Bill Bush:

So yeah, that’s a huge… Certainly if you look at GTM or any of the various pieces, lot of cost down over the next period of time. I saw something yesterday actually kind of reading in advance of this, that the cost curves for batteries are almost steeper than what we saw in panels. And that happened true in solar as well. But I think the true change was when pension funds and large industrial managers like the guys that go back in you. I mean once you start seeing large multibillion dollar funds coming into the market, you know that it’s a real thing. And so to me, I think that has actually been a massive change. Even though storage doesn’t work in nearly as many states as solar does. I think the acceptability and the financeability of the product is going to really accelerate growth pretty dramatically.

Jon Powers:

Yeah. We had a theory when we started CleanCapital that if we could work in the yielding of solar… Our mission has been to bring new capital into the marketplace, and if we could work in operating solar and keep people familiar with what it is and how these assets work and how they’re, it’s really a yielding asset that we could move into other asset classes. That is great to hear this is happening in storage.

Bill Bush:

Yeah. I was explaining something with somebody this morning. I was like, it’s a lot like real estate. It has the same kind of basic tenant of you’ve got a customer contract, maybe you have an incentive, maybe you don’t, but that’s kind of what like what a real estate asset is. I go and I buy a building. It has a certain rent roll and my hope is that one of two things or maybe both are going to happen that the property is going to appreciate and I’m going to be able to charge more rent tomorrow rather than today. Storage has those same dynamics associated with it. You have a customer contract, you have an incentive of some sort and you have market participation, which is the ability to appreciate that asset over some period of time. So to me that’s the most exciting part of this where solar kind of has that but not nearly to the level that the storage side does.

Jon Powers:

And I might want to turn it to the venture side for a second. And can you talk a little bit about what, first of all, for folks who aren’t familiar with what Powerhouse Venture does and then how I think there is a phenomenal sort of momentum a lot internationally, but also here at home for folks to be investing in climate solutions. For instance, we just had Melanie Nakagawa who has a really great climate metrics they developed for their firm for instance. So how is that affecting what you’re seeing in the technologies coming forward?

Emily Fritze:

Yeah, definitely. So Powerhouse is an Oakland based seed fund. We invest in clean energy startups, mostly software and digital technologies. We started off as a coworking space about five, six years ago just offering space for the energy startups to basically co-locate and work alongside one another. Since then, we’ve housed 70 startups in the physical space, including some notable startups that are now in the growth stage like Mosaic, the solar loan financing company, PWH Analytics, Powerhive among others. And as we all know undoubtedly what is still-

Jon Powers:

Do you have to kick them out the door at a certain point, be like, “Listen, you guys are too big”?

Emily Fritze:

We do. We do.

Jon Powers:

“Go pay rent somewhere else”?

Emily Fritze:

It’s a positive transition when that happens. So what we all undoubtedly know is that what is still needed in the market is early stage capital that is prepared for the risk associated with that very early stage and in the nature of our industry. And as we all know, there was a lot of venture capital that came into clean energy and unfortunately some not so smart investments, a lot of investors lost money. I think the exciting thing in the last couple of years, certainly we’ve seen at Powerhouse, is that there is a reemergence of venture capital and an interest in investing in this space and clean energy and in climate more broadly. Some of course motivated by impact investing, but also others returning with interest in the clean energy and transportation sector at large. I think one-

Jon Powers:

Is there a sector you’re finding people are more interested in than others?

Emily Fritze:

Yeah, I think certainly the rise of electric vehicles is for the first time requiring that or allowing customers have to think about electricity. And as a result, we’re seeing all sorts of interesting innovation in business models. But I also think that it is in some cases gives venture capital the types of market opportunities that they’re looking for as they see the fusion of electricity with transportation. So that’s one particular area. But I also think that investors are just a little smarter. A lot of people lost money in biofuels and refineries and large scale material processing. And what you now see is folks doing a little bit like what we’re doing at Powerhouse Ventures, which is investing in the what is still needed, which is that digital transformation of the clean energy sector and all of the many opportunities and business models that are emerging in that space.

Jon Powers:

Yeah, I mean we talk about actually a lot of this show with guests about how in the venture space today people are looking at how to bring multiple verticals together. Right? We’ve had Brooke Porter on who talked about how they’re tying to tie the internet of things into the broader sustainability piece. When you look at the sort of the state of play in venture for clean energy, you’ve got breakthrough and the stuff that they’re doing. How do you guys sort of differentiate yourself from sort of the broader market that’s excitingly developing, right? Because a couple of years ago people were like, Oh we tried this before and it failed. It’s not going to work.”

Emily Fritze:

Yeah. So one, we operate at the earliest stage possible. So we are that first check-in pre seed rounds or seed rounds for the energy and mobility startups. We also are focused on and historically have been on this cutting niche area of the smart home FinTech business model innovation. So a lot of the accompanying technologies whereas we have those great players like Breakthrough who are supporting the high risk hardware innovation. And three trends. So far, we’ve made eight investments and the fund will make another 25 to 30 over the course of the next four years. Some of the trends in our portfolio so far. Of course the rapid deployment of distributed generation and a lot of really interesting creative software approaches to integrating and optimizing DRs. A couple investments in companies who are looking to optimize infrastructure assets and predictive maintenance both for wind and solar. And then we’ve actually made a couple of investments in startups that are working in emerging markets who are enabling technologies for micro grades or attempting to tap into all of the unlocked potential in Africa and Southeast Asia.

Jon Powers:

Yeah. Interesting. So I’m going to take a minute to sort of look out here and if you sort of fall back from the last few years at SPI, right? You had sort of the post-Trump election fear that the world was going to fall. You had the tariffs on solar fear that that was going to crush the industry. I think it didn’t smoothly go over it, but it continued to grow. Our industry continues to grow in leaps and bounds. We’re getting the highest new employees in the workforce are solar installers and wind technicians. Storage is making incredible trends. There are policy uncertainties ahead, the investment tax credit, what’s going to happen to that? How new markets are going to kind of open up.

Jon Powers:

But if you sort of looked out over the course of the year, there are some great macro trends as well. You’ve got corporate procurement growing in unbelievable ways, more educated procures and not just in the Googles and Apples, but even in the smaller corporate leadership. What are some of the views that for instance, STEM takes of these macro trends and where do you see the market going over the course of the next year? It’s a lot there.

Bill Bush:

I guess if I knew that answer, I probably wouldn’t be sitting right here. But I think there’s going to be a couple of trends that we would expect to see. And I think one of the biggest ones is this continued pairing with solar plus storage. I mean, folks have been predicting that for a little while. We announced this morning that we signed a 61 megawatt hour deal with Kearsarge developer in the Northeast. That’s twice as big as any deal we’d ever done before. It represents about, I think it’s 200% of bookings from three years ago. So it kind of gives you some sense of, and that’s just one deal we’ve signed this year. And that’s a solar plus storage deal.

Bill Bush:

And so I think that is really going to be a trend where I think you’re going to see more states figure out how batteries can harden their infrastructure. And it’s a little scary for a lot of regulators I think because the batteries represent an asset class that they’re not used to. And just like they went through solar very difficult time on the interconnection side of things, how much generation equipment they were going to need to have their whether it was all sorts of issues around there. I think those questions are going to be starting to be answered. So I think it’s kind of a question on some level of continued progress is what I think you’re going to see over the next year. I don’t see any really big things happening really. I don’t think… Certainly the-

Jon Powers:

Do you any uncertainty around the ITC or…

Bill Bush:

I mean I think the ITC is a political football all of it. And certainly the Trump administration has been very vocal about being in favor of infrastructure. Storage is absolutely an infrastructure investment.

Jon Powers:

Absolutely.

Bill Bush:

So it should fit kind of right in there, but frankly they haven’t been the nicest to renewables in general. And so there’s a little bit of a kind of a dichotomy there. And I think Adam said that the best is that I think it’s a state problem. The states have always led on the renewable side. The federal government really never has. They’ve come in a little bit late, a couple of times, first with the grant and then with the ITC. And certainly helpful to the industry, for sure. I mean, I’m not denigrating that in any way. But if you think about it, it was like really California and New Jersey, which really got solar started, not the federal government.

Jon Powers:

Totally. Yeah.

Bill Bush:

And so from that standpoint, I mean, to me it’s heartening to see, and I didn’t actually know the stat that Adam mentioned earlier today and heard that so that I think you hear things like that. And to me, every time there’s a solar facility built, that means there’s another opportunity for storage because everybody’s familiar with the California duck curve or probably everybody here at least is familiar with that, maybe not everybody.

Jon Powers:

My dad listens to the show. He has no idea what that is. But now I’ll have to explain it to him.

Bill Bush:

Yeah, he’s like, “What is that duck thing? I don’t know if you’re talking about.” Yeah, so certainly, and I heard this morning, which I think is kind of true, is that storage is the friend of everyone. Utilities like it. Solar customers like it. Solar developers like it. States seem to like it. So from that standpoint we’re kind of in the sun-

Jon Powers:

That’s great.

Bill Bush:

We’re in a happy little spot right there and hopefully we’ll be able to stay there.

Jon Powers:

So Adam looking at you, put some great stats out about the growth of the hundred percent goals and the states, but have you worked on the federal side? One of the things we were able to do is create a lot of best practices to share and I think we’re seeing each of these states is trying to tackle things differently, whether it be the changes we’re seeing in Massachusetts or in North Carolina or in Illinois. What do you see any sort of coming together of best practices amongst these states that are really putting some really aggressive goals out? And I’m going to follow this to Emily about how do companies start to look at that. But I’d love to get your thoughts on how we can sort of charge our drive so there’s a little more synergy across those 50 fiefdoms that we’re wrestling with.

Adam Browning:

That’s a great question. I could take that a lot of different ways, but I think I’ll just start by saying, if the early days of policy advocacy were around making this stuff cheap, now it’s really about making it work and also making it work for whom. And really the pathway to winning on a lot of these a hundred percent clean energy was really around having them centering equity, thinking about who benefits and really having a very broad coalition at the table. So what does that mean from an investment? And I’m really glad to hear a lot of Emily’s talking about seeing like ventures investing a lot of places that I think that the policy conversations going as well, which is first make it cheap then it could all work. And the conversation here is really around grid reliability and this is where we really do have many different conversations amongst the different regional transmission organizations, the different organized and unorganized markets of like how do you really design markets so that you in the end have a reliable grid? Grids going down are career ending problems for policymakers.

Adam Browning:

So a really interesting report out recently by Rocky Mountain Institute that looked at the next 68 gigawatts of natural gas that have been proposed. And if you look at that, I did the economic analysis and said 90% of those could be beat economically by clean energy portfolios. You look underneath that, what is a clean energy portfolio? If you limit that to solar storage and wind, that 90% number drops to 25%. So demand response, energy efficiency, really all the ways of turning the knobs on the load side are crucial to really making this grid work, making it work for individuals, the customer centric vision and making it work really efficiently, lowering the overall capital investment that we have to have. So that is really where I see a lot of the trends happening right now going forward to the future. It’s not just the solar, it’s like everything else that’s in service of it that matches our demand and our load.

Jon Powers:

So, I mean that’s a super complicated challenge that we’re trying to address. And I think-

Adam Browning:

Welcome to my world, yeah.

Jon Powers:

But going back to sort of the heart of the question now, how do you take that into the policymakers and all these different states and try to at least bring some alignment so the companies that Emily’s investing in are able to come up with solutions that can work probably but not for one specific market?

Adam Browning:

Yeah. Like it or not, we do have 50 different states and I don’t think that we’re going to have a one state fits all one template fits all scenarios for good reasons and for bad reasons. So I think partly, in some states we have policymakers and really companies that are interested in really trying to pioneer new solutions.

Adam Browning:

So let’s just take very recently in Oakland, home to at least two of us here, three of us maybe, you had a local community choice aggregator, East Bay Community Energy sign a contract with Sunrun who is doing behind the meter storage on low income housing. And those batteries are going to be put into service for those customers most of the time, except for when there’s a CAISO demand response proxy event. And then it’ll be really a grid service at that time. So there’s no reason why PGNE couldn’t have done something like that. Partnered with a low income community to really drive more reliability into the system except for they didn’t. They didn’t want to. When you have a policy situation where you put a more responsive grid operator in control of decisions, you get new solutions like this.

Adam Browning:

And this is something… Sorry. I didn’t… I name checked the competitor here. But broadly speaking I think the more that we get these examples of people that are willing to pioneer new innovative programs that solve for grid problems in new ways, we’re going to see new solutions. And again, this wasn’t just the state, this was also a CAISO situation where you have sort of state and regional policy coming together to make it all work.

Jon Powers:

So Emily, when you’re coaching new companies that are developing interesting technologies that will hopefully go to solve some of these challenges, how do you get them to think about sort of the policy and regulatory environment? Because it’s always been a barrier to a lot of entry for energy company.

Emily Fritze:

Yeah, it’s a great point. Having also been on the policy side prior to being at Powerhouse, something that I’m very personally invested in. I think honestly we could be doing a better job of helping coach startups to think about the policy and regulatory framework as they’re developing their products. Most of them, not surprisingly, are pretty heads down developing technology and in some cases where if they’re developing software where that needs to be attuned with reach structures and time of use or whatnot, they’re a lot more in line with policy trends and regulation. But I don’t think that we’re probably doing enough to involve some of the policy leaders early on. And also in preparing them for that growth stage where they are going to very much so need to be aware and apprised of the policy framework.

Jon Powers:

All right. Interesting. So if we’re going to have this again next year, and you could sort of step back and take a sort of educated guess or a prediction at something that’s going to change the market or how the market’s going to grow, how do you sort of view the next 12 months for our space? And I’ll start with Emily.

Emily Fritze:

Well, I think something that seems so obvious but that is worth reminding us in the course of this conversation as we look forward is the fact that it’s good to be at SPI. Solar is doing extremely well. One third of global capacity is now renewables, 55% of that is solar. Cost of solar has come down to 85%. And what I was thinking about before jumping in the podcast is I think a lot of us listened to Greta’s really inspiring remarks yesterday and so much of our ability to meet those carbon reduction goals is our ability to deploy renewables broadly, but especially solar. So a lot to celebrate here this year at SPI. Going forward, I think certainly a lot of what happens in the next year is contingent on some of these big policy decisions like the potential decision around facing down ITC I think will predict the continued and maybe outpaced growth in residential storage, electric vehicle sales and continued proliferation of exciting technology around soft costs where there’s, as we know, huge opportunities.

Jon Powers:

Bill, I’m going to turn to you on this one.

Bill Bush:

Boy, that is a pretty wide question. I would say-

Jon Powers:

From your perspective, from the storage side, what would the next year-

Bill Bush:

Yeah, no, I think we’re going to see probably on the bad side, probably not as much price decline on batteries as we might hope for it. But I’ve always thought the best thing that could happen to the industry, whether they’re renewables, is that it doesn’t need the ITC. And so certainly… I listened to an interesting podcast, one of your podcast competitors, they interviewed Ed –

Jon Powers:

It’s a community, we don’t compete.

Bill Bush:

A community of friends. A lot of friends. And it was interesting, he was talking about support for renewables generally. And he said it’s not like the Rockefellers and the whoever oil companies didn’t have massive government support when they got started. And yeah, they basically have a hundred year headstart on renewables, or maybe 75 or something depending on when you start the clock.

Bill Bush:

So to me, I think what’s going to happen, and I think it’ll have an interesting impact is I think there will be a solar ITC. I think the Trump administration is going to pass that. And I think that is going to spur both more standalone storage and more paired storage. And so hard to predict how much, but I see that as a massive driver. It’s such a politically expedient solution that I don’t think the administration is going to be able to pass the fast ball on. And so I mean a year from now I would expect to see that. And that will have an interesting impact.

Bill Bush:

Though in some ways, I’d say it’s probably good to be off the dole in same way. I think when industries become self-serving, I was thinking about for any company when they move out of mom and dad’s house or they start generating-

Jon Powers:

Solar powerhouses at mom and dad’s house?

Bill Bush:

Or generating enough cash to feed themselves, that’s an amazing accomplishment. And I think you’re seeing that with solar companies today. I certainly worked for one in Perigo. We were feeding ourselves, we didn’t need an incentive in some markets. And I think that the storage companies need to be able to do the same thing.

Jon Powers:

Yeah. Excellent. 2020 election is going to be sitting right in front of us when we have our next Solar Power International. So how is the conversation happening at the presidential level going to affect the stuff that you guys are doing sort of at the state level?

Adam Browning:

So I think part of the reason for a lot of the recent success here is that A, there’s really good politics behind this. And state policy makers realize, look, there’s no cavalry coming to the rescue. I worry about this. My kids are looking at me funny and nobody else is going to solve this. It’s up to me. So going up to 2020… So 2016 elections, or sorry, 2018, we saw 1400 candidates run at different levels on some sort of 100% clean platforms. Eight of those winning ones became governors. We’re going to see that whole phenomenon doubled. We’ve broken the taboo on this being seen too hippy dippy. Now this is like where you have to be to be relevant to the conversation.

Adam Browning:

So I would say a lot of gubernatorial candidates, a lot of those races really will be a referendum on how renewable can you get. How much this plays into the presidential election? I think it will be a formidable issue. Climate broadly, renewables as a way of getting to it, but really focused on the state level and governors really matter. I see this is now an accountability issue and people will be held accountable to whether or not they support this. So I see they’re going to have to do that on the run up to the 2020 elections as well. So hopefully next year, knock wood, I hope I don’t jinx it. Another three to five states that have passed 100% clean laws.

Jon Powers:

Yeah. I’d love to see it. So first of all, thanks everyone for joining us. I know SPI is a really busy time. We appreciate you being here at the lounge. We’d love to do this again next year and sort of see where we’ve come up. I would just want to challenge the folks that are online listening, folks now I’m a huge fan of Vote Solar, go to Vote Solar and donate today because it’s the policies that they’re pushing that’s going to help our industry continue to grow. They can also donate to STEM if they want but I don’t know if you take their money. Or find clean energy investments to make. But thank you so much for taking the time. I hope you guys have a really successful couple of days out here in Salt Lake City and look forward to seeing you next year.

Adam Browning:

It was a pleasure. Thank you.

Bill Bush:

Thanks.

Emily Fritze:

Thanks.

Jon Powers:

Thanks.

Jon Powers:

Thanks for listening to our live recording at Solar Power International 2019. I want to specifically thank Bill and Adam and Emily for being great sports and joining us on the floor for a really interesting conversation about where the market’s been and really where it’s going in 2020 and beyond. You can join us for another live podcast that’s going to take place at Solar Storage and Finance USA in New York City, October 29th and 30th. You can go to cleancapital.com and go to our podcast page for Experts Only and find a discount for registration. Hope to see you in New York.

Jon Powers:

And as always, I’d like to thank our producers, Carly Battin and Nicole Waddington for their help making this episode come together. I look forward to continuing the conversation. Thanks.

Jon Powers:

Experts Only Podcast #54 With Climate Impact Investing Expert, Melanie Nakagawa

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Experts Only Podcast # 54

With Climate Impact Investing Expert, Melanie Nakagawa

[ Former Director of Climate Strategy, Princeville Capital ]

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This week on the pod we speak with Melanie Nakagawa, Head of Climate Initiative at Princeville Capital. Melanie previously served as Deputy Assistant Secretary for Energy Transformation at the U.S. State Department (2015 – 2017) where she helped countries implement clean energy commitments and led engagements in high growth markets such as India and Morocco. Additionally, she served as a strategic adviser to Secretary of State John Kerry, where she spearheaded engagements with the private sector that focused on climate investment and addressing climate change.

Host Jon Powers speaks with Melanie about Princeville Climate, Princeville Capital’s fund which invests in growth-stage technology companies with a primary goal of having a positive impact on climate change in sectors such as Smart Grid, Advanced Mobility, Smart Cities, Industrial, Smart Agriculture and Resilient Health.
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Listen now

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Full Transcript:

Jon Powers:

Welcome to Experts Only Podcast sponsored by Clean Capital. 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.

Jon Powers:

Welcome back to Experts Only Podcast. Before we get started today with our interview, I wanted to talk about two upcoming events. One is Solar Power International in Salt Lake City. Our whole team at Clean Capital’s going to be on the ground there, so if you want to connect to talk about the podcast, to talk about solar systems you want to sell, you can reach us at cleancapital.com, and we look forward to meeting up in person.

Jon Powers:

And also, October 29th to 30th in New York City, Clean Capital is proud to be hosting a live recording of Experts Only at the Solar and Storage Finance Conference this October. You can go to our website cleancapital.com to get information about getting a discount code to be part of that summit. It should be a really fascinating conversation about accelerating a decentralized and intelligent and sustainable market, so I hope you can join us.

Jon Powers:

So let’s talk about today’s guest, the amazing Melanie Nakagawa. Melanie is currently with Principal Climate, but I know Melanie from our time in the Obama Administration. She worked on Capitol Hill for then-Senator Kerry, and then she went on to serve in the administration in a series of roles helping to drive both the Paris Negotiation, as well as helping international countries really try to meet those goals and move forward on clean energy.

Jon Powers:

But then she moved into the private sector and has been working at a really amazing initiative to focus on a climate-positive metric for investments on the venture capital side. So she’s joined Principal Climate, which is part of Principal’s capital fund, and they’re working on amazing efforts to find those companies that are going to be helping to address climate change in the future. So I hope you enjoy the conversation.

Jon Powers:

Melanie, thank you so much for joining us at Experts Only.

Melanie Nakagawa:

Great. Thanks so much for having me.

Jon Powers:

You’ve got such an amazing and diverse background. I want to talk for a second about, first of all, before we get into your work in policy and on the Hill and the State Department and at NRDC, how did you get interested in energy and climate issues to begin with?

Melanie Nakagawa:

So interestingly, I started off sort of early days as a long distance runner, and when I was in college, I really enjoyed running, and I went to Brown University where it was a bit “pick your own adventure” type of schooling and curriculum. And as I got to my sophomore year and had to declare a concentration at Brown, I thought, “What do I like? I like being outside, I like environmental issues, I like international issues.” And so I ended up thinking, “I’ll concentrate on sort of environmental aspects.”

Melanie Nakagawa:

And there I really started to learn much more about what’s happening on climate change, on new energy policies, new energy developments that were happening, and I really start getting really excited about that, coupled with the idea of international flavor to the work that I’d be doing.

Melanie Nakagawa:

And so, after college, I ended up going straight to law school. And there again, I felt like really my interest was being outside, being involved in environmental issues, and climate change increasingly was the top issue that was affecting everything around me when it came to … whether it was water issues or energy, how we use our energy, how we’re driving our vehicles. And so that’s kind of what drove me into the climate and energy fanatic.

Jon Powers:

So right out of law school then, did you go to Natural Resources Defense Council, or was there sort of a step in between there?

Melanie Nakagawa:

No, right out of law school, I ended up basically getting my dream job, which was to go work for NRDC. I had summered there a summer prior to graduating. I did a dual degree, so I got a joint master’s and law degree, and I had two opportunities when I graduated law school in my masters. One was to go do a presidential management fellows program, the PMF program, which was kind of a fast-track route into a government role.

Jon Powers:

Right.

Melanie Nakagawa:

And then the other route was I had this offer with NRDC, and I was really sort of at a sort of crux of do I go towards my master’s degree, which was on international studies and peace and conflict work, or do I go towards my law degree, which was really focused on environmental issues? And I decided for a variety of reasons to go down the NRDC route because, at the time, that literally was my dream job. The organization is doing so much great work. It was 2005. They were fighting a very conservative administration and winning a lot of cases, and it was a really exciting time to be there for both law and policy.

Jon Powers:

And were you based in DC then at NRDC?

Melanie Nakagawa:

Yeah, I was. I was part of the international program in the DC office.

Jon Powers:

And then what drew you to Capitol Hill and working for Senator Kerry and the Senate Foreign Relations Committee?

Melanie Nakagawa:

So when I took that job at NRDC, I knew that I had this other opportunity to go into government, and I knew I really wanted to go into government. My grandfather worked for the Japanese government as an ambassador, and I used to travel around the world to see him in his various posts. And I really thought government service was a really exciting job and exciting role to play. He did it for the Japanese government, but I really just loved the service he was doing.

Melanie Nakagawa:

In 2005, it wasn’t for me the time to go into government, but I chose NRDC because I looked around at the people I would be working with, and many of them had served in the Clinton Administration, and they had said, “Look, NRDC has sometimes a revolving door for folks that go into government or out of government, and you might have the opportunity, if the election goes the right way, that in 2008 or 2009, you could go back, and you could go into government.”

Melanie Nakagawa:

And so, when I left NRDC or when the 2008 election happened, and President Obama got elected, Democrats took over the House and Senate, that really seemed like the right time for me to think about a position in government and really think more about a legal type of position in government. So that’s when I started looking at the Senate, and John Kerry had taken over as Chairman of Foreign Relations Committee and was really keen to staff the Foreign Relations Committee with his climate expertise.

Jon Powers:

Right.

Melanie Nakagawa:

And he really kind of launched a climate bill from that position as Chairman of Foreign Relations Committee, and he looked around and tried to staff that with domestic experts, international policy experts, and I was fortunate enough to be tapped to join his team as he was staffing up to work on international climate.

Jon Powers:

We had a bad connection there, so what was the draw from them to your experience? And by the way, for those that don’t know and aren’t aware, for our listeners, Senator Kerry then became Secretary of State Kerry, has been very passionate on climate for decades and led that work both across the Senate and then obviously later on when he served as Secretary of State.

Melanie Nakagawa:

So it was interesting. I had never done before a position on Capitol Hill. I did a lot of work focusing on advocacy, on drinking water and climate and clean energy, but had yet to … I wasn’t an intern. A lot of people that end up on Capitol Hill might’ve interned there at some point or had an early start there and then came back around.

Melanie Nakagawa:

And so, for me, it was really … I had a couple of colleagues that knew that then-Chairman Kerry was looking for somebody with climate expertise, and I had a couple of colleagues that said, “Look, you should really throw your name into the ring for this position because it’d be great. John Kerry is a champion, a leader on climate, and he really wants to use that platform to launch a really comprehensive effort to pass legislation on it.” And so that’s how I found my way in. It was a really fast interview process and kind of almost caught me off-guard how quickly it moved, given how slowly other types of employment works. But it was great. It was an incredible experience

Jon Powers:

In that role, were you crossing into the efforts to push the climate bill that he had coauthored with Senator McCain?

Melanie Nakagawa:

I did. He ended up … that bill was basically sort of headquartered out of the Foreign Relations Committee, and the committee really quarterbacked … the staff on the committee really quarterbacked that cap and trade bill. And that two years of effort to put together this comprehensive package, after we watched it pass, the Waxman-Markey Bill pass out of the House and then take the reins and bring it over to the Senate and really stitch together a pretty unique ecosystem of players.

Melanie Nakagawa:

I know, Jon, you’re part of that fight, especially in your role then, and it was one of the things where you brought together the veterans community, the military voices, national security. I think that was really the first time a really concerted effort was taken to address the national security implications of climate change that you continue to see reverberate through the advocacy efforts even today about the importance that this plays for the national security elements in our community.

Melanie Nakagawa:

But it was a great effort and one that … politics ultimately won the day in terms of us not being able to pass a full comprehensive package, but excited to hear the conversation today about pricing carbon and just the growing momentum behind an effort to actually see a price on carbon tax both at the state level but also federally.

Jon Powers:

Yeah, so much was learned through that fight that I think now we’re back in a new climate moment where, I think, post that, the failure of that legislation to move forward was a variety of efforts. I think after Waxman-Markey passed, there wasn’t a defense of the members that voted for it. The environmental groups were still getting their game together. And then you really couldn’t talk about climate change. At that time, I was in the Obama Administration. Like in the Pentagon, you couldn’t use the word, I think, the words “climate change.”

Jon Powers:

And then momentum began to rebuild again. I think today we’re in an entirely new moment, but then you went from being on the Hill to working for then-Secretary of State John Kerry. You served as a deputy assistant secretary for energy transformation at the State Department, a long title. For people that don’t know what that means, what was your role at State? And I know you’ve worked with other governments helping to drive clean energy commitments. What does that title do on an international stage?

Melanie Nakagawa:

Yeah, so I had two roles. I first started off as a climate policy advisor to him in the policy planning shop, and then that was really focused on the Paris Climate Agreement, helping pull together the stakeholders and the ecosystem for the Secretary of State to really drive forward a comprehensive Paris Climate Agreement, working with all the key players of the State Department to get that delivered. And then, after we achieved the Paris Climate Agreement, it was really about how do you help countries implement their targets. Part of Paris was proving that this diplomatic.

Jon Powers:

Hold on just a second. You definitely passed over a pretty major accomplishment, which getting the climate commitment in Paris. What was that moment like for you as a person having worked so hard?

Melanie Nakagawa:

Just being on the floor of the Le Bourget, which is actually an airport hangar in Paris, outside of Paris rather. It was just incredible. It came down to, being a lawyer by training, it really came down to basically particular words and placement of particular words and trying to get agreement around that, and then finally being able to overcome that and see us actually agree to this comprehensive package was just a monumental experience. It was one where everybody on the floor was cheering, and the global community was watching. You had heard that they were, but you actually could feel that they were there in that moment and really excited to see the world really kind of change kind of the trajectory of where we’re going. This is the developed world and developing world all coming together on a kind of global commitment in a unified voice.

Melanie Nakagawa:

And so I think we were thrilled. The Secretary of State was on the ground for nearly two weeks throughout that negotiation. And it was just a huge effort played over years of effort to get us to that moment, and to finally see it happen and to really change the paradigm of how we were approaching climate change and how the global response to it was changing was great. And I’m pleased to say that it really, still to this day, I still see that as a watershed moment where that really marks a change in behavior across our entire ecosystem, from businesses to schools to the average citizen. 2015 Paris was really a moment that did … we said it was going to set sort of a signal to the marketplace, and now, many years later, I really do believe and see that it did send a signal to the marketplace. The marketplace has changed direction because of that agreement.

Jon Powers:

Yeah. I want to come back to it in a second, but just for … very few people will have the opportunity which you had to be in the room for those level of dialogue and negotiation. So how much of that was happening with the principals, the secretary sitting down with the foreign ministers, and how much was happening sort of at the staff level as you got down to the nitty gritty of the final hours of getting it done?

Melanie Nakagawa:

It was, in a sense … some amazing pictures I’ve seen sort of posted around where it was actually both, right? You had both the Secretary on the phone with foreign ministers because many of the foreign ministers were actually not in Paris. They were back home in their own capitals, and so he would be calling them to talk about different provisions that needed to be moved or things that he wanted to talk to them about and making sure that we could get agreement to move forward different pieces of the package.

Melanie Nakagawa:

And then you also had those that were in Paris at the time and sitting down with them at all levels to really work out the nitty gritty details. At one point, the Secretary of State went into a negotiation at 2:00 AM where there was another foreign minister in that room, but he was there, and he took over the chair and talked through some issues in that conversation.

Melanie Nakagawa:

So it was interesting to see a foreign minister, frankly, operating at all levels to really get a deal done at the end of the day. And at the same time, the White House team was there. You had the State Department team there, Special Envoy Todd Stern leading with his counterparts as well. And so it was really just all the different pieces that had to all come together in that moment. It made the entire negotiation process so unique because there’s just so many streams of effort that had to be orchestrated and coordinated and frankly in unison to actually ultimately achieve what we did.

Jon Powers:

So you said earlier, coming out of that moment, it really did set the table for, I think, what we’re seeing today. Even in the face of an administration that has pulled back from the commitment, there’s literally now thousands of cities and states, public sector and private sector organizations who’ve signed the “We are still in commitment to Paris,” basically pledging to continue to drive towards those goals. And that would not exist if we weren’t able to get to the steps that you guys were able to achieve. It’s a pretty amazing accomplishment.

Melanie Nakagawa:

I think it’s also true though, that in the face of this administration’s pullback or perceived pullback from Paris, you’re also saying these companies and others have to step up with a louder voice.

Jon Powers:

Right.

Melanie Nakagawa:

You probably wouldn’t be forced to. You wouldn’t have seen that if we had an administration that was as forward leaning on the climate issue, right? Because the federal policy would be what was gathering all the headlines and the attention, and it would almost take some of the pressure off of these companies to have to force their voice and step up into the gap that was being created. And so “We’re still in” really was this call to action in the face of a pullback, a federal pullback.

Melanie Nakagawa:

But I’d be interested to see would that still exist as loud as it is and as widespread and proactive if you didn’t have this perceived and actual federal pullback from the Paris conversation? And so I think there is … it’s not at all … by no means am I saying it’s a good thing that the administration changed its position.

Jon Powers:

Sure.

Melanie Nakagawa:

But it is really great to see this gap being filled with frankly an even louder voice and one that commands almost both more emissions under their belt as well as more capital.

Jon Powers:

So you’re transitioning now, leaving public sector and moving to the private sector. You and I have talked about this one on one, but obviously I’ve never recorded it. So I’d love you to tell the story. What was your interest in finance? How did you make the move from doing the work you’re doing at an international level and in the policy realm to decide to get into sort of venture capital and private equity and finance?

Melanie Nakagawa:

So, when I was looking at leaving the government after the election, one of the things … I kind of reflected back on what I’d done to date. I’d done basically about eight years at that point in the public sector in government, both on Capitol Hill and then in the State Department. And one thing that I realized, especially my last few years at State when I was in the Energy Bureau helping countries and working with countries to implement their Paris targets or to help the countries get on the right path with the right policies and the regulatory frameworks to drive the kind of change needed in their economies to hit those initial Paris climate targets, what I realized was as much public sector dollars we were bringing to the table and the Obama Administration brought forward a significant amount of public sector resources to tackle this challenge, it still pales in comparison to the trillion that we’re operating in the other direction.

Jon Powers:

Right.

Melanie Nakagawa:

And more and more studies were coming out that the gap between public sector, public resources to finance the transition and the private sector resources needed, the gap was continuing to grow. And I thought, we have an administration that was most likely not going to be putting in more money, let alone holding it steady from the public coffers, into climate solution. But now is really the moment to go after that larger pie of private sector and private capital and bring that to bear into the climate solution space.

Melanie Nakagawa:

And a lot had been shifting and changing by 2016, 2017 to make it so that, by that point, there really was an opportunity for the private capital markets to see significant returns, healthy investments by going into climate solutions. And I thought this was a real opportunity for me to now make that pivot and apply what I’ve learned and what I know about regulatory and policy change and bring that into really successful investing from the private capital markets.

Jon Powers:

So you transitioned and now you’re at Principal Climate, which is a part of the Principal Capital Fund. You’ve helped launch the climate initiative there. I want to talk more about the climate initiative for sure, but can you give some history on Principal Capital and the work that they’ve done historically in the venture space?

Melanie Nakagawa:

Of course. So Principal Capital is an investment firm that backs rapidly growing technology focused and tech companies around the world. It has offices in Hong Kong, San Francisco, a small one in Amsterdam, and I’m here in Washington D.C. And the firm is founded by partners that have a long-standing pedigree as technology investors, over 25-plus years as technology investors and particularly around the world and in companies growing quickly around the world. So I was really excited to see a firm that’s out there with the technology experience, technology backing of growing these companies to really successful exits and being innovative and being disruptive as well across all different types of technology platforms.

Melanie Nakagawa:

And they already had a fund under management called Principal Global, and they were going through this process of thinking through their next fund strategy, and climate change, as many of us have come to the realization, is such an important, critical, global threat and a challenge that they really felt that they could have a positive impact on addressing, using their expertise and their knowledge. They’ve got capital markets expertise, tech expertise, and they really needed that last thread, which was the climate expertise to understand where to move and how to really see successful investments through.

Melanie Nakagawa:

So, as they started launching the Principal Climate Fund, they brought me in to really help think through the policy and regulatory strategy, understanding which markets are growing quickly and what we call “Where is there a policy pull for climate solutions,” making sure we’re not making the mistakes of funds that went before us that may have felt like a policy push in the wrong direction. They’re really looking through that. And so we excitedly have launched the Principal Climate Technology Fund, and we’re looking at really exciting climate positive technologies that are having a real impact in addressing climate adaptation but also mitigation.

Jon Powers:

So let’s talk about the climate positive strategy. It’s really interesting, and you and I have talked about it before, but it’s one of the few metrics out there to actually measure the impact of these investments you want to make. How did you come up with a climate positive strategy? And can you talk a little bit about how you’re using it and deciding where to deploy capital?

Melanie Nakagawa:

Yeah, so we took a pretty deep dive into how climate or environmental issues were being measured across the private companies space. We looked at the public markets as well for understanding how they look at it, but also really understanding what’s being done in the private markets.

Melanie Nakagawa:

And so, from that perspective, we landed on four guiding principles to our impact methodology. The first was we wanted to look at both mitigation and adaptation, so not just to gigatonnes of greenhouse gases reduced, but looking at really a much more comprehensive view when it comes to climate solutions, both mitigation and adaptation.

Melanie Nakagawa:

The second key guiding principle was we want to use what we call a positive screen on our investment strategy, not just a negative screen. And so you may have seen out there things that say, “We won’t invest in fossil companies” or “We won’t invest in tobacco or firearms.”

Jon Powers:

Right.

Melanie Nakagawa:

And that’s really important to have a negative screen, but we thought we could be better, right? We could actually also apply a positive screen where we’re actually proactively bringing certain things into our portfolio.

Melanie Nakagawa:

The third kind of guiding principle was to make sure we had metrics that were material to climate change, not just broadly the so-called environmental social governments or ESG investing, but really take a look at that universe of metrics and hone in on what are the ones specific to the climate impact. It’s emissions, it’s efficiency. In some cases, it’s biodiversity because of the importance of land use.

Melanie Nakagawa:

And the last key piece was really to integrate financial metrics of the company into our methodology. So it’s great sometimes if companies are performing well, but unfortunately they need to have a grant to stay in their profitability year on year. So that would not work for us, right? We really want to look at the company’s performance to make sure it was financially sound, that it was growing quickly, that it was a really good longterm investment for us, and not just one that might look like it has a high impact but needs a grant every year, versus those that might look like a smaller impact but actually be a really sustainable company and be growing quite rapidly, that its impact will actually kind of grow exponentially over time. That, to us, was a much more exciting opportunity for us than the one that has a perceived high impact right now, but needs a financial injection of grants every year.

Jon Powers:

It’s interesting. It’s similar to how we approach things at Clean Capital. We look at the market today and look for real assets with significant returns or real returns. And the positive impact that we’re investing in solar and climate for us is obviously critical to our mission and critical to what we’re doing. But when we talk to our investors, it’s really about the returns, right? They want to see that these things are able to stand on their own.

Melanie Nakagawa:

Exactly. And that’s why we almost don’t even call ourselves an impact fund because we’re returns focused first, right? First and foremost, we are a traditional tech fund, returns oriented. But there’s also this impact piece which we want to make sure we report on. And that’s why we created the climate positive investment strategy is so that we could actually have something we could report on, that we actually have terms and sort of guidelines around how we report our impact to our investors on an annual basis so they know that this is the emissions that we’re reducing or the efficiency we’re creating or the water that we’re saving, but all things that relate to the climate change ecosystem. We want to make sure we added that to the financial performance as well so that the investors who are interested in climate change really get that feedback.

Jon Powers:

So, if I have a company, if I’m starting a company that is looking for venture capital backing for instance, and I think I can meet those metrics, how do I go about approaching to be a partner with you?

Melanie Nakagawa:

So we have a scorecard that we deploy really early on when we look at a company, our climate positive scorecard, and we run the company through it. It’s got some basic questions of understanding what kind of impact this company may or may not have when it comes to the material climate metrics that we’ve created in our scorecard. We run you through that, and assuming you come above our threshold of climate positive impact, you’re deemed as a potential opportunity for our climate fund. And then we run you through the financial metrics to make sure the performance of your company fits our growth stage investing strategy. And then we go into further discussions, and we get to the very end of that process, and we actually invest in you, and you become a portfolio company. Then, on an annual basis, we’ll have these conversations about the kind of metrics we’ll be tracking and reporting onto our investors and work with you on those metrics to make sure that we know how you’re tracking it and help you through that process.

Jon Powers:

So, if you’re looking online, you can find these at principal-capital.com, right under Principal Climate Efforts. It’s really well laid out. And if someone wants to reach out, can they reach out with their company through your website? How do they find you guys?

Melanie Nakagawa:

Yeah, you can find us on our website, which is principal-capital.com, and you can go to our Principal Climate Fund, and there’s a site there you can just reach out and send us a note. We’ve got an inquiries inbox, and we’d love to hear from companies in particular that are your software business model type of companies that are later stage. We invest around $20 to $50 million because we’re typical growth stage investors. But if you do data analytics or include machine learning or AI into your climate positive strategy and in your platform, we’d love to talk with you and hear from you because that’s the kind of companies we’re excited about. And given our capital markets markets expertise, we really want to see those companies that are thinking about an exit in three to five years or have global ambitions because of our footprint globally. These are all ways where we can really provide value add to those types of companies that are out there.

Jon Powers:

So most funds don’t like to talk about their investors, so I’m not going to quiz you on this, but there’s a very famous investor you guys brought on. It was in the media, so I can raise it, but Leonardo DiCaprio, let’s talk about him for a second. He recently in publicly supported your fund, and obviously it gained a great deal of press, and I’m going to quote him here for a second.

Jon Powers:

“Addressing climate change requires an urgent, broad-based shift in our energy use. Technology and private sector investments would play a critical role in securing a healthier future for our planet. The division of the principal Capital team and the goals are part of this effort and I look forward to working closely with them.”

Jon Powers:

Why did he choose you guys over so much that’s out there today? Obviously, for folks who don’t know, by the way, Leo’s incredibly active in the climate space and doing amazing leadership stuff, but the fact that he’s going to work with Melanie and her fund is very exciting.

Melanie Nakagawa:

I think that, and I won’t speak for him by any means, but one of the things that we’re seeing generally in this space is that more and more people are realizing you can do both, right? You can have a philanthropy and a foundation element that’s geared towards climate solutions, but you also need to bring the private capital markets into the space as well. And so to join up with a fund like ours that’s doing really exciting growth stage tech investing directly into companies is one that’s really filling an important gap that’s out there in addressing climate change. But you need both. You need both a philanthropic side as well as one that’s geared towards returns and impact.

Melanie Nakagawa:

And so having him join us has been … We’re incredibly excited to have him on board. It’s really important to have … he’s the U.N. Messenger for Peace on climate change and just an incredible advocate for climate solutions. He worked really closely with John Kerry when both when he was in the Senate, as well as Secretary of State and so just someone I’ve admired and has been a long-time champion for climate and also has done these phenomenal documentaries. We were in Paris together when John Kerry filmed that portion of his film for before the flood. And so just really seeing the passion in someone like DiCaprio and to have him on board has been really important for a fund that’s centered around really addressing climate change in a meaningful manner.

Jon Powers:

Excellent. So just one question left before we get to sort of our final question. But you’re obviously looking at a variety of climate trends. I love the idea of the climate, the policy pool. If there’s one specific area that really excites you of what you’re looking out into, what is it?

Melanie Nakagawa:

I think what I’m really excited about is this thread that’s happening. I guess I would say two. One is both the what I call self-serving policies, which are not state or government targets that are supposed to fulfill a federal target or a federal mandate, but really states going after 100% clean energy, 100% renewable energy targets because it makes their own economic sense or it makes their own sort of statewide, from a jobs perspective and even from a sort of a statewide growth perspective. I like the fact that we’re seeing these sort of self-serving policies because we’re seeing them in the United States in particular where there isn’t a federal target or federal push for this type of climate action, but you’re seeing states take that upon themselves.

Melanie Nakagawa:

And the other part that I’m really excited about is what you’re seeing from the corporate side. You’re really seeing corporate commitments and corporate policy driving a lot of the innovation and disruption that’s happening when it comes to climate and clean energy solutions, whether it’s fleet-wide targets or looking at electric vehicle fleet-wide standards, which is then driving things like improved fleet telematics or charging infrastructure or better ways to look at procurement decisions. And for companies like yourself, it’s driving the build-out of more solar and renewables. So those two, I think, are the key areas I’m really excited about that’s really driving a lot of change and disruption.

Jon Powers:

Fascinating. So I’m going to take you back to Brown University. You were getting ready to graduate before you went to law school. You’ve had an incredible ride up to this point and continue to do amazing things, but I can’t imagine you forecasted that in your own head when you were at Brown. If you could sit down with yourself and give one piece of advice, what would you say?

Melanie Nakagawa:

I would say to myself at Brown that my career to date has kind of taken … it’s really been a patchwork of experiences from public sector, private sector, nonprofit, and to really sort of embrace those different turns in my own career because building on all that experience is really what’s making me even stronger, a stronger investor and a stronger person in the policy making space as well. I think being able to move in and out of the different environments and being able to speak in these different conversations, whether it’s in the private sector or public sector, I think it’s important to have that range in one’s career.

Melanie Nakagawa:

And coming out of Brown, I think what was really exciting, I remember I was at Brown before I applied, and there was a panel of people speaking, and it was somebody who was … I think he was an astrophysicist major who’s now an English lit professor. And I really thought that was an interesting sort of panel of people to have, which was what your major was didn’t necessarily dictate what you ultimately did at the end of the day, but Brown gave you the tools to do that. I didn’t really believe it at the time.

Jon Powers:

Right.

Melanie Nakagawa:

And I think now, as my career’s taken these various turns, I realized having these comparative skillsets and these different experiences in different sectors really makes you a stronger sort of professional athlete, if you will, once you come out on the other side.

Jon Powers:

That’s fascinating. Yeah, because you’ve definitely covered quite a bit in your career. And thank you so much, Melanie, for joining us. Thanks for the work you’re doing. There’s so much more we can talk about, and I would love to have you back on for another conversation in the future.

Melanie Nakagawa:

Great. Thanks so much, Jon, really appreciate it.

Jon Powers:

Of course. And for our listeners, look forward to seeing any of you that’s going to be at Solar Power International. So please go to cleancapital.com, and if you want to meet with our team, we are going to be out there. And also, as we talked about in the introduction, we’re going to be at the Solar and Storage Finance USA Forum October 29th and 30th in New York City, and I’m chairing the forum and helping to have some really interesting conversations, and I hope you can join. You can get that information on our website at cleancapital.com.

Jon Powers:

Melanie, I really look forward to future conversations on some exciting stuff that you’re doing.

Melanie Nakagawa:

Great. Thank you so much, Jon.

Jon Powers:

Yeah. Thanks to Carly Battin, our producer, and as always, look forward to continuing the conversation. You can find more episodes at cleancapital.com

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.
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