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Four challenges that will shape electric utilities this decade

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

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

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

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

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

1. Declining Energy Consumption

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

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

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

2. Expense of Repairing and Replacing Infrastructure

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

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

3. Mounting Costs & Liabilities from Climate-Related Disasters

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

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

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

4. Rapid Growth of Distributed Energy Resources

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

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

Time for U.S. Utilities to Transform

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

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

The Cleanie Awards™ Selects CleanCapital For Startup of the Year

NEW YORK (Oct. 23, 2018) – CleanCapital has been chosen as The Cleanie AwardsTM recipient for Startup of the Year. The Cleanie Awards program is the first comprehensive awards program exclusive to the cleantech industry. The program, in its inaugural year in 2018, sets out to recognize innovation excellence, business leadership and superior outreach campaigns. Nominations were submitted from individuals and organizations of all sizes and across many facets of the industry.

For CleanCapital, this award signifies how influential this company has been within the cleantech field, specifically within innovative and competitive field of companies bringing new ideas to market.

“The Cleanie Awards set out to identify the unsung movers and shakers in the industry, from the top of the Fortune 100 list to hot startups, pioneering individuals and high impact advocates,” said Elyssa Rae, program director, The Cleanie Awards. “CleanCapital exemplifies the type of innovation and leadership that we are seeking in an award winner. Their accomplishments serve as an inspiration to the broader cleantech industry.”

“We are honored to be selected for a Cleanie Award as Startup of the Year. Finance has a critically important role to play in order to accelerate the deployment of clean energy at the speed and scale required to mitigate the most severe impacts of climate change,” said Marc Garrett, Chief Technology Officer of CleanCapital. “We are tackling these challenges every day at CleanCapital, as we leverage technology to increase the flow of capital throughout the clean energy market.”

CleanCapital is a financial technology company that makes it easy to invest in clean energy. Despite the historic growth in clean energy, the flow of capital within the distributed space remains limited. CleanCapital is solving this challenge using proprietary technology to identify, screen, finance and manage clean energy projects. This unique approach is giving owners and developers the capital they need to grow while also providing investors with unique access to the distributed clean energy investment market.

Founded in 2015, 2017 was a pivotal year for CleanCapital. The company established strategic capital partnerships to finance distributed generation assets. To date the team has acquired nearly $150M in operating solar projects. In 2017 alone, CleanCapital doubled its state footprint and increased its megawatt production by 150%, and with current acquisitions totaling over 100 MWs in 12 states. CleanCapital also successfully launched the Experts Only podcast with over 30 episodes and 30,000 downloads to date and closed $3.7M in Series A financing.

CleanCapital was selected by a cohort of judges and leaders representing a cross section of the cleantech and renewable energy sectors, including Allie Burns, Village Capital; Thiam Giam, Black & Veatch Management Consulting, LLC; Marissa Gillett, Energy Storage Association (ESA); Kristen Graf, WRISE; Gil Jenkins, ACORE; Shalini Ramanathan, RES; Chris Vlahoplus, Scott Madden; and Tom Weirich, Rubicon Infrastructure.

A full list of winners can be found thecleanieawards.com.

To learn more, visit cleancapital.com

About CleanCapital
Founded in 2015, CleanCapital is a financial technology company that makes it easy to invest in clean energy. CleanCapital has built a proprietary technology platform that identifies, screens, and manages clean energy projects enabling project owners an opportunity to exit their portfolios while providing accredited investors, including institutional investors, family offices, and investment funds, unique access to the clean energy investment market. Stay up to date on the evolving market of clean energy finance by following the company on Twitter or Facebook or connecting via LinkedIn. Learn more at http://www.cleancapital.com.

About The Cleanie Awards:
The Cleanie Awards is the first comprehensive awards program exclusive to the cleantech industry. It generates much needed visibility for innovators and disruptors in the industry who are creating life [and planet] changing solutions. The campaigns recognized by the award program aim to influence public opinion about technologies delivering on the promise of a clean energy future. For more information, visit our website at www.thecleanieawards.com. Follow us on Twitter or Facebook at @CleanieAwards and on LinkedIn.

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

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

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

The evolving art of the clean energy deal

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

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

Solar Portfolio 3.1

New assets in MA.

Leveraging technology and data to identify assets

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

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

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

The next phase of clean energy origination

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

Growing our partnership with Carval Investors

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

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

 

CleanCapital Announces Second Acquisition in One Month, Adding 10.2 MW of Operating Solar

 The portfolio of two operating solar projects in Massachusetts leverages the $250 million equity partnership with CarVal Investors

New York, NY [May 31, 2018] CleanCapital announced a second solar acquisition from G&S Solar, a New York-based developer that builds, develops and operates solar systems in multiple states in the Northeast. The 10.2 MW portfolio comes less than a month after the acquisition of a 14.3 MW portfolio from X-Elio. This new portfolio is comprised of two solar projects located in Massachusetts and consists of high-quality customers including a corporate entity and municipality as the offtakers. CleanCapital’s proprietary platform enabled their ability to execute on these two complex transactions in a short timeframe. The technology, coupled with access to dedicated capital, streamlines and expedites due diligence and analysis, allowing complex deals like these to close efficiently.

Today’s announcement brings CleanCapital’s total to nearly $150m of acquired operating solar assets. It’s an exciting year for the team as they change the paradigm for clean energy finance. Despite the historic growth across the industry, the flow of capital within the space remains largely stagnant. Leveraging their proprietary platform and capital partnerships, CleanCapital is bringing liquidity to a historically capital inefficient clean energy marketplace.

“This is only the beginning. Closing two complex deals on such a short timeline is an exciting next step for us and the clean energy marketplace. We were founded on the principle that we can streamline the complexities of clean energy transactions by leveraging technology, allowing for more capital to enter the sector and accelerating clean energy deployment,” said Marc Garrett, CTO, CleanCapital.

“G&S Solar was pleased to sell a portion of its solar assets in Massachusetts to CleanCapital,” said John Faltings, President of G&S Solar. “Transactions such as this can get bogged down by the complex diligence process but the CleanCapital team was efficient and very professional at managing the acquisition of these operating solar assets. We look forward to working closely with them in the near future.” This deal was brokered on behalf of G&S Solar by Chris Hopgood of Ignite Renewable Capital, LLC.

CleanCapital is a financial technology company that makes it easy to invest in clean energy. They deliver technology solutions to all aspects of the transaction process—from lending to capital raising, origination to diligence. The proprietary technology platform identifies, screens, and manages clean energy projects enabling project owners an opportunity to exit their portfolios while providing accredited investors, including institutional investors, family offices, and investment funds, unique access to the clean energy investment market.

About CleanCapital:

Founded in 2015, CleanCapital is a financial technology company that makes it easy to invest in clean energy. CleanCapital has built a proprietary technology platform that identifies, screens, and manages clean energy projects enabling project owners an opportunity to exit their portfolios while providing accredited investors, including institutional investors, family offices, and investment funds, unique access to the clean energy investment market. Stay up to date on the evolving market of clean energy finance by following the company on Twitter or Facebook or connecting via LinkedIn. Learn more at http://www.cleancapital.com.

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Leveraging Technology to Finance Clean Energy

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

The Ability to Close Complex Deals

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

Streamlining Diligence by Leveraging Technology

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

Smooth Closing Process

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

Growing Our Partnership with Carval Investors

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

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