Until recently, it has seemed that “cleantech VC” was a four-letter word.
Or perhaps a term reserved for hushed whisphers of digust and distrust thanks to the financial woes in the sector about ten years ago.
But, it appears that the tide may be turning.
Here are three headlines that might give cleantech entrepreneurs some hope.
Renewal Funds just raised $145M to invest in cleantech (what?)
Here are some highlights (link):
ArcTern Ventures just raised $165M to invest in cleantech (oh my!)
Here are some highlights (link):
Clean Energy Ventures just raised $110M to invest in cleantech (gasp!)
Here are some highlights (link):
Before all of us entrepreneurs get too excited about sending an email to these groups and receiving $10M in growth capital the next day, let’s remember this...
Venture capital firms reject at least 95%+ of all the deals they review
Far less than 1% of startups raise capital from VC firms.
The estimates vary:
In contrast, the last study above showed that “57% of startups are funded by personal loans and credit, while 38% eceive funding from family and friends.”
These VC firms like low company valuations.
Fundraising takes a ton of time, and will distract you from running your business.
Author: Dr. Chris Wedding
If you’re an investor that likes the predictability of debt (check), but loves the upside potential of equity investments (yep), then Revenue Royalty Notes might be worth exploring.
Why might investors like Royalty Notes?
Importantly, future performance cannot be predicted by historical performance, so you’ve gotta feel good about the consistency and duration of a company’s past revenue, plus the sanity they used (or threw out the window) when making forward projections.
A Comparison: Royalty Notes vs. Debt or Equity (CaroFin)
And since it takes two tango…
Why might entrepreneurs like the Royalty Note structure for their growth capital?
One more tiny detail: If there’s no revenue in the business yet, then there’s likely no Royalty Note either. Gotta stick to expensive equity for the time being…
We may not be able to have our cake and eat it, too.
(Although people have been thinking about this since at least the year 1538.)
Nor can we defy the Heisenberg Uncertainty Principle and know both the velocity and position of subatomic particles at the same time. [Dang it, my life’s dreams ruined…]
(Geek out more here.)
But don’t dismay…
It is, in fact, possible to invest in companies with instruments having both debt and equity characteristics via the Royalty Note.
[Insert a long sigh, and cue inspirational music...]
To learn more about Revenue Royalty Notes, check out this article by CaroFin, a private marketplace for alternative investments:
Photo credit: Pratiksha Mohanty via Unsplash
By: Dr. Chris Wedding
If you think the “energy transition” is just for Democrats or greenies, then consider this quote from a Goldman Sachs natural resource executive:
“I’ve probably spent more time talking with oil company executives about the energy shift and renewables in the last 2 years than the previous 23 put together.”
Last year, $6.4B was invested in hydrocarbons versus $5.8B in renewable energy, according to PitchBook. That’s a pretty tight race.
And a CDP report notes that 2018 expenditure on clean energy sector by the world’s 24 largest oil and gas companies was roughly 1.3% of total budgets vs. 0.7% last year.
On one hand, that’s almost 200% growth year-over-year. Or (slight reframe) its chump change as a fraction of overall investments, with 98.7% of capital still going to conventional energy lines of business.
Plus, over 70% of those investments came from EU-based oil and gas majors. Maybe that’s because the science of climate change is magically different across the ocean. (Yep, sarcasm)
As further evidence that times are changing, here’s a look at three organizations…
Why are oil and gas major making these investments now?
#1. They are already experts in the energy sector.
This is partly a situation of a [very powerful] hammer seeking a nail.
Decades of experience in conventional energy can translate into efficient capital deployment, project development, and new technology commercialization in the new energy sector, too.
Building and operating offshore oil rigs is complicated. The same is true for offshore wind projects, and this is a market expected to reach $60B by 2024. “Have skills, should apply.”
Running gas stations is not rocket science, but profitability is also not a given. So, it makes sense for Chevron to add EV charging to its gas stations, as long as they get the rate tariffs right so they do not drown in pricey demand charges.
#2. Clean energy investments can be a hedge against softer demand for oil and gas.
When Fitch Ratings talks about the growth in electric vehicles potentially creating an “investor death spiral,” it’s worth listening to their reasons.
#3. Renewable energy markets are not little runts to ignore anymore.
Bloomberg projects that over 70% of all new power capacity investment between now and 2050 is expected to be in solar and wind projects.
Their research further shows that clean energy sector investment has exceeded $300B globally for the last five years.
Finally, analysis suggests that the advanced energy economy (clean power, alternative transportation, energy-efficient buildings) now exceeds $1.4T, or twice the size of the global airline industry.
#4. Corporate sustainability reporting is becoming mainstream. “We are watching you.”
At least 85% of Fortune 500 companies now engage in sustainability reporting.
Drivers of this trend include stakeholder demands, global trends towards greater transparency, peer pressure, and a realization that sustainability topics can be material to financial risk and return.
Samples of third-party sustainability reporting include the following:
What kinds of new energy investments are oil and gas majors making in the last two years?
I will only focus on the top four oil and gas majors in terms of their investments in and commitments to lower carbon energy. This includes Total, BP, Equinor, and Shell. (See graph below).
I am mostly listing investments by their VC arms, with some other infrastructure investments sprinkled in here and there.
Finally, I am not listing companies that are “kind of” related to clean energy, such as ride sharing or financial settlement technologies for the energy sector.
Total Energy Ventures
BP Ventures (plus some larger corporate deals)
Equinor Technology Ventures
Shell Ventures (and some bigger Shell New Energies deals)
How will investing in renewable energy be different than their historic energy investments?
If recent history is a good predictor (not always true), then low carbon investments are likely to be different than conventional energy investments in the following ways:
How does the increasing involvement of oil and gas majors create winners or losers in the clean energy sector?
The (potential) winners include:
The (potential) losers include:
Should you be bearish or bullish?
Why these trends can be easily ignored
Why investors and entrepreneurs should pay more attention
In conclusion, here are some potential action items
I will describe these as the 3 “C’’s, with questions for you to ask yourself, answer, and do something about over the next 30 days.
(Or just hide under them rug for a while. What could possibly go wrong?)
#1 - Canary
What do these trends mean in terms of “canaries in the coal mine” for your overall investments in the conventional power, oil, and gas sectors? (Pun intended.)
If a Shell executive refers to their “buying spree” in the low carbon sector like this -- “It’s all about survival” — then how or why would your investment allocation to the conventional energy sector be different, and therefore, not face some new risks?
If McKinsey and Mining.com report that electric vehicles will likely reach cost parity with conventional vehicles in the early 2020’s, and if Fitch Ratings talks about how this shift in transportation choices could cause an “investor death spiral,” how might you view current or future investments in the oil sector?
#2 - Clock
Even if you agree that historic changes are coming to energy markets, the key question is this: When?
When do you (or sources you trust) think that these shifts in energy investments will actually affect your portfolio?
By way of analogy, at some point we may live on Mars, but now is likely not the right time to invest in Martian real estate. (Unless you’re a billionaire who thinks that all hope is lost for long-term survival on this planet.)
#3 - Collaboration
There may be winners and losers, but it is not a zero sum game.
This discussion needs a reframe. Let’s consider a newly created 21st century word: “Coopetition” — collaboration between competitors for mutually beneficial results.
For environmentally minded entrepreneurs, how can oil and gas majors be strategic partners, investors, and customers, instead of the enemy, a monolithic group to badmouth for all the world’s problems, the 800-pound gorilla that must be defeated.
For VC or private equity investors, how can oil and gas major’s investment decisions serve as an anchors to derisk your capital allocation alongside them? How can you build relationships with them for a future exit opportunities?
Finally, thank you...
A big shout out to Pitchbook, IPE Real Assets, Greenbiz, Preqin, Bloomberg New Energy Finance, Advanced Energy Economy, Greentech Media, Reuters, CDP, RW Baird, Energy Storage News, Columbia University’s Earth Institute, Oilprice.com, Bloomberg, Mining.com, McKinsey & Company, ThinkProgress, Wind Power Engineering, and Governance & Accountability Institute for their research and reporting on this topic.
By: Dr. Chris Wedding
I recently spoke on a panel about impact investing at the UNC Cleantech Summit, where 1,000 good souls joined to talk about opportunities and challenges in smart and connected communities, energy storage, grid modernization, sustainable farming, coastal resiliency, and energy innovation for economic development.
Fellow panelists included these smart folks:
To begin our panel, we talked about the definition of impact investing.
If you can’t describe something, it’s hard to assess where it’s been, where it’s going, who’s involved, what the challenges are, what opportunities are most exciting, and…
[drum roll, please]
...whether impact investing delivers financial returns that are less than, equal to, or greater than other comparable investments in the market.
Starting from the broadest definitions and moving to the narrowest, here we go…
Impact investing = “Total portfolio approach”
This framing moves away from the magnetism of venture capital and instead points to the obvious: Every investment has some impact.
Accordingly, all bonds, stock, checking accounts, and savings accounts need at least a cursory review for positive and negative impacts, as well as other alternative investment classes such as hedge funds, real estate, infrastructure, and private equity.
In ImpactAlpha, William McCalpin, managing partner of Athena Capital Advisors, with $5.5B under management, put it this way: “Carving out $10M to do a few impact deals is no longer enough for many investors. Institutions want to drive this through their whole portfolio.”
To that end, the impact investment non-profit TONIIC has created its 100% Network, a “global network of high net worth, family office and foundation asset owners who have committed to deploying 100% of their investments in at least one portfolio in pursuit of deeper positive net impact. These investments are made across all asset classes, in alignment with each investor’s social and environmental priorities.” This initiative provides tools, lessons learned, and a community to share best practices.
Total market size:
Impact investing = “SRI (Socially Responsible Investing)”
Many of us associate SRI with negative screens — that is, public equity investments that screen against (and don’t invest in) “sin industries,” such as firearms, tobacco, gambling, and alcohol. (Though the latter, in moderation, is hopefully not a big sin, lest I need to repenteth.)
This approach to investing goes way back, like hundreds of years, like ancient history, like Biblical times, man. (Insert surfer voice.)
Investopedia will take you back in time to illustrate that SRI is not some newfangled innovation from know-nothing “hippie capitalists” (a term coined by my MBA friends years ago).
Centuries-old SRI includes Jewish law, from about 3,000 years ago in the Pentateuch (first five books of the Bible); Shariah law, from about 1,400 years ago in the Quran; and Methodists’ and Quakers’ beliefs and practices, from about 200 and 100 years ago, respectively, in the U.S.
Despite, or perhaps because of, this rich history, SRI has become an umbrella for many related themes of investor interest, including ““community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing,” and “values-based investing,” per US SIF: The Forum for Sustainable and Responsible Investment.
Total market size:
Impact investing = “ESG (Environment, Social, Governance), aka Responsible Investing”
SRI was version 1.0 of investing for financial and social or environmental motivations, while ESG is supposed to be version 2.0.
However, these two terms are still used somewhat interchangeably in many circles.
For me, ESG is about an active approach and a positive screening process to not just do less bad (e.g., sin industries) in a passive style as in SRI. This includes seeking out companies that excel in the management of social, environmental, or governance issues. The goal is to reduce risk (beta) and increase profit vs. benchmarks (alpha).
The United Nations Principles for Responsible Investment (PRI) may be the most popular group for defining ESG. (So, if you want to be one of the cool kids, you better, like, join now. I mean, totally.)
UN PRI counts 1,900+ signatories from the finance sector, representing over $89T in AUM. Before you get excited thinking that about 50% of the world’s assets are invested according to ESG principles, hold those horses.
These signatories apply ESG practices selectively, not across their entire portfolio.
However, according to the principles to which they publicly commit (see below), the plan is for an evolution to a more all-encompassing approach to Responsible Investing.
UN PRI -- Signatories’ Commitment
“As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).
We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:
The Principles for Responsible Investment were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices. The process was convened by the United Nations Secretary-General.
In signing the Principles, we as investors publicly commit to adopt and implement them, where consistent with our fiduciary responsibilities. We also commit to evaluate the effectiveness and improve the content of the Principles over time. We believe this will improve our ability to meet commitments to beneficiaries as well as better align our investment activities with the broader interests of society.
We encourage other investors to adopt the Principles.”
To learn more about the segments within ESG and SRI, you can view some great graphics and summary PDFs by by US SIF.
Total market size:
Impact investing = “Measurable social or environmental impact alongside financial returns”
For this definition, I’ll reference a leading impact investing sector non-profit association, the Global Impact Investor Network, GIIN.
[And if you’re remembering my prior reference to another impact investing industry association, TONIIC, and asking yourself whether investors in this sector actually do love “sin” industries like alcohol (gin + tonic), the answer is...I don’t know. But the more interesting question is this: Does the impact community have a stronger sense of humor relative to other financial sectors?]
In their annual survey of impact investors (n = 229), they report a 13% increase year-over-year in impact investments globally, with total assets under management at about $228B.
Here is a summary of the most popular sectors as determined by the percentage of impact investors investing in each:
GIIN stresses that impact investments should have intentionality (i.e., positive outcomes cannot be accidental) and should require impact measurement (e.g., show me your KPIs).
Now, I love metrics as much as the next guy or gal steeped in finance and science. However, as I experienced when I was co-leading sustainability at a $2B private equity fund, measuring social or environmental impacts is tricky.
To that end, Andrew Beebe, Managing Director of Obvious Ventures — a VC firm “on a mission to help fuel startups that combine profit and purpose,” aka, #worldpositive companies — had this to say about metrics.
[Note: This may be the longest quotation I’ve every used in an article, but bear with me. It’s worth it.]
“We don't require hard metrics in sustainability or impact from our portfolio company for specific reasons. First, it's super hard. When you ask a vegan cheese company, "Please tell us your positive impact each month," how do you figure that out? Is it how many cows didn't have to get milked? Is it how much methane from each cow that didn't get produced? But then, of course, you'd have to offset that with the emissions from your delivery trucks. It's just too hard. That's the practical reason, but there's also a strategic reason: Companies will pivot. And when they change, you have to rejigger all of those impact measures. What we do is simply ask the question, is this company likely — regardless of pivot and because of the value of its leadership — going to continue to have a positive impact on the future of humanity? On the human potential? After that point, our decisions are economically driven.” (Source: Greenbiz)
As for whether impact investors are seeing real impacts from their allocations, 97% of the GIIN respondents report that they are meeting or exceeding their impact goals.
As further validation of this type of measurable impact investing, TPG, one of the world’s largest private equity firms with over $100B in AUM, launched its Rise Fund in 2016 with $2B in AUM. That’s serious amount of capital from a very serious investor, who has no interest in below-market returns.
Combining their deep investment experience with partners champions like U2’s Bono, impact investment experts like Elevar Equity, and nonprofit strategy advisor Bridgewater Group, fundraising has been fairly easy. In fact, they are now raising a second fund targeting $3.5B.
The Rise Fund website provides more detail on the opportunity, the societal need, and their rigorous approach to impact measurement:
“It will take more than $2.5 trillion per year to meet the United Nation’s Sustainable Development Goals...We have defined 30 key outcome areas, aligned with the United Nations Sustainable Development Goals, in which impact is both achievable and measurable through evidenced-based, quantifiable assessment. For each potential investment, we calculate an Impact Multiple of Money (IMM)™, part of our proprietary assessment methodology that allows us to estimate a company’s potential for positive impact.”
Total market size:
Impact investing = “Filling a gap”
Finally, some industry professionals restrict the impact sector to investment opportunities that are thought to be unfinanceable — that is, ones that mainstream investors will not, or supposedly, cannot touch due to fiduciary duty, the responsibility to put financial returns above all else.
The problem with this definition is that the boundaries of what investors consider attractive, or not, is always changing.
Consider off-grid funding for small solar energy solutions.
The size of the need (only recently deemed a “market opportunity”) is immense: According to the International Energy Agency, roughly 1 billion people globally lack access to electricity.
I’ve been on the ground in Ethiopia and India doing work d.light and Greenlight Planet, two global leaders in this field, and I’ve seen how life-changing these microsolar products can be.
Five years ago, most investors would have viewed this field as being all about charity, led by foundations and government aid organizations.
However, today we see investments commitments such as these:
The other problem is that this definition severely restricts the size of the market. So, as a proponent of the sector, I don’t like it.
But if I put my cheerleading pom poms down for a second, constraining the market size also means that mainstream investors might miss out on emerging sectors, demographic, and geographies that represent new ways to place capital and generate attractive financial, environmental, and social returns in parallel.
Luckily, this is the least common definition of impact investing.
Total market size:
Financial Returns: Below or Above Market?
Ah, the most critical question and the most misunderstood: “Does impact investing require concessionary returns, a financial sacrifice in order to do the right thing?”
One of the most authoritative studies on the topic was conducted by Deutsche Asset Management and the University of Hamburg in 2016. They reviewed 2,200 reports to assess the linkage between ESG excellence and the financial performance of companies.
For another perspective, we can look at the responses from impact investors in the 2018 GIIN report.
Here were their conclusions:
Going one step further than the mainstream might be ready for, as he does so well, Al Gore is championing a new initiative called the Fiduciary Duty in the 21st Century Progamme.
Led by the UN Environment Program Finance Initiative (UNEP FI), UN PRI, and Generation Investment Foundation, it flips this discussion on its head.
Instead of seeing impact returns as being at odds with an investor’s fiduciary duty, it notes that “there are positive [fiduciary] duties to integrate environmental, social and governance factors in investment processes.” That is, to ignore ESG consideration may be akin to slacking on one’s duty to achieve the best risk-adjusted returns for investors.
To put some of this into practice, they have created roadmaps for institutional investors that “address fiduciary training, corporate reporting, asset owner interaction with service providers, legal guidance, the development of investment strategies, ESG disclosure and governance structures.”
For more on this topic, you can check out more research aggregated here by US SIF.
Why is this market not growing faster?
Because people too often act like ostriches burying their heads buried in the sand to avoid new impending realities?
(And, by the way, ostriches don’t really do this. You can trust my source: National Geographic Kids. “Ostriches don't bury their heads in the sand—they wouldn't be able to breathe! But they do dig holes in the dirt to use as nests for their eggs. Several times a day, a bird puts her head in the hole and turns the eggs.” OK, Fun Fact Time is now over.)
Below are a few barriers based on the reports referenced above and my own experiences in the sector:
Impact investing is not going away. Instead, it will become mainstream.
I think it’s going to be like other niche fields that I’ve entered five years ahead of the masses — green real estate, solar power, energy storage — before the billions of dollars began flowing into sectors thought to be purely about mission, solely the purview of “hippie capitalists.”
If you don’t agree, then consider one more trend: An estimated $30T of wealth is expected to be transferred from Baby Boomers to Millennials over the coming decades. And research shows that this younger generation cares more about using their capital to make an impact, not just a profit.
Luckily, both are increasingly possible.
By: Chris Wedding, PhD
“You miss 100% of the shots you don’t take.”
Depending on whether you are from the South or the North, you’ll think that quote was attributed to Michael Jordan or Wayne Gretzky. With two degrees and a professorship at UNC Chapel Hill, I’m definitely going with MJ.
Regardless, this pithy wisdom applies to our topic at hand — Innovators that harnessed blood, sweat, tears, and billions of dollars to shoot for the moon with bold battery solutions that did not work out.
The silver lining (or maybe it’s lithium) is that those were the early days. And it’s better to gamble with pennies than with gold.
Going forward through 2040, Bloomberg projects $620B to be invested in the battery sector. That’s a frighteningly large amount of capital. So we better learn lessons from those early failures and invest these dollars intelligently.
First, a review of why batteries are wonderful...
Below are three figures which tell a compelling story.
The 13 benefits that batteries can create for building owners (behind the meter), utilities (front of the meter), and grid operators (e.g., Independent System Operators).
— Source: RMI
The surprising growth of residential energy storage installation in the U.S.
— Source: GTM Research / ESA U.S Energy Storage Monitor
Areas of the U.S. where commercial and industrial energy storage can produce an attractive return on investment today, not in some distant future where Elon Musk is the next billionaire president.
— Source: NREL
And now, a list of battery companies “with arrows in their backs”
The following companies were cutting edge, but the cuts went too deep. God bless them for being innovators that were too early.
In aggregate, these companies raised more than $5B from smart, accomplished, and connected investors, such as the following:
Pitchbook, Crunchbase, Greentech Media, PV Magazine, VentureBeat, and the New Yorker
Finally, 10 lessons for “keeping your shoes clean in a cow field”
Focus. Focus. Focus. — Some battery manufacturers tried to serve multiple markets and geographies, across both stationary (power grid) and EV (electric vehicle) sectors. You have to pick. Say no. You’ve heard it before: “If you try to please everyone, you’ll end up pleasing no one.”
Vet storage technologies the way that investors vet energy project investments — This matters because ultimately tech needs to scale into deployments. Below are six questions to ask of a battery technology and company:
Apply the pre-mortem — Watch for “froth.” If all investors are in love with the company, ask why it could fail. Once you identify the flaws, ask whether there are risk mitigation strategies, and if you believe them. Ignorance is not bliss.
Manage burn-rate like a hawk — Raising a big round, or being on a rocket ship based on confident financial projections are not excuses to spend too much. Pretend your dad was a CPA like mine. Make sure a board is in place and that they firmly hold the executive team accountable, without applying a death grip.
Compete against the giants with your eyes wide open — If the battery technology company wants to oust lithium-ion batteries from their global dominance, then get ready for a long, uphill battle. Granted, at the top of that hill, you might see a pot of gold waiting. But you may have aged a decade in the process. Or maybe instead you should just climb a different hill: Find a niche use case where lithium-ion is not the answer. Find its weakest performance parameter, innovate to excel on that same attribute, and then find the one customer segment in a specific geography that loses sleep over that problem you could solve with a non-lithium-ion solution.
Don’t depend on business-to-customer sale channels — As individuals, we are fickle, distracted buyers. Businesses are not. They seek what’s best for them and buy in large quantities. Find battery companies that make businesses happy. Then sell to them in order to reach your ultimate customer, whether it is the business or that business’ customers. For example, make the utility or auto manufacturer your friend, not your foe.
Partner with strategic investors — These guys (and gals) provide three benefits: (1) They might be more patient with their capital, allowing time to maximize company value before exiting an investment. (2) They can provide fantastic validation that the storage company has market potential and may indeed scratch their own itch. (3) They can be extraordinary customers that “make the business,” adding serious revenue through large contracts.
Raise capital before you need it — Plenty of companies run out of cash before they raise their next round. This was also true for some early stage storage startups. Don’t depend on cash flows for growth too early on in the business. Raise more than you think you need, share the pie, and earn the opportunity to watch it grow.
Prioritize capital-light business models — If the battery company wants to use lots of venture capital to build factories, run away. Far away. Instead, contract manufacturing, creative lines of credit, and supportive supply chain partners can reduce capital cost needs. In addition, it always helps to invest in the “brains” of the storage devices. Get some intellectual property, some software, and some automation.
Good looks alone won’t cut it — Cool design can’t overcome poor quality or inconvenience. That said, ugly form factors can also be recipe for inducing yawns if there is any consumer component to the sales cycle. Find the balance. But keep your eye on the target: High performance.
I’ll conclude with a relevant metaphor that takes me back to my days in Kentucky...
We’re off to the races. Don’t be too late to make that bet. Pick your jockey(s). Pick your horse(s). The prize money is much more than a bucket of oats.
By: Dr. Chris Wedding, Managing Partner
The energy storage market is kind of like the Loch Ness Monster — It’s rarely seen. It’s said to be huge. And many think it’s not real.
If you’re like us, you have dozens of articles and reports on energy storage (and other topics) starred for reading later. But “later” never seems to arrive with the free time you needed to read about this high potential market.
As such, we’re providing this “Cheat Sheet for Energy Storage Finance” based on our work as buy-side and sell-side investment bankers experienced in both energy storage venture capital and project finance.
I’m also including some perspectives from my panel last week at the UNC Cleantech Summit entitled “Financing Energy Storage.”
Thanks to Greentech Media, GTM Research, Utility Dive, Bloomberg New Energy Finance, Bloomberg, McKinsey & Company, i3 (Cleantech.com), Lazard, Energy Storage Association, PV Magazine, Rocky Mountain Institute, Renewable Energy World, and Energy Storage News for their great work that helped us compile this research.
The Market Opportunity
Big picture: The rise of energy storage is expected to mirror the giant leap that the solar sector took between 2000 and 2015 (link).
For those of you who rode the solar roller coaster like we did, you might want to get that amusement park seatbelt and whiskey ready. You may need them.
Global Energy Storage Deployment Forecast: 2016-2030E (GWh)
Source: Bloomberg New Energy Finance
This September 2018 headline from Bloomberg sums it up well on the residential front: “Residential Energy Storage Surging, No Longer Just a ‘Cool Toy’” (link) Their impetus was two-fold:
U.S. Quarterly Energy Storage Deployment (MW)
Source: Greentech Media
U.S. Energy Storage Internal Rate of Returns for C&I
Source: Greentech Media
U.S. Annual Energy Storage Deployment Forecast: 2012-2022E (millions of dollars)
Source: Greentech Media
U.S. Residential Energy Storage Deployment (MWh): 2013-2018
Source: GTM Research
Angel & Venture Capital Finance
We’re just in the first inning of this game. And for a guy who prefers basketball (born in Kentucky and living in North Carolina), that’s saying a lot.
There’s little doubt that Stem has been the big winner, with almost $300M invested to date. With its focus on artificial intelligence, aggregation of distributed batteries, and managing demand charges for commercial customers, it makes sense.
We’ve also seen a host of energy storage companies get gobbled up by bigger giants eager to get a headstart in the battery game. Enel bought Demand Energy. Wartsila snatched up Greensmith. And Aggreko consumed Younicos. See a longer list here.
No one knows what other innovations will make it to market, but we can guess that they will make storage easy and beautiful, take advantage of multiple revenue streams, serve more than one customer, and be loved by utility giants for the grid problems they’ll help solve.
Here some other statistics for your next dinner party:
Corporate and Venture Capital Activity: 2013-2017
Source: i3 (Cleantech.com)
Top Energy Storage Venture Deals: 2016-2017
Source: i3 (Cleantech.com)
The scale of investments in energy storage project finance will continue to dwarf venture capital investments in the sector.
It’s also worth noting that non-recourse financing -- i.e., no corporate or personal guarantees necessary — is on the way. Three big project developers have won this unique benefit of the project finance model: Powin | RES | Green Charge.
However, limitations to quicker market expansion for battery project finance revolve around these investor considerations:
Here some other fun facts for your quiz later:
Economic Values for Energy Storage
Source: Rocky Mountain Institute
13 Types of Value from Energy Storage
Source: Rocky Mountain Institute
Stacking the Benefits of Energy Storage
If you’re looking for a Blue Ocean Strategy play in clean energy, something with few competitors and new customers, then the time is nearing when you might be late to the party.
But don’t run away crying and defeated just yet.
With $100B of expected investment in the sector over the next 12 years, “the cup runneth over” with opportunities, whether your cup of tea be VC-stage innovation with hundreds of possible winners to choose from, or perhaps project finance targets for lower risk and much bigger capital deployment.
Shout out to Thomas Kelley for the cool Volts photo.
Recent solar industry headlines (see the latest from Forbes) would suggest that international trade negotiations (or perhaps more precisely, disputes or wars) are among the most important things to know about solar. Opinions vary on the efficacy of such international policy, but suffice it to say that this escalating trade kerfuffle is masking the growing strength of the solar industry. Let’s not get caught up in the headlines. Be smart and take a deeper dive.
Part of the beauty of solar is that it comes in many shapes and forms, ranging from utility-scale solar farms to smaller-scale applications on homes and businesses. Here, I want to focus on bread-and-butter solar applications for homes, leaving the bigger, headline-grabbing projects aside.
Residential solar is no longer just a “California and a bunch of others” story
Far from being a luxury for the rich, residential solar has grown to being a legitimate complement to grid electricity (alternative if paired with energy storage) across the US. Generally speaking, the reason is simple -- cost. On average, residential solar is now cheaper in essentially every state in the US according to SUNMetrix, which produces a state-by-state solar cost comparison analysis. Even if the solar federal tax credit were completely eliminated, only two states would no longer offer cost savings to solar adopters.
Figure 1: US Solar Cost Comparison with Grid Electricity
Source: SUNMetrix, 2018
Figure 2: Annual Residential Solar Installations
Source: GTM Research & SEIA, 2018
Precipitous reduction in solar costs, and still going
Let’s put some numbers to this story. According to the National Renewable Energy Laboratory (NREL), residential solar costs have decreased from a levelized cost of energy (LCOE) of $0.52/kWh in 2010 to $0.151/kWh in 2017, with projections to reach $0.09/kWh or below by 2030 depending on technological innovations. That is over a 70% reduction in solar electricity costs the last 7+ years, with another 40% reduction projected over the next decade or so at a minimum. Translation: The already significant financial benefit of solar will only grow over time. #WhySolar
Figure 3: Comparison of Modeled Solar Cost Pathways
Source: NREL, 2018
The clever skeptic may retort -- this is apples-to-oranges when you compare the average cost of electricity on your utility bill with the initial installation cost of solar. Good point, oh revered skeptic. Initial capital costs to install solar have always been a limiting factor for potential consumers. Fortunately, this is also precisely the problem that was solved in order to unlock the potential of this market. Early on, the solution was for solar companies to offer long-term power purchase agreements (PPAs) to customers. The solar company would install the system at no cost, retain ownership of the system over the long-term, and sell the homeowner power from the solar panels at a specified rate over, say, 20 years.
While PPAs still exist, they are giving way to solar loans, which allow the homeowner to retain ownership of the system and pay it down over time as with any other loan. Point being -- there are many options to offset those initial capital costs over a long period of time so that the solar adopter is, in effect, making an apples-to-apples monthly payment.
These dramatic cost reductions paired with a wider array of consumer financing options have driven massive growth in market adoption, which is generally what we see in market growth, as shown in the GTM Research graph below. It is not the quintessential hockey stick graph due some policy uncertainty at various times in the past, but the growth trends are apparent, and not projected to abate even after the federal tax credit for solar is eliminated in 2022.
Figure 4: US Solar Installation Forecast, 2010-2023E
Source: GTM Research & SEIA, 2018
Still miles to go in market potential
Even with this rapid market growth, there is still a large untapped, addressable market throughout the US. According to the NREL, there is a 30 GW annual technical market potential for residential solar nationwide across both new construction and roof replacements. “Technical” being the operative word here. There are many factors beyond just technical feasibility that drive market adoption, especially when it comes to a big expenditure for a person’s home.
Notwithstanding, the point is clear. The addressable market dwarfs the current market penetration numbers, which were at just above 2 GW in 2017 according to GTM Research.
Figure 5: Average estimated annual residential rooftop PV market capacity potential from 2017 – 2030
Source: NREL, 2018
Parsing the signal out out the noise among the morass of residential solar companies
At its core, the residential solar business is relatively simple -- sales, equipment, installation. As such, there are fewer barriers to entry compared to many industries, which has paved the way for hordes of supremely adequate solar installation companies. It is the quintessential “two guys (or gals) and a truck” phenomenon. It is not too hard to make reasonable money installing solar systems (at least for a little while), so a bunch of relatively unsophisticated companies are doing it.
Yes, you have the publicly traded stars out there -- SunRun, Vivnt, prior to its Tesla acquisition SolarCity, etc. However, these national brands appear to be ceding their market position in many geographies to more locally grown and known companies that are buffeted by the holy grail of marketing, happy customers and word-of-mouth advertising. There is a smorgasbord of these smaller, local and regional companies. Some have really refined operations, well-oiled machines so to speak. Others have slick advertising, but spotty execution. In all cases, it is really difficult to cut through the noise to discern which are positioned to capitalize on the growing market opportunity in residential solar.
Here are five hallmarks of a “cream of the crop” residential solar company:
Buyer beware, there is no magic formula to identifying the best performers among residential solar providers. It requires diligence, research, and some perceptive sleuthing to find those diamonds in the rough. The market conditions are ripe, however, for a number of successes to emerge out of this exciting sector.
By: Dr. Chris Wedding, Managing Partner
I recently spoke about investing in energy storage at the SuperReturn Energy investor conference in Boston. In this blog, I hope to pass along 4 of my top 100 takeaways.
(OK, slight exaggeration, but productive indeed.)
Unfortunately, I am unable to also magically transmit the decadent Legal Seafoods’ lobster tails and sushi rolls from the sponsored dinner (#WeLoveLawFirms) or the conference bling (#MyKidsLoveGiftsFromWorkTravel).
1. Natural gas is misunderstood.
First, low commodity prices will not always mean low power prices. The costs of distribution of gas to the power plant, plus the transmission and distribution of the electricity it produces take place on an ancient grid. (That’s a technical term. But Edison would recognize today’s grid if he magically reappeared in his Florida laboratory.)
Recent research suggests that the average age for power lines is 28 years, while the U.S. DOE quotes studies by the Brattle Group (for the Edison Electric Institute) estimating about $2T in investment needs for the grid from 2010 to 2030 just to maintain the service reliability.
Second, natural gas is not a perfect “bridge” to a low carbon future.
On one hand, its emissions factor (pounds of CO2 per BTU emitted when burned) is roughly 43% lower than burning coal (whose butt it is kicking).
On the other hand, the operational emissions factor for natural gas is infinitely higher than solar or wind (#DivideByZero). Also, methane leaks during exploration and distribution likely counteract its lower greenhouse gas emissions (compared to coal, that is) when combusted at power plants. As you know, methane’s greenhouse gas impact is at least 30x more potent than CO2.
Third, there are two giants in the natural gas ecosystem that see some writing on the wall, and I think they see lots of four-letter words there.
GE has laid off 12,000 workers in its power generation business, and now Siemens is considering selling off its natural gas turbine business, whose Q2 revenue was down to $114M from $438M in Q2 2017.
And with Bloomberg estimating 157 GW of renewables added vs. just 70 GW of conventional power in 2017, we can understand why they might be making those moves.
Having said all of that, I don’t pretend to live in a world of rainbows and unicorns. Conventional energy will likely be part of the global mix for many decades to come. Even in a world where solar and wind power dominate, this analysis shows that natural gas will have a large, though diminishing role over time.
2. $1T of clean energy investment presents challenges for entrepreneurs and investors.
Most climate change scientists, policymakers, and private sector leaders project a need for $1T of low-carbon investment needed per year in companies and projects in order to keep global temperature increases below 2o C.
However, last year Bloomberg suggests that global clean energy investment stood at just $333B. By my math, that’s 67% lower than the amount of capital we will need.
To get there, we need at least two things:
As for investor interest, it is growing.
When I first began speaking at the SuperReturn investor conference series three years ago in Boston, London, and Berlin, I was often part of the 1%. (No, not that 1%. I am a pauper compared to my colleagues in attendance who manage billions in capital.)
What I mean is that I was often the only guy talking about the future opportunities and threats presented by the mainstreaming of energy storage and electric vehicles, or the continuation of investment opportunities in solar, despite the challenges of (and false conflation with) the cleantech VC missteps of the late 2000’s.
Today, many more investment professionals -- with decades on Wall Street instead of roots in the jungles of the Central American rainforest -- are making big investment commitments to renewables, exploring new deals in energy storage, or analyzing the threats that EVs pose to mid- and long-term oil prices.
[You can read more here about the mainstreaming of renewable energy investing in my feature piece for Preqin, a global leading for market intelligence for private capital markets.]
In contrast to this growing interest, investors worry about yield compression.
With lots of capital chasing a disproportionately smaller number of good deals at scale, and with risks being hammered out of renewable energy infrastructure, IRRs have gone down.
[Note: Although IRRs are a helpful underwriting metric, many investors prefer to look at the “multiple of invested capital,” or total cash out vs. total cash invested.]
When I first began investing in solar power projects, we underwrote to private equity returns north of 20%. Today investors in operating projects might get 6-9%, while those investing in development plus operation and/or platform plays (investing in the development company, too) are targeting “mid-teens” returns.
To clarify, these are leveraged returns.
And when most oil and gas investors hear this, they laugh a little on the inside when comparing these numbers to their target returns from 20-30%. But this is apples-to-orange, due to risk. Renewable energy infrastructure returns are based on [15-25]-year contracted cash flows, while oil and gas investments often depend on far riskier exploration and development, plus volatile global commodity markets.
As for deal flow, scale and quality are the two constraints.
Regarding the scale of these markets, things are getting better. For example, annual U.S. solar project installations are up roughly 50% versus just two years ago, and by 2023 total installed U.S. solar capacity is expected to increase by more than 2x.
But we still need more entrepreneurs to build more projects and companies worthy of investors’ capital. (A tantalizing call to action, for sure.)
Regarding quality, over the years, we’ve vetted 100s of MWs of solar projects. But very few have passed review and made it to investment committees. Again, things are getting better. Developers and entrepreneurs are learning from past mistakes (e.g., using venture capital, the most expensive capital on earth, to built factories to make s*#t).
For more about what it takes to increase a company’s chances of raising capital, we’ve written a few primers, structured in numbered lists, with attempts at humor included.
3. We overestimate the impact of new tech in the short-term, and underestimate its impacts in long-term.
This quote from Bill Gates highlights a comment from an investor panelist: In the current energy transition, trillions of dollars will be created and destroyed.
Another investor put is this way: If you have no strategy on the growing role of clean energy, then you’re leaving value on the table.
For my panel on energy storage investments, the topic on most investors’ minds was this: “Is energy storage a real market today?”
Opinions varied. But here is the right one: Heck ya, it’s real today. But it’s not real everywhere...yet. Hence the confusion.
There are hundreds of millions of investment already committed to or invested in batteries each year at the utility, commercial and industrial, and residential level, including projects involving our clients.
Consider these stats from Greentech Media:
To be sure, the bulk of energy storage investments have yet to come. Bloomberg estimates $100B invested by 2030. For a great graph of billions of dollars projected to be invested, check out the black bar graph here.
But even today, giants like NextEra estimate that no new gas peaker plants will be built post-2020 due to the falling price and increasing performance of large-scale battery storage.
[For more about energy storage investing, you can read our research here -- Financing Energy Storage: A Cheat Sheet.]
Despite early indications of massive growth for new clean energy solutions like storage or EVs, most people see them as a long-term thing. Not a material consideration for today’s portfolio.
However, this graph from NYT / HBR shows that often new technologies are being adopted on increasingly quick timelines, following S-curves with step change growth, not incremental linear progress.
Of course, when comparing EV adoption to smartphone adoption, investors at the conference pointed out that there is a massive difference in the CapEx among these items; hence much slower adoption is possible.
But if any fraction of Tony Seba’s projections in his ReThinkX report on the future of transportation are correct (the question may be “when, not if”), then we could be talking about switching from a CapEx discussion to an OpEx discussion, thereby making the mass transition from ICE (internal combustion engine) vehicles to EVs much quicker.
According to one investor panelist, this research estimates that most Americans spend about $10,000 per year on their cars, while ReThinkX projects that autonomous shared EVs could reduce personal travel costs by 90% while also delivering convenience, too. (Ah...to relax and work while going to the airport in a Lyft, instead of navigating traffic and crowded parking garages in my own vehicle.)
Building on that theme, while at the event, I received an update from Bloomberg on their EV projections for 2040: 55% of new sales and 33% of global fleet. (#ThatAintNoNiche)
[Quick aside: Some panelists laughed at the idea that EVs meant clean energy. True, it depends on the grid mix of high vs. low carbon energy sources. But this calculator from U.S. DOE shows that EV CO2 emissions are roughly 50% less than gasoline-powered cars based on average in the U.S. The calculator lets you see differences by state location, too.]
Panelists also noted that major adoption of EVs in the U.S. could lead to 2x growth in utility power output, even describing this monumental revenue-generating opportunity as a “w*t dream” for utilities.
(And, yes, the room was mostly full of men. I apologize. Just the messenger...)
In a time when Moody’s just gave the utility sector a negative outlook for the first time in history, maybe Elon Musk is right: The electrification of transportation could be a much needed savior for the challenged power sector.
Considering that the average capacity factor for U.S power plants is roughly 40%, the utility sector has lots of excess capacity in sunk costs to harness with 100+ EV models coming online by 2020.
[Background: Most grids tend to overbuild capacity in order to manage peak loads, thereby underutilizing power plants and perhaps wasting CapEx for perhaps 90%+ of the hours in a year.]
On a related note, solar plus storage has until recently been an enticing topic for discussions at conferences, or fun projects for my graduate students. But this, too, is changing quickly.
Today almost all renewable energy RFPs from utilities in deregulated markets require the inclusion of energy storage capacity.
And suprisingly, the bids are coming in at very low prices. As an example, Xcel Energy’s recent process resulted in 10+GW of bids for solar plus storage at 3.6 c/kWh and wind plus storage at 1.8 c/kWh, which are both new record low prices.
Finally, investors often feel limited in their consideration of long-term trends and multi-decade infrastructure assets due to the [8-10]-year life of most private equity funds.
In response, panelists came out in two camps:
4. Definitions of ESG and sustainable energy vary widely.
Despite the concern that ESG (Environment, Social, Governance) or sustainable investing is for hippies who love to earn below market financial returns, many investment giants would disagree. Below are samples of their thinking:
Yet still there is confusion about what the terms mean.
Some panelists said their investments in oil and gas have been doing ESG for many years. Now they just needed to add social sustainability goals.
However, they were equating ESG with HSE -- Health Safety, and Environment. While there is overlap, and both are important, there is at least one key difference:
Furthermore, some conventional energy asset managers, intending to do better in ESG, described their greenhouse gas footprinting efforts, and believe that that their conventional energy holdings are low carbon.
Some said the CO2 impacts of oil and gas investments were very low impact because exploring, drilling, and transporting via pipelines constituted a very small amount of the sector’s air pollution.
This is true relative to the combustion of those resources. However, companies are increasingly being expected to consider and account for broader life cycle impacts of their investments, inside and outside of their direct corporate control.
In this new world order, a new analogy may apply: Making guns, but not accepting some accountability for gun deaths, could be a dead argument.
(Yep, pun and controversy intended.)
For more short (and sweet?) commentary on clean energy finance, along with tips on productivity, life hacks, and trivia for your next dinner party, check out our (mostly) weekly newsletter -- 2 Bullet Tuesdays.
It’s a quick 4-minute read, with bullets and short paragraphs, plus links for you to learn more if you somehow have more than 24 hours in a day.
Photo by Jesse Collins on Unsplash
By: Dr. Chris Wedding, Managing Partner
In the last quarter, investors poured more than $324M into blockchain for energy companies.
Can you believe that?
Well, you shouldn’t. But which part is most unbelievable?
While $324M seems shocking, it’s all about context. That amount has indeed been raised, but it’s taken 12 months to do so, according to GTM Research.
What’s more shocking is that over 75% of this capital has been raised via Initial Coin Offerings, or ICOs.
When thinking about this emerging market, it’s kind of like being back in high school: Some investors have FOMO (Fear of Missing Out). But others think they’re too cool to hang out with the kid who just became popular after years of dork-dom.
But what should you, oh wise capital providers and ye capital-hungry blockchain entrepreneurs who worship the clean energy gods of purity, know about blockchain-focused energy opportunities?
Here are our top 4, out of our longer list of 75. (I exaggerate slightly.)
1. There are 120+ blockchain energy companies. But most are relative newbs.
Yep, that’s a term from my kiddos. I can’t wait to finish this blog so I can go tell them I used their word correctly.
But do I use the word “newbs” to be mean? Heavens, no. I’m a good Catholic-Buddhist, after all. (Oh, they exist.)
What I’m referring to is the age or maturity of most companies in this sector. Research from Solarplaza suggests that most ventures were formed in 2016 or 2017, and investors at the GTM Blockchain Forum note that most founders have little to no operational business expertise.
That does not mean that these young ventures lack merit. But it does make the hill to success tougher to climb. (Think steep slopes covered in poison ivy and man-sized Venus flytraps.)
As Greentech Media’s Chairman observed [paraphrase]: “We see many white papers for ICOs sponsored by blockchain in energy startups. Some are are interesting. But some are sketchy.”
Another panelist at a recent blockchain energy conference noted: "We're currently working with Atari, but we need to be using Playstation 4 to make most [blockchain for energy use cases] work at scale.”
An investor panelist put it another way [paraphrase]: “Blockchain is today where the Kardashians were in 2008. When their name is on something, it can print money. But then smart people ask ‘Why? What businesses do they really have? Maybe a clothing line, a home video business (get it?), and a few others?’ But then you realize there is a genius marketing mastermind behind it all. The hype is, in fact, part of the cause for success.”
Lastly, all hail innovation. Seriously. This is how it works: First, divergence. Second, convergence. However, we’re very far from the latter.
2. There are a bazillion use cases. And the energy world is 6-trillion-dollars big.
Just in case you thought that 120 companies in the same emerging sector was a lot, think again.
The Energy Web Foundation, co-led by our friends at the Rocky Mountain Institute, see over 200 potential uses cases for blockchain in energy. Even if only half of those scenarios prove to be real, that is still many, many niche markets ripe for multiple companies to do well in many geographies.
Moreover, the energy industry is not a tiny pearl hiding in a small oyster. It’s more like an ocean full of 100-foot long blue whales, as plentiful as squirrels on a college campus.
But seriously...no wine glass in hand...The energy market is one of the biggest industries on the planet, and it’s full of intermediaries that control the flow of electricity and money. This creates a huge playground for diverse and interoperable blockchains, distributed and trusted ecosystems of counterparties, and automated and smart contracting abilities.
Eight Major Use Cases for Blockchain Energy Companies
Source: Greentech Media
Popularity of Use Cases for Blockchain Energy Companies
Projects Announced and Deployed for Blockchain Energy Companies
Source: Greentech Media
3. ICOs are crushing equity investors. But that can (should?) not continue.
In the broader universe of early-stage blockchain companies, ICOs are killing venture capital. I mean, like the Incredible Hulk vs. me in a boxing ring, or some such awful mismatch.
However, the U.S. Securities and Exchange Commission is taking a pretty hard look at ICOs — in the past, present, and future. And let’s just say that their eyebrows are raised, you know, where one is raised higher than the other.
While many ICOs have tried to avoid SEC oversight, when it walks like a duck and quacks like a duck, then...It’s a security. (If you don’t know what I mean, take a look at their guidance here.)
All is not lost for conventional equity investors. Venture capital and corporate strategic investors bring value that can be far greater than capital alone. (The latter is the extent of the contribution from ICOs.)
The other benefits of working with institutional equity investors include rich networks that can lead to partners and customers, insights on corporate governance based on lessons learned from dozens of past ventures, and deep sector expertise to allow for threat and opportunity recognition beyond what the core team might focus on while their heads are down building a company.
Capital Raised for Blockchain Energy Companies to Date
Source: Greentech Media
Capital Raised for Blockchain Companies: Q3 2016 to Q4 1017
Equity (blue) vs. ICOs (orange)
Source: CBInsights, Tokendata
4. Blockchain is not just for nerds. It’s for the C-suite.
Some famous venture capitalists have said that they look for the next big investment opportunities by watching what scientists, engineers, and other smart folks are doing outside of work, perhaps late at night or on the weekends.
Blockchain may have started out that way. But today, it’s a topic that rises up to, or comes down from, the highest level in organizations — the C-suite or the Board of Directors.
Why is that?
One guess is that they see blockchain as a disruptive innovation focused on challenging core competencies and going outside of the box to amplify corporate synergies, finding opportunities in AI, and gobbling up low-hanging fruit.
Just kidding. I was trying to use as many meaningless buzzwords as possible in one sentence.
But the reality is not too far off: The top level of management is charged with finding and responding to risks and opportunities that lurk further out, beyond the blocking and tackling of tactical business execution, metaphorically crouching behind a dumpster to surprise the marathon runner in mile 20.
Wrap up, Part 1:
What are some things that investors love about blockchain?
Blockchain-based energy companies can be attractive because...
Wrap up, Part 2:
What are some attributes that investors hate...ur...worry about blockchain-based energy ventures?
Investments in blockchain-based energy companies can be challenged because...
Conclusion: Is there one?
OK, so like many emerging sectors for investment, there is plenty of risk and reward.
But as they say, “Sitting on the sidelines is no way to win a game.” (Can you tell that it’s almost March Madness. I grew up in Kentucky and am a professor at Duke and UNC, so go blue!)
As IBM put it in a recent Tweet, “We do not know where #blockchain will go, but there is a need to jump on board!”
Let’s be clear about one thing. It really could have been you.
You knew about cryptocurrency way earlier than your friends. You could explain blockchain to your grandmother in less than 60 seconds. But you did not pull the trigger.
Some hint of disbelief that something so newfangled and profoundly nerdy could not take over our collective financial imagination.
So, here you are today with a severe case of FOMO, watching cryptocurrency values skyrocket (and plummet and skyrocket again), and your 20/20 hindsight dreams of overnight millions squashed.
We are all feeling it, though funny enough, the ones that are feeling it the most are probably the ones that did invest and are riding that roller coaster up, down, up, up, down, up. Why didn’t I buy more!?!? $1,000 dollars invested in Bitcoin in 2013 would be over $300,000 today (though this could easily spike or plunge 25% just while I am writing this piece). The agony!
As of this writing, Bitcoin had lost more than 60% of its value since its peak at over $19,000 in late December. Heed the crash and avoid Bitcoin like the plague, or buy low as smart investors do during an overcorrection? Again, the agony!
An unintended consequence of the fervor around Bitcoin, as well as some other popular cryptocurrencies like Ether and Ripple, is the new public debate about the potential of blockchain to disrupt (!) industries other than just the financial sector. Any industry that is founded on the flow of information and money qualifies, so that’s basically everything.
But is blockchain a panacea, destined to democratize data and money, all the while disintermediating the entrenched intermediaries that dominate the global economy?
Of course, there are camps firmly planted on both sides of that debate. I am not here to stake my flag on one side or the other. Rather, I aim to take a sober view of where blockchain may actually be the revolutionary technology that it is touted to be, and where it fails to live up the hype.
Before we get started, there are any number of awesome explanations as to what blockchain is - see here (PwC) and here (IEEE) for two of my favorites.
Here is my heroic attempt to distill blockchain to its bare bones essence:
That sounds kind of revolutionary, so what am I missing?
At its core, blockchain is most suitable in contexts in which data transfer (communication) is challenging, trust and privacy is highly valued, and data security is paramount. Again, this sounds like virtually everything that takes place on the Internet.
This comes to bear primarily in two places: (1) the increasing number of unwieldy, siloed data systems that are highly susceptible to cybersecurity issues (e.g., see here for the 17 biggest data breaches in the 21st century) and (2) markets that are hampered by unnecessary inefficiencies, limitations, and complexities due to costly intermediaries.
Seen through this lens, the energy sector is an excellent test case to take a deeper look into potential applications and pitfalls of blockchain technology.
Sounding the Emergency Horn for Energy Monopolies
The electric grid is arguably the most impressive technological achievement in the modern world. At the very least, it is certainly one of the most impactful to our everyday lives.
The extraordinary cost and complexity of the electric grid initially lent it to monopoly protection by governments seeking order and control over its development and management.
The last several decades have seen the unraveling of the heavy regulation supporting electric utility monopolies in many areas of the world, which have given way to more competitive markets in which many different types of energy providers, generators, and other service providers vy for customers. This has opened the floodgates to a much more diverse set of actors engaging in energy transactions via the grid, yet antiquated regulation and entrenched utility interests still limit the ways in which producers and consumers can transact for power and energy-related services, especially micro-transactions.
Blockchain applications in the energy sector are positioned squarely at the crossroads of deregulation and the empowerment the market participants (e.g., consumers, prosumers, generators, etc.).
Consumers and producers can form a more direct relationship with each other using blockchain technology wherein smart contracts (very smart) are used to transact for power and other grid services.
As direct procurement and contracting scales, the role of the electric utility may be relegated to managing the transmission and distribution infrastructure, which, in many markets, would be a significantly reduced role in the functioning of the market. (Gulp.)
This simple example may naturally lead you to conclude that peer-to-peer (P2P) energy trading is the inevitable future for the energy sector. Imagine you have excess rooftop solar generation you would like to sell your neighbor across the street -- the blissful life of the prosumer.
This fanciful scheme is actually being tested and enacted in a small number of demonstrations. However, for reasons that we will get into shortly, P2P energy trading is neither the most likely nor nearest-term viable application of blockchain technology.
Where Blockchain Finds its Groove in the Energy Sector
Let’s start with the good news.
The ballyhooed explosion of cryptocurrencies, which has fueled the popularity of blockchain, is not the only game in the energy sector. There are a wide range of applications from energy trading (e.g., grid management, microgrids, wholesale and P2P trading) to asset management (e.g., data collection and processing) to renewable energy certificate tracking to mobile payments (e.g., electric vehicle charging), among many others.
To say that there has been an explosion of emerging companies in this space in recent years would be an understatement. But how many companies have a legitimate product, and, importantly, a viable market application with willing [and ready] customers is an entirely different question.
Most energy and blockchain companies still bask in rose-tinted fields of possibility, while precious few have deployed a commercial product beyond demonstration projects.
Not to despair, we are still in the early stages. But neither does that mean that this process of innovation and experimentation will inevitably lead to a wholesale disruption (!) of the electricity sector.
As with many prognostications (especially related to technological innovation), please take my ranking of energy + blockchain applications in order of their long-term viability and timing to market with the requisite grain of salt:
Check out SolarPlaza’s comprehensive guide to companies in the energy + blockchain space. The World Energy Council takes a different tack with their energy + blockchain use case taxonomy. While certainly extensive, I am relatively certain both of these excellent resources have missed some under-the-radar companies and sub-sectors that will emerge in the coming months and years. That said, it is no small task to track this rapidly evolving space.
The bottom line is that blockchain may not be a panacea, but it certainly could be part of an enabling technological solution to drive the transition to a more distributed, digital, secure, and renewable electric grid.
One of the more encouraging developments has been that blockchain has not only unleashed a wave of innovation at the startup level, but also inspired the formation of a number of non-profit consortia working in collaboration to support the energy + blockchain space. The Energy Web Foundation, HyperLedger, and Enerchain are among the most prominent efforts, each of which is backed by the who’s who of corporate behemoths.
So, pick your favorite energy technical challenge (as if I had to even ask) and keep up with the rapid pace of progress.
Energy-backed Cryptocurrency Beat Down
As we started on this journey, I led with the remarkable explosion of interest and speculation in the cryptocurrency markets. To be clear, this is by no means limited to cryptocurrencies that you could recognize by name -- Bitcoin, Ether, Ripple, etc.
Various market tracking websites list over 4,500 cryptocurrencies worth nearly $500B. To put that in perspective, the US Gross Domestic Product (GDP) is a bit over $18T, which means that the global cryptocurrency market is valued at over 5% of the US economy. (You can thank me later for that bit of cocktail chatter.)
If you want to kill a couple of hours, take a look through some of the more esoteric cryptocurrencies, and your mind will be blown at the number of completely ridiculous schemes underpinning these financial instruments: Coins to gain VIP entrance to Las Vegas strip clubs to coins that allow you to buy objects in video games. This explosion of cryptocurrencies are a true testament to human ingenuity. At least one cryptocurrency plainly states that it is merely a means for guileless investors to give them money for nothing. Kudos for the honesty.
In the energy space, there are a number of attempts to use cryptocurrencies or tokens as a medium of exchange for power and other energy services. The general proposition is that a coin or token is minted by a company, which confers upon the owner the right to some future consumptive good. A simple example would be a coin could be exchanged for X kWh of electricity generated by a solar farm. Sounds pretty simple and compelling, right?
Upon deeper inspection, a number of key friction points become clear. First, these coins presuppose that an independent exchange functioning separate and apart from the existing energy markets can arise magically out the much lauded network effect. More consumers demanding, purchasing, utilizing, and trading coins, and more producers generating electricity in exchange for coins, selling those coins for other cryptocurrencies, and then monetizing those cryptocurrencies outside of the exchange.
A producer generates electricity and exchanges the right to consume that electricity for a coin. That coin gets purchased with another more liquid cryptocurrency like Bitcoin or Ether, which can then be exchanged for a fiat currency like U.S. dollars that has exchange value for other goods and services in today’s economy.
A consumer buys the coin with their Bitcoin, Ether, etc., and then can either consume the services underpinning the coin (e.g., electric power in many cases), hold it, or trade it to someone who places an even greater value on those services.
Now, the real magic lies in believing that transacting for kWh’s of electricity in this exchange will be an overall better proposition for the producer.
In other words, will the producer be able to generate more revenue with a similar or greater degree of predictability using some energy-backed coin or token compared to more conventional methods of either project finance using long-term power purchase agreements (PPAs) in the case of standalone renewable energy projects or net metering in the case of rooftop solar on homes?
The answer is anyone’s guess. But there are certainly blockchain-based energy companies banking on producers flocking to alternative forms of project finance or market compensation.
There is a part of this puzzle which simply does not make sense. Imagine you have the opportunity to make a wager based on the future value of a kWh of electricity. How bullish are you that kWhs in the future will be worth much more than they are today? History would indicate that electricity prices do not tend to skyrocket in value in well-functioning markets. In the renewable energy space, electricity prices have plummeted in recent years. So, why would someone invest in an energy-backed cryptocurrency if the ceiling is so low on the value of the kWs of electricity backing the coin or token?
From the issuer perspective, part of the appeal of minting an energy-based cryptocurrency is that it is a means for producers to acquire other, more liquid cryptocurrencies which have seen extraordinary increases in value recently. This has had appeal with the growing speculative fervor surrounding Bitcoin, Ether, etc. without using any of your precious dollars.
It is a classic arbitrage scenario for you economics nerds. Imagine, for instance, that you, the producer, generated one MWh of electricity, were granted some energy-backed coin, and exchanged it for 10 Ether on January 1, 2017. At the time, you got a great deal, as the value of the Ether that you received was around $80 ($0.08/kWh), better than what you could have gotten in the merchant markets or through a PPA or net metering agreement. You decided that it was not worth your while to exchange the Ether for dollars, and you just held onto it. Today, you looked at your digital wallet, and lo and behold, the 10 Ether that you received from the original one MWh that you sold is now worth over $8,000. In just over a year, you grew the value derived from that MWh by over 100x! What is not to like about that? But who knows what is going to happen with Ether (or any other cryptocurrency) over the next year? So how long can the dream last?
For the consumer, there needs to be interest in directly consuming those kWh of electricity, but that will not likely cut it. In addition, the consumer will need to believe that the exchange value for the coin or token will have a future speculative value greater than the purchase price. That has been a relatively easy sell to date, but there may be a weakening of that foundation with the growing volatility in many cryptocurrency values in recent months.
The bottom line is that many energy-related cryptocurrencies are, either directly or indirectly, betting on Bitcoin, Ether and the other dominant, liquid cryptocurrencies to continue this meteoric rise (and fall only to rise again) in value, which is driving this explosion of coins and tokens to get a piece of the action. Is that the basis of a healthy, functioning cryptocurrency exchange? Only time with tell...
An Obligatory Word about Energy Consumption
You energy conservationists out there may be exclaiming -- “But doesn’t blockchain use an exorbitant amount of energy to run?!”
Not really, and certainly not for the use cases that we are talking about. The doomsayer prognostications of world energy consumption being dominated by blockchain largely revolve around a faulty extrapolation of energy consumption from Bitcoin mining. Even the NYTimes got in on the hyperbole, though CNBC had a more sanguine view.
Not to slip down that slope, but the bottom line is that this is a symptom of an immature technology scaling exponentially. No right-minded person could have possibly anticipated the speculative fever that would envelope Bitcoin, which has fueled increasingly extravagant investments in energy intensive processing capacity to compete as a Bitcoin miner. This can and will be corrected over time, just like it has been for the Internet, which was consumed by similar criticisms during its early years.
So, this is a bit overwhelming, yet how can I be among the smarter people in the room on energy + blockchain...
With a healthy balance of enthusiasm and skepticism, it is well worth your time and effort to keep a tally on the energy + blockchain space. There will inevitably be a litany of failed companies, over-hyped experiments, and even a likely SEC regulatory backlash (see the SEC Chairman’s latest statement on cryptocurrencies and ICOs).
Notwithstanding, there is literally no doubt in my mind the blockchain technology is here to stay, and will, in all likelihood, catalyze a lot of change in how energy is financed, produced, bought and sold. It will not change everything, and will certainly not do it overnight.
Blockchain is in its toddler years. Stumbling about (think explosion of crypto-schemes, coins, tokens, etc.) and occasionally articulated a coherent word of phrase (think legitimate business value proposition). Over time, and with a lot of falling down and bumping heads (you can tell I have a young child), this little toddler will grow up into being a much more mature little person (even then with a lot of room to grow). Until then, just enjoy the ride (and heed the SEC when they say that things are about the change).
By: Dr. Chris Wedding, Managing Partner
OK, so you’re now ready to take your business to the next level by growing faster with outside investors.
And you’ve already had the “come to Jesus” realization that giving up a percentage of equity and profits just means that you get a smaller piece of a bigger pie pumpkin, instead of owning a larger piece of a smaller pie (or one that’s already been destroyed by mold and cockroaches.)
So, are you ready to hit the road, rack up those frequent flyer miles, pitch to 50+ investors, pre-order the champagne bottles, and get ready to play ping pong in the office between customer meetings?
But let’s agree that there is always room for improvement, and that no one is ever really ready for anything. (Except maybe Michael Phelps.)
Here are 11 items to consider when you get ready to raise investment capital.
1. Your Vision
Are your 5-year plans for the company both ambitious and believable? If you lack ambition (e.g., 3% growth per year), then you might elicit yawns from investors. If your projections are not believable (e.g., zero to 40% market share in 3 years), then you might instead cause laughter. (We’re big fans of humor, but not this kind.)
Do you have competitors? Please do not say, “No.” That’s a surefire way to have your follow up emails and calls ignored. Competition is a sign of market validation, that others believe your idea is a good one. Now the important part: Why are you better? Have you created a table showing 3-6 competitors (column headers) compared quantitatively (e.g., scale of 1 to 4) across 5-10 attributes (rows of the table)? And once you’ve done that, and done so honestly, will your competitive advantage be obvious to investors?
How much capital do you have in the bank to cover both operating needs (i.e., to continue advancing the ball on the proverbial court) and fundraising expenses (e.g., travel, marketing costs) over the next 6-12 months? Or how much near term revenue do you expect to realize with a high degree of certainty? If it’s not enough to cover both buckets of expenses, then you may end up out of breath, sweating and exhausted, before reaching the white tape at the finish line.
4. Prepared Materials - Teaser, Pitch Deck, Financial Model
Based on our experience, I am confident that you are confident that your financial model, pitch deck, teaser, and related fundraising materials are 90% ready to go. However, the devil is in the details. (And we don’t want any devils.) Moreover, there is power in many minds and many eyes taking an outsider’s perspective on your company or project opportunities and challenges. It is common to spend 4-8 weeks conducting internal due diligence and recreating or refining these materials.
5. Your Brand
Brand building may sound like an afterthought, or a consideration only for Fortune 500 companies. However, research suggests that many customers’ buying decisions are largely made before we ever talk to them. Their unconscious analysis is based on word of mouth and online research. Here are questions for which you need to have the right answers:
6. Your Team
Does your team have the relevant experience and credentials to convince investors that you all can “get *$#! done”? This is about breadth and depth. How are they compensated - salary, commission, equity? How motivated are they to see the company succeed? And how about an Advisory Board? Having one helps build credibility and support customer acquisition and/or deal flow. Nobody knows everything, so stand on the shoulders of giants and tell the world how great those shoulders are.
7. How much is enough?
It’s easy to err on the side of raising more money vs. less. But the flip side, of course, is that larger amounts of investor capital may mean a greater burden (e.g., collateral at risk, size of financial returns required) and lack of control for you (e.g., equity ownership). However, the opposite is also true: If you raise too little capital, then you either do not make it to the next important milestone where additional value is created, and/or you are stuck in capital raising mode too frequently, to the detriment of actually running your business. Finally, the amount of capital you seek to raise is a large determinant of the type of investor that will find your venture interesting.
8. Strategic or Financial Investor
As a refresher, financial investors -- e.g., banks, VC, project financiers -- place capital primarily to generate financial returns directly from the entity into which they invest. On the other hand, strategic investors -- e.g., corporate investor -- may be investing to generate returns from your company as well as from synergies that are created through overlap among your expertise and theirs (e.g., different product lines, divisions, geographies, customer base). They tend to be slower to invest, but can sometimes offer preferred investment terms, consider higher valuations for your company (i.e., you get to eat more of that pumpkin pie), and/or create lucrative distribution channels.
9. Use of funds
How will you invest the capital? Why do you plan to allocate dollars that way (versus other scenarios)? Be ready to explain the logic and provide details. Expect to be questioned as if you were sitting in a dark room under a bright lamp in an old industrial warehouse. (I exaggerate slightly.)
No investment is without risk, unless you want to get rich on US Treasury bonds. (Good luck.) And it’s never fun to be blindsided by critics. So, please, please, please do not ignore a thorough discussion of risk factors when talking to investors. However, don’t forget to also provide a point-by-point response for how you seek to minimize those risks.
Below are examples of risk factors to address:
11. Unit costs
Detailed financial models with multiple scenarios and various Excel tabs are not the quickest documents to digest. Similarly, 5-year financial projections are helpful but only show aggregated analysis. What investors really need to understand in the initial conversation is this: A customer-, site-, unit-level assessment of costs and benefits at a high level (e.g., one slide). From this, they can assess the strength of the business case and move on to hear the rest of your pitch.
12. How thick is your skin?
Our job is to ask tough questions, and to play the devil’s advocate. We are on your side, but based on our line of questioning, it may seem like our goal is bury your business plan and financial model in red ink. Au contraire. Our constructive criticism prepares you to handle the tougher questions when they come from investors. We’re like benevolent drill sergeants who guide you through boot camp so that you’re prepared for your best showing when trying to earn investors’ confidence.
To learn more about the capital raising process, here are three related blogs we’ve written on the topic:
By: Dr. Chris Wedding, Managing Partner
It’s easy to assume that the energy storage market is plagued with technology risks.
With over 70 battery chemistries being tested or deployed, it is no surprise that many financiers worry about backing the wrong horse and earning a “goose egg.”
However, as the Transformers comic series so wisely noted years ago, this is another situation where there is “more than meets the eye.”
(Get your nerd on, and read more at the Transformers Wiki. Yep, it’s a real thing.)
In this post, I will call out 7 factors that are projected to make lithium-ion batteries the top energy storage technology through at least 2025.
1. Lithium — Not One, But Many
This dominant type of battery is a leader in part because it is not defined by just one type of chemistry. So, the math is not quite fair.
Many of these versions of lithium-ion batteries actually compete amongst themselves.
Lithium-ion batteries include varieties with cobalt oxide, manganese oxide, iron phosphate, nickel manganese cobalt oxide, nickel cobalt aluminum oxide, and titanate (titanium oxide).
Use cases for this smorgasbord of lithium-ion options cover areas of great interest to us at IronOak Energy Capital — such as grid services, demand charge reduction, and EV uses — as well as non-power sector applications such as medical devices and power tools.
For more, here’s a good summary from Investing News.
2. Experience with the Technology
Lithium-ion is about as innovative as a middle-aged person.
(That was meant to terrify all Millennial readers.)
With roots in the 1970’s, lithium has gone from science labs and discussions of the distant future to billions of dollars of investment and global dominance.
In terms of actual energy storage installations, lithium-ion batteries increased their market share considerably: 29% (2012), 40% (2013), 46% (2014), 71% (2015), and 93% (2016) of all batteries installed globally. (Source: IHS and Navigant)
The numbers are even higher today. In the U.S., lithium-ion batteries led all energy storage installations for the tenth straight quarter, including a roughly 97% market share in Q1 this year. (Source: GTM)
The next biggest player was vanadium flow batteries with 3% market share.
Source: GTM Research
With each additional quarter of lithium’s leadership, the whole host of market players becomes more comfortable with the technology, from regulators and developers to investors and suppliers.
Furthermore, costs for lithium batteries have fallen 50-70% since 2010 and are expected to fall another 25-50% by 2020. (Sources: Lazard, Moody’s, Tesla)
In addition, each year their performance continues to increase.
As such, competitors to lithium face a moving target, one where the bar is constantly rising.
3. Scale of Invested Capital: Divided and Conquered
With dozens of lithium-ion competitors trying to win over technology investors, they each receive less capital than they need to scale quickly.
Lux Research notes that “beyond lithium” battery companies raise an average of $40M over 8 years.
Compare this to the $5B invested in Tesla’s Nevada Gigafactory. Or the three additional gigafactories they announced in February of this year.
In addition, this trend is happening outside of Tesla’s magnetic media coverage.
Experts suggest Tesla’s factory is only 1 of 12 such factories around the world.
In Asia, Amperex Technology, Panasonic, LG Chem, and Boston Power are all planning new lithium factories in China. And Samsung and BYD plan to expand their existing plants.
And in Europe, Daimler announced in May this year its own big ole’ lithium-ion battery plant. But it will only cost about $500M. (Yep, sarcasm.)
4. Size of Balance Sheets
Startups are known for innovation, being nimble, and disrupting 800-pound gorillas. While exciting, those are also correlated with company-level risk and balance sheets that leave something to be desired.
So, if you are the developer and investor in a large stationary battery installation serving the power grid, or the global manufacturer of thousands of electric vehicles, do you choose an innovative startup or an 800-pound gorilla to supply your batteries?
Yep, you guessed it. Big and boring wins the day when it comes to scale. As an imperfect proxy, think of large market capitalizations — Samsung ($254B), Panasonic ($26B), LG Chem ($18B), or Tesla ($57B).
As they say, “You won’t get fired for hiring McKinsey.”
It reminds me of another grim expression: “I want just one throat to choke.” If something goes wrong with those batteries years down the line, you want to be able to … well, you get the idea.
5. Expert Analyst Projections
With its considerable inertia, the lithium-ion battery market is expected to continue leading the battery market through at least the next decade.
Projections vary, but here are a few to digest:
It’s worth noting that some lithium competitors may have stronger Compound Annual Growth Rates than these projections imply. However, they are starting from a much smaller base so percentages can be deceiving.
6. U.S. Government Projections
When countries don’t have what they need, they look for alternatives. (Or go to war. But let’s stay positive.)
In terms of known global lithium reserves, the U.S. has roughly 0.3%.
That’s not so great when projections suggest $1.4T of U.S. infrastructure could be underutilized over the next 15 years without feasible energy storage solutions.
It can also be a limiting factor when electric vehicles hold the keys (yep, bad pun) to managing grid stability as renewable energy penetration grows. As an example, consider that California, the sixth largest economy in the world, is eyeing a new 100% renewables target by 2045.
Accordingly, U.S. national laboratories are on the hunt for lithium alternatives. The most notable initiative is Joint Center for Energy Storage Research (JCESR), an innovation hub based at Argonne National Laboratory.
So, what is their latest conclusion after considering dozens of next generation battery technologies?
Well, one of the two is still based on lithium — that is, lithium-sulfur batteries, which are lighter and have greater energy density than today’s lithium-ion versions.
7. Will Lithium Popularity be Its Demise?
You have undoubtedly seen articles suggesting that lithium is a rare metal whose availability will be entirely consumed by Tesla’s Gigafactory.
OK, now forget all of that.
Let’s talk about the difference between lithium reserves vs. resources.
Quiz time: Fill in the blank.
So, which is reserves and which is resources?
Duh, right? Resources refers to the lower, much higher number. Reserves applies to the upper, lower number.
Moreover, the volume of resources should continue to climb higher as projected future demand for lithium entices companies to invest more in exploration.
Now consider some wild numbers from Mr. Musk: The world could be powered 100% by clean energy if we had the storage capacity output form 100 gigafactories.
If true, and if you assume that the full volume of resources is static, then experts suggest we would still have enough for 50 years of lithium supply.
All in all, no one can predict the future.
But it’s nice when many prognosticators are saying similar things: Lithium batteries make up 97% of new installs in the U.S. (and similar dominance globally). In addition, the seven factors above suggest that its market appeal is likely to continue into the foreseeable future.
That said, lithium-ion batteries are not perfect.
For example, their maximum duration is four hours of storage.
Yet experts suggest that in the years ahead power markets will demand longer duration batteries that allow for over four hours of capacity. Some even call for seasonal storage — think multi-month capacity.
And lithium batteries are also not perfectly scalable. So, a 5x increase in size may not mean a 5x increase in power, as would be the case for a flow battery.
But keep in mind that the perfect is the enemy of the good when it comes to controlling market share.
I hope you’ve heard this expression before.
(If not, then you may be questioning my politeness or my sanity.)
It goes something like this: “You have to kiss a lot of frogs before you find your handsome prince.”
Of course, this is the actual quote from the Brothers Grimm fairy tale, and refers to seeking true love. (But we’ll leave that topic for someone else’s blog post.)
In the world of finance, this perspective can refer to the lengthy, inefficient, and often frustrating process of finding the right investor in, or buyer of, your company or infrastructure project.
(But it does not require that the investor be handsome.)
So after banging our own heads against the wall to source investors, and after watching dozens of entrepreneurs do the same as we sat on the other side of the table (i.e., with the capital), here are a few tips we’ve collected for bringing in the right investor to finance your renewable energy venture.
1. Know thy investor
Investors are not a single monolith. And one size does not fit all.
They vary by risk tolerance, length of investment period, geographic preferences, sector focus, financial return expectations, cultural, ethics, partnership expectations, type of investment, and...uh...personality.
Consider some profiles of startup investors to avoid from Entrepreneur.com.
As an example, if you’re raising money in the solar sector, consider the wide gap between an early stage venture capital firm which might finance a solar technology company with expectations for 30% IRR vs. an infrastructure private equity firm which might finance a utility-scale solar project with expectations for 9% IRR.
Both are solar investors, but they one is from Mars and the other from Venus.
So, let me put on my professor hat briefly: Do your homework. Dig into the research. Don’t slack on it.
Your extra effort in this due diligence will help you separate the right investors from the wrong ones.
2. Work your network
This is common knowledge. But it is not common practice.
It’s critical to know where you and the potential investor have mutual professional or personal contacts.
This is about getting a foothold and building trust.
To help you establish rapport before and during your initial meetings, you might want to ask questions about or make reference to people and firms that you both know.
But beware: This can also backfire.
I once did this while talking to a CEO that was considering our help raising up to $90M for renewable energy infrastructure development and finance.
I referenced a well known industry leader that had worked with this CEO we were pitching. Oops. He had...um...a less than stellar opinion of this mutual contact. Long silence. Views 180 degrees apart. Yep, awkward.
Luckily, we still won the engagement.
So, make LinkedIn your best friend. Use those 2nd degree connections to make potential investors part of your own professional network.
3. Be systematic
Everybody knows somebody.
And so it goes with a company’s ambitions of raising capital to finance a renewable energy or energy efficiency venture via a few of their own relationships.
Often company executives have their list of five or ten potential investors, and they are excited to bring home the bacon. (Free range and organic, of course.)
But this is not enough.
Most timelines with potential investors take three or six months to play out and arrive at a yes or no decision.
So if you start with a few investor prospects and wait, say, four months to get their answer, you may have just set your company behind schedule by four months or more.
To some degree, this is a numbers game (i.e., in addition to finding the right investor fit).
Instead, a better approach, and the one we take, is to create lists with dozens of prospective investors, each vetted based on fit according to their past investments, current mandate, and other variables.
To do this, we use our own investor network plus databases like Preqin, with over 20,000 investor profiles and 380,000 financial industry contacts.
4. Create an organized data room
I have heard it said before that “Cleanliness is next to Godliness.”
(Are you hearing the voice your mother or grandmother right now? I sure am.)
Or perhaps this expression bears some relevance here: “How you do anything is how you do everything.”
Honestly, I’m not sure I agree with either of these nuggets of wisdom.
However, many investors will see a correlation between how organized your data room is and whether your company is a serious platform to be trusted with their capital.
These data rooms need clear organization, from easy-to-understand folder systems and clearly named files.
If this sounds boring to you, then don’t do it.
Instead, delegate to a team member who loves creating order from chaos, but is perhaps less equipped to work the magic you can with business development and strategic partnerships.
(SIDE NOTE: No one is great at everything. Play to your team’s strengths. To discover these, consider a simple test like the one at Strengthsfinder. We have used them and found a ton of insight.)
You also need completeness in your data room. No stones left unturned.
Are you missing a spreadsheet showing historical financials, a trusted third-party report discussing the broader market opportunity, or project-level pro formas for infrastructure assets?
If so, then that investor follow up after a great initial phone call might lead to a resounding thud as the likelihood of financing your business with that investor falls to zero.
Consider secure software-as-a-service platforms such as Box or Firmex to create your virtual data rooms.
5. Don’t overpromise
Here’s another overused cliche for you: “Underpromise and overdeliver.”
I very much agree with this one. But I often see the opposite play out when entrepreneurs talk a big game to investor prospects.
The reality is that investors will uncover the truth after they get deeper into due diligence. As such, it’s better to be straightforward from the beginning.
And not all due diligence questions can be easily answered with strong data-driven foundations. So, don’t be shy to say something like, “I don’t know the answer. But here are the three steps I’ll take by Friday to get you a good answer.”
You don’t need to know know everything. Instead, you just need to know where to get it or who can tell you the answer.
That means you need a great team, whether internal or external. Or perhaps a Brain Trust like we have at IronOak Energy Capital with clean energy experts across the US.
6. Be pleasantly persistent.
At IronOak Energy Capital, we pride ourselves on being persistent.
(Read: We’ve been called bulldogs in the past.)
And it’s best to balance that doggedness with the patience that investors require to do their homework and make informed investment decisions.
The point is this: Follow up matter. I mean, it really matters.
There are dozens of reasons that your first string of emails and phone calls to the investor did not get the investor’s attention: Travel, vacation, another deal closing, a sick kid, an ailing grandparent, internal strategy reviews, etc.
So, in the mission of funding your world-changing venture, be a heat-sinking missile on your best-match investor targets.
7. Share some beers.
Now don’t the wrong idea here.
I’m not talking about a case of beer, just one or two cold drafts of microbrew at the popular locally owned place near your investor’s office.
You are hoping to start a new multi-year relationship with another firm, but that firm is made up people, and those people want to actually like the folks with which they do business.
So, be likeable. Ask questions about their family and hobbies. Do it because you want to invest in the social capital required to build a strong partnership for a high-performing business.
And after you both contribute to a successful exit or profitable cash flow, then you can share bottles of champagne to celebrate.
In summary, raising capital is a lot of work.
It’s not just about a few phone calls to those investors who seemed interested. It takes a ton of time and can be a huge distraction from your core business.
That said, it is often required to survive and thrive as an organization.
It reminds me of a phrase I came to love while living in Japan: “仕方が無い.” Or, “sho ga nai” for short. It roughly means “there is no other way, so just do it.”
Said differently, just get ‘er done and worry about the details later.
The question is this: Who will do that work for you and find the right investor to place capital in your business?
P.S. If we can be helpful, drop us an email at info[@]ironoakenergy.capital.
P.S.S. The theme of this blog post is a shout out to my late grandfather whose nickname was Froggy. He built a successful small business out of nothing in small-town Kentucky and ran it successfully for 60 years. An inspiration to all of us out here blazing our own trail as entrepreneurs...
We’ve all been there before.
The big investor meeting has finally arrived.
But somehow we come out of it with a foot in our mouth, not with a deal in hand.
We have made missteps ourselves.
And we’ve seen many renewable energy entrepreneurs, project developers, and executives slip up when pitching to us and our investor partners, too.
Thankfully, there is hope.
“You will only fail to learn if you do not learn from failing.” - Stella Adler
In that spirit of reframing embarrassing missed opportunities when meeting with investors who could have changed the fate of your business…
...please do NOT DO these things the next time you’re pitching to an investor.
1. DO NOT create a slide deck longer than, say, 15 slides.
Investors, like you, are busy folks.
And as a former CEO and mentor is accustomed to saying, “A new bus comes by every 15 minutes.” The “bus” here refers to another deal in which they can invest.
You should assume that you have 15 minutes or so to convince the investor that your business is worth their time and capital. So, get to the point early in the meeting.
2. DO NOT squeeze your entire knowledge base into each slide.
I’m sure that are the expert on your business. And it should be clear that you’re passionate about it.
However, remember that white space is your friend. Super dense slides have the opposite effect on audience comprehension and retention.
Also consider adding a bordered text box on each slide with the main takeaway you want to stick in the investor’s mind.
3. DO NOT start the meeting before engaging in some pleasantries.
When I first began working in private equity, the leadership team would often spend one-fourth of the meeting on small talk. I was puzzled.
With my “get ‘er done,” Dr. Efficiency mentality, this seemed like a waste of time. Ah, the arrogance I had.
Those Southern pleasantries were of immense importance. They were about establishing rapport, mutual contacts, and areas of common interest inside and outside of the professional world.
What I learned is this…
Despite the investor vs. presenter mentality, these meetings are just another discussion between people. And people trust and like to do business with people they can relate to.
4. DO NOT talk about the investor’s business, as if you understand it better than they do.
To be clear, you should do your due diligence on the investor. You should definitely understand who they are and who they are not, what they can and cannot invest in, etc.
However, do not talk about their business based on their website (e.g., it could be outdated) or based on what you’ve heard second hand (e.g., there could be deal- or time-specific factors that make this market intelligence irrelevant to you).
5. DO NOT get into lots of technical details unless asked.
Most investors are not technical experts in your industry or about your product. For sure, they will need to become more fluent in the details, but not in your first meeting.
More importantly, you need to start big picture: Strengths of the industry and how you ride that wave, challenges in your sector and how you address them, the problem you’re solving for customers, the reason your business has an edge relative to competitors, and why you have the right team.
So, first hook them, assuming it is a fit regarding their investment criteria, available capital, and so forth.
Then, later reel them in with nitty gritty details, as required, to educate the investor on why you will succeed and deliver the appropriate return on their investment capital.
6. DO NOT refute feedback from the investor, as if they are uneducated newbies.
“Feedback is the breakfast of champions.”
This was a problem for me many years ago. Criticism was a threat. Ah, such a fragile little flower I was.
And when I first presented about the business logic of green building many years ago, an investment executive questioned a fundamental part of my thesis. In a room full of investment professionals, he had put me on my heels.
But his goal was not my explosive destruction. Instead, he wsa offering great feedback, and I needed to incorporate it in future meetings like this.
So, step out of your protective glass bubble.
Don’t get defensive. Instead, provide a counterpoint if need be, but emphasize that it is a good point, and you will give it more thought, discuss it with your team, or do some more research.
7. DO NOT go too blue sky with overly ambitious and far off projections.
I can’t tell you how many pitch presentations I have sat through where I thought:
“If those projections are correct, then I need to quit my job in finance and go work for this startup or project developer.”
So, avoid the borderline unbelievable projections for your business or for the market in which you’re operating. Even if you believe they are real.
And only rely on the most trusted data sources. Referencing something like www.ecodorks.info from 10 years ago as the basis for your strategy will not work.
Lastly, do not flash forward to what the world will look like 15 or 30 years from now. Investors care about what will happen mostly within the period of their investment with you.
This doesn’t make them callous, profit-driven robots.
This makes them good investors, often serving as fiduciaries to protect and generate returns for their investors (e.g., pension funds).
8. DO NOT show internal disagreement among your team.
No team is perfect alignment all the time.
(Obviously, you’re opinion is the only correct one though.)
But do not let any difference of opinion or lack of group confidence come across during your investor meeting.
One. Unified. Force.
9. DO NOT leave the meeting without asking for advice.
I received some great feedback before raising angel capital for one of my startups:
“If you want capital, then seek advice. If you want advice, then seek capital.”
This worked well for that raise. I went seeking advice, and never led with an ask for capital. But I raised the capital we needed.
Don’t get me wrong…
If you have done your due diligence on the investors, and you know that they are a good fit for your business, then you should include an “ask” slide in your meeting regarding capital needs.
But their advice can sometimes be more valuable than the capital they might or might not provide.
Said differently, intellectual capital or network capital can be as important or more important than investment capital in growing a successful business.
10. DO NOT show up late, or go over your allotted meeting time.
“If you’re on time, then you are late.”
Or so it is often said among military professionals.
Being on time for the beginning and end of your meeting is a sign of respect. And respect is the great foundation for an investor-entrepreneur relationship.
11. DO NOT delay on following up to your meeting.
Although Woody Allen suggests that showing up accounts for 80%+ of success, I have to disagree.
Following up is equally or more important.
And that’s partially true because most people are very bad at follow ups.
They might forget about it, or take a week to get back in touch.
Maybe they don’t say, “Thank you for your time.”
Or they don’t sufficiently respond to questions and criticisms raised in the investor meeting.
So, think about a detailed, respectful follow up within 1-2 days of your meeting.
OK, all done.
I hope that was as cathartic for you as it was for me.
Now you know about 11 things to NOT do. But how about the top tips for what you SHOULD do?
Look forward to more details in our next blog post.
(Oh yeah, a cliff hanger.)
By: Dr. Chris Wedding, Managing Partner
You may need investors. And they might need you.
But how do you know which investor is the right fit for your business?
Based on IronOak Energy Capital’s work in raising capital, sourcing investment opportunities, and conducting strategic analysis in clean energy sector, we have advised private equity, venture capital, and angel investors with experience investing in over 600 companies and projects.
From that experience, we know that the investment community is hunting for opportunities in the growing sector. But they are sometimes left unsatisfied.
And despite the best intentions, the process of developers and entrepreneurs finding the right investor is inefficient and frustrating.
We learned this the hard way through our own mistakes, and by having to tell so many innovators that the capital we represent was not the right fit for them.
We are eager to see this change. The advanced energy economy now exceeds $1.4T. And environmental challenges like climate change need solutions from the investment world.
Here are 10 questions that you could ask potential investors in your business.
1. What is the size of your current fund?
Bigger is not always better. Instead, it is best to seek the right amount of capital from the right investor. However, be wary of the size of investment you are seeking relative to the size of the investor’s fund. Concentration risk can be a limiting factor.
2. How much dry powder remains in the fund?
Investor websites are not always up to date. Always ask for the latest information. Here, dry powder refers to the amount of capital left to place from a fund. For investors in evergreen vehicles, this may refer to investment targets that have yet to be met for a given year.
3. What is the investment period for the fund?
Investment fund managers are typically required to make investments within the first 3-6 years of a fund’s inception. Even if capital remains, managers may only be allowed to make follow-on, not new investments. For evergreen investors such as family offices, this may not be a limitation.
4. Do you have discretion over investments?
You want to work with investment professionals that have the final say regarding an investment decision. Some fund managers have to obtain approval from their investors for every decision. This requires delay and uncertainty in the process.
5. Are you a financial or strategic investor?
Financial investors are typically passive and do not add incredible value to a company’s chance of success. However, strategic investors seek to provide strategic advice and important industry network benefits, on top of their capital investment. But they are not passive.
6. What is your cost of capital?
Sometimes the answer will be, “It depends on risk, team, etc.” However, you deserve an answer, even if it is just a range of Internal Rate of Return (IRR). Plus, many investors are more driven by Equity Multiple (total cash out vs. total cash invested), which is always correlated with a strong IRR.
7. How do you describe your risk tolerance?
Every investor is different. And you need to know the nuances. Angel and venture capital investors like risk and expect high returns. However, infrastructure investors and debt providers are more risk averse, but can often place much larger amounts of capital.
8. What is your typical hold period?
Outside investment capital is frequently needed to grow your business. However, that comes with expectations for an exit, the sale of the company. Some investors look for 3-year hold periods, while others aim for 20-30 years. Your time horizon needs to align with theirs, or you may feel the fire.
9. Can you provide references?
It is often assumed that only investors conduct due diligence on you and your company. But an investment is a partnership. And you should vet the capital providers, too. Ask around and talk to those who have worked with them in the past. Any red flags?
10. Why are you interested in investing in my company?
You should not seek to be just one more investment for a capital allocator. Make the investor tell you why you and your company are of unique interest to them. Why are they best positioned to help you succeed?
This is not the final list, of course. But it should raise your game in future investor meetings.
Our goal is to remind entrepreneurs, executives, and developers that without good investments, investors have no business.
Don’t go into investor meetings begging.
Instead, vet the investor while they also vet you. It could be the beginning of a fruitful, 3-10 year partnership. Or the opposite if you’re not careful.
By: Dr. Chris Wedding, Managing Partner
The storage market is projected to grow over 100x from 2013 to 2022.
That’s great. Let’s go celebrate.
Or maybe the famous William Gibson quote is worth highlighting:
“The future is here — it’s not very evenly distributed.”
When it comes to battery storage, that “future” today is defined as Hawaii, California, and the Mid-Atlantic (i.e., PJM power territory), with some random outliers such as Kentucky and Michigan as well.
However, the financial feasibility of energy storage will grow quickly.
Analysts project that commercial storage pencils today in 7 states. But that number is projected to rise to 19 U.S. states by 2021.
(Minor footnote: The assumption for that math is that investors accept a 5% IRR. I hope that will be true. But today our investor network suggests a higher return threshold, perhaps in the mid-teens.)
Battery costs are, of course, a key driver. So let’s consider four trends for investors to keep in mind.
1. Energy cost is not the most important driver in assessing financial returns
“Wait, what? But you just said that costs were critical.”
Let me explain.
Capital costs get most of the attention in discussions about energy storage investment opportunities.
And there’s good news: Prices are falling quickly. (Statistics below)
However, capital costs are not the only consideration in achieving an attractive IRR.
Instead, here is the key question. (Be prepared for some rocket science.)
Is value greater than cost?
As the Lazard figure below illustrates, when “stacking benefits” from energy storage projects, more and more project opportunities will begin to make financial sense.
These benefits, or potential revenue streams, can include grid benefits (e.g., regulating frequency, deferring major capital cost upgrades) as well as host-user benefits (e.g., lowering demand charges on power bills).
Unfortunately, policy and technology are still barriers to the realization of multiple sources of revenue for the same storage system. Both are slower to adapt to market possibilities than entrepreneurs and investors would like.
Energy Value Proposition: Value vs. Cost
Furthermore, if you’re coming from the wind or solar industry, it’s helpful to remember that energy storage is not an industry where one size fits all. There is not one energy storage market. There are many.
Finding battery investment opportunities that make sense require the right match among technology, geography, utility territory, customer, and business model. (See the figure below.)
Energy Storage Feasibility: The Nexus of Technology, Market, and Business Model
2. The costs for batteries has fallen about 50% since 2010
According to a 2015 Moody’s report, energy storage costs have fallen by half in the last six years. They predict “significant market impacts” for power producers.
But even greater costs reductions have been seen in recent months. For example, over the 18 months prior to June 2016, energy storage provider Stem saw a 70% reduction in their costs for batteries.
The falling prices can be attributed to a number of factors, such as the overall scale of production among all manufacturers, the volume of production on an individual company basis, and the balance of supply versus demand.
3. Storage costs are projected to fall another 25-50% by 2020
First, be aware that storage cost projections vary depending on the technology (e.g., lithium, flow, flywheel, sodium, zinc, compressed air) and the use case (e.g., commercial, residential, microgrid, island grid, transmission-level, peaker replacement, frequency regulation).
Below is a snapshot of expected storage price drops on an annual and five-year basis.
The outlier, not included in this chart, comes from Telsa. (Are you surprised?) Its Nevada-based Gigafactory is expected to drive down the costs of its lithium-ion batteries by at least 50% by 2020.
Average Projected Energy Storage Cost Reduction: 2016-2020
4. Battery cost dynamics are closely linked to electric vehicles in two ways
First, let’s be clear: We’re just talking about lithium-ion batteries.
(Apologies if you’re now shaking your head saying, “Duh, of course.”)
First, lithium batteries will fall, in part, because EV sales have increased dramatically in the last five years — a nearly 600% increase in annual sales between 2012 and 2016.
Furthermore, EV sales are poised to grow more significantly in the years ahead. BP predicts 100 million EVs by 2030, for a 6% market penetration, while other analysts project 15% to 35% market penetration, where EV sales account for 8 out of 10 new car purchases.
See the two graphs below. And be sure to compare the EV sales for 2016 on both graphs. Wow, indeed. Get your motors running…
Just like we see in so many sectors, with greater scale comes lower costs for all lithium batteries, not just those for EVs. (Again, common sense comes in very handy.)
Annual EV Sales: 2010-2016
Source: EV Volumes
PEV = Plug-in EV
Correlation: Projected Cost for EV Batteries vs. Growing Demand for EV
The second reason that battery costs and EV sales are connected is this:
Like U.S. Marine drill sergeants, EVs demand a lot from their batteries.
Once the battery capacity gets below about 75%, the EV needs a replacement.
But the battery still has lots of useful life in less intensive applications, such as stationary uses serving the grid, industry, or homes.
Car companies like BMW and Nissan are already working on second-life uses for their EV car batteries for the home storage market.
It seems like an obviously great idea — preserve that supply-constrained lithium, don’t throw away a perfectly good technology, and most importantly, get cheaper batteries for the masses.
But, it’s not that easy. (Is it ever?)
How do you combine used batteries from different manufacturers? Or those from the same manufacturer but made in different years with different technology?
How do you assess useful remaining battery life in a non-invasive manner that doesn’t destroy part of the battery in the process?
How do you ensure safety? And get relevant warranties and insurance needed for selling thousands of second-hand systems?
Energy storage costs have fallen about 50% since 2010, and are projected to fall another 25-50% by 2020.
That said, costs are not the sole determinant of investor interest.
The value of storage systems is severely constrained today because policy and technology has not yet enabled the potential multiple revenue streams from the same under-utilized storage systems.
But that is changing.
So, will you dip your toe into the energy storage market today?
Or will you wait for it to make progress on its 100x market growth trajectory between 2013 and 2022?
How do you feel about the risks today versus the risks tomorrow, when there are far less technology and policy challenges, but far greater competition to invest in the best projects?
By: Dr. Chris Wedding, Managing Partner
1. Investor interest in energy storage is high — perhaps irrationally high
Enthusiasm around the energy storage sector is more feverish than ever. This is simultaneously encouraging and concerning.
Important questions remain. Here are a few:
Despite such rationale thinking, many investors want in on the action. Consider the statistics below from the website AngelList, a trusted resource for angel and venture capital investors.
2. Most battery investors are angel and venture capital investors — for now
Technology — both software and hardware — are today’s investment focus. As such, angel and venture capital investors drive this discussion.
The table below from the witty and savvy data scientists at CB Insights offers a great summary of who’s investing in energy storage technology.
(Source: CB Insights)
3. Project financing for batteries is coming — albeit slowly
Given the industry’s youth, examples of infrastructure investment in this sector are hard to find.
However, energy storage projects, not technology, will receive the vast majority of capital in the years to come.
Let’s look at two examples of investors deploying capital for battery project finance. The table below is compiled using data from the good folks at GreenTech Media and Crunchbase.
(Sources: GreenTech Media, CrunchBase)
As the costs of batteries continue to fall roughly 10% per year, and as technology performance and warranties improve, more debt and infrastructure investors will get into the game. Bloomberg’s graph below illustrates how fast prices have fallen for batteries used in vehicles.
Cost Decline for Electric Vehicle Battery Packs: 2010-2015
4. Oil and gas majors want a piece of the energy storage opportunity
As an article at OilPrice.com put it, “Who cares why the [global] temperature is rising?”
Said differently, regardless of where an individual, investor, or company stands on the issue of climate change (**), the opportunity to profit from the shifting global energy mix is very attractive, if not historic.
Consider McKinsey research which projects that the global energy storage market could be worth $90B to $635B by 2025, depending in part on adoption of electric vehicles.
Or take a look at the figure below illustrating how Total, one of the world’s seven supermajor oil and gas conglomerates, is investing in energy storage, amongst its broader renewable energy investments (e.g., 66% ownership in solar powerhouse SunPower).
Total’s Investments in Energy Storage and Other Renewable Energy
Other oil and gas giants are also making bets on energy storage, such as:
** We are not climate change scientists, but we defer to those who are: According to the US federal government (NASA), over 97% of actively publishing climate scientists agree that climate change over the past century is extremely likely due to human activity. Moreover, at least 18 of the world’s leading scientific organizations (e.g., US National Academy of Sciences) have issued public statements endorsing this position.
5. Lithium batteries are not the (only) opportunity
When I speak to investors about the energy storage market, many are worried about technology risk.
While the Energy Storage Association tells me there are over 70 battery chemistries being tested or deployed, research shows that there is just one dominant family of battery chemistries. Lithium-ion batteries made up 96% of all batteries installed in the US in 2015.
More importantly, as the market demands batteries with longer duration, installations may shift away from lithium-ion, which are typically discharged in increments of seconds and minutes or perhaps two hours, to longer duration batteries, such as flow batteries.
GreenTech Media’s projections below illustrate how investors may want to think about growth segments and technology as the market shifts from largely utility-scale installations to almost half of storage deployments taking place behind the meter.
US Energy Storage Installations (MWh, left) &
Battery Duration (hours, right): 2015-2021E
(Source: GreenTech Media)
If industry soothsayers are correct, and the energy storage market today is where the solar market was in 2005, then we could see substantial investment opportunities in this sector.
But do not jump in with both feet.
Warranties, balance sheets, developer assumptions on revenue and cost, track record, and policy enablers all require an extra set of eyes.
(And, yes, we would be happy to help on that front.)
1. Growth in solar is pushing costs down the virtuous path of technological learning
If you consume any media or analysis on the solar market, you have undoubtedly seen many graphs like the one below. That sweet exponential curve has driven much shift in investor attitudes about and activity in solar.
It is likely a relief that you are no longer a pariah when you bring up solar at investor conferences. Solar has
been one of the fastest growing sources of electricity (along with wind and natural gas) since 2010.
(Source: GTM / SEIA Solar Market Insight Reports, LBNL Database)
But the real beauty in the growth of the solar market has to do with technological learning, or the predictable cost decreases that result from increasing “experience” with the technology.
Most technologies exhibit the pattern displayed below. Growth in the development (or usage) of a technology unlocks a hidden treasure trove of reductions in cost, which further fuels the positive feedback loop generating more development growth. And so the march goes on.
The graph below shows the reduction in the price of solar electricity, which is one measure of cost. We are going to dive into some others.
The brain tickler is what the rate of cost reductions will be moving into the future. Even though solar has experienced an unexpectedly rapid reduction in costs, many predict this trend will not abate for some time.
(Source: Ramez Naam)
2. Just because solar build costs are cheapest in utility-scale does not mean that is where the best risk-adjusted returns are
The undiscerning investor may jump to conclusions - utility-scale solar must be the best bang for the buck because it is the cheapest. But you would be only partially right (and sometimes mostly wrong).
While utility-scale solar is now consistently being installed for less than $2.00/W, this is the market where we are seeing the lowest per kWh revenues, as utilities are getting a bit less generous with their PPA terms (more on that later). But the projects are big and relatively standardized, so the investment profile is still attractive to many investors.
Commercial (here referred to as non-residential) solar is a tantalizing market in that it can present an attractive investment profile, but often with some funky (e.g., heterogeneous) risk characteristics. You can find some appealing portfolios of projects above the 500 kW threshold, but there are a whole suite of idiosyncratic risks associated with the offtaker, EPC, etc.
Only the brave (and smart) are wading into vast expanse of untapped opportunity in commercial solar, and with some considerable success. Watch out for the leading actors in the space.
(Source: Scientific American)
3. Averages are useless - smart investors think in terms of distributions
It is all too easy to think of solar as a monolithic industry, but that would be missing the story beneath the headlines. Distributions are the key to understanding market trends, and identifying areas ripe with opportunity.
The graph below tells a story of market convergence. Most projects are achieving similar build cost performance over time. If you are presented with a project with all-in build costs above $3.00/W, then you either have a particularly challenging project, or a particularly challenged builder. Pick your poison.
This convergence also means there is more a general sense of how to benchmark a project, and hold EPCs accountable to the standards being set by their peers.
Disclaimer: the sunniest places are not necessarily the best markets for solar. That largely is a policy driven issue, which will be a topic of another post. But sun (or insolation if you want to sound clever) can be very useful.
The real takeaway from understanding geographic distributions is that capacity factors (e.g., the underlying technology performance of generating electricity) places some bookends around what sort of revenues and costs a project can support to hit your hurdle rates. The Northeast needs a bunch of incentives to have projects pencil for investors. Less so the case in sunny California or the Southwest.
Developers are often inclined to slightly (or aggressively) inflate the performance of their projects. This is an easy area to push back if you have the right data at your fingertips. Remember solar negotiations 101: Don’t take the developer’s project valuation at face value.
4. Return compression and the southern PPA migration
It is often headline news when a new record low PPA rate is achieved. This is great for offtakers and utilities, but can be a source of deep consternation for investors seeking market rate returns. What is the enterprising investor to do?
Utility-scale PPAs are now consistently below the $50-$60/MWh threshold, which is remarkable considering that just a decade ago, PPAs were 5x those rates. But this means that an investor that wants to compete in this market needs deep pockets and a low cost of capital. If when you look in the mirror, that is not you, then it is time for a gut check. Translation - you need to take some perceived (?) market risk.
If you want to wade into a different area of the PPA pool, that means tapping to the aforementioned commercial (often referred to as C&I) market, or exploring more nascent markets such as community solar. You may be able to attract better PPAs, but they will be offset by higher per Watt build costs, O&M costs, and a different risk profile. This means a different underwriting and due diligence process that can cascade into high transaction costs for the unprepared. Choose your battles.
5. Don’t forget that solar projects are long-term operating assets. Investors should be riding the downward trend in OpEx to boost returns, especially on the back-end.
One unmitigated piece of good news for investors is that O&M costs are also trending downward, now below $15/kW-yr. These often underappreciated components of any project cost profile are a key to unlocking longer-term value.
Many investors often neglect to put the time and effort needed to manage OpEx costs to optimize returns, especially on the back-end of an asset’s lifespan. If you pay more attention in structuring asset management, O&M, insurance, and other OpEx contracts, the ROI will be, let’s just say, highly justified.
1. Growth in global solar development has not stalled, despite the 8% decline projected for 2017
Global solar development is projected to grow a remarkable 48% compared to 2015, reaching 76 GW installed by the end of 2016, according to Mercon Capital Group. We in the U.S. cannot claim all of the credit. It appears as though record-level solar development in China is largely responsible for this growth.
But when you look at 2017, investors start to become very wary. Exponential growth from 2.6 GW to 76 GW in 10 years (40% CAGR), followed by a projected 8% decline in 2017! What gives? Well, again the story is about China, which is expecting a steep decline as a result of anticipated tariff cuts and reduced national targets following the solar module oversupply that fueled the 2016 growth.
In the U.S, we are expected to stay steady after a 70% spike in solar development in 2016. But let’s not sleep on Japan (still a vibrant market) and India (emerging as a real contender).
(Source: Solar Industry Magazine)
2. Don’t get too concerned about fluctuating solar stock prices -- remember the long game
Public markets are fickle. And remember stocks are valued (theoretically) in terms of future projected cash flows. Which means it is all about expectations. Right now, many investors feel there is a bear market lurking around the corner, and the SunEdison debacle has done little to assuage the public’s concern about the solar industry.
The big name market barometers are sending signals to be very worried about the long-term prospects of the solar industry. SunPower (SPWR), First Solar (FLSR), and Canadian Solar (CSIQ) are all taking a nosedive. Yieldcos -- Pattern Energy (PEGI), 8point3 Energy Partners (CAFD), and the much beleaguered Terraform Power (TERP) -- are also all trending down after a comeback from last summer’s downturn.
Two things are dragging down stock prices - persistent low module costs putting a downward pressure on revenues and over-leverage eroding cash flows. Only the companies with the financial agility to continue to generate positive cash flows will weather the price wars, but the solar industry as a whole with weather this period successfully.
(Source: Google Finance)
3. 83 companies committed to 100% renewable, but just wait for the prosumer revolution
According to RE100, some of the largest corporations in the world are aiming to get to 100% renewables. Some of the usual suspects are from the tech world -- Apple, Facebook, Google. But you might be surprised to find old school corporate behemoths such as WalMart, Nike, Johnson & Johnson, Proctor & Gamble, and the Tata group have joined the ranks, as well.
Now, all of that will not be solar, but a lot of it will. Solar affords the corporate investor a lot more flexibility in the project size and location, lower basis risk, and better synchronicity with peak demand. Corporate power purchasing grew to 3.23 GW in 2015 (Source: RMI), and is only expected to grow more, especially as virtual net metering and community solar policies allow for more off-site solar solutions.
Watch out for some of these companies to cross into the ranks of “prosumers,” companies that both produce and consume energy. Apple recently filed for licenses in California, Oregon, and Nevada to sell its excess electricity directly to consumers (Source: HBR). This really could be a gamechanger.
4. Solar investors flock south to Latin America, even as returns head in the same direction
It is not headline news that Latin America is becoming an attractive area for investment in solar. The region is expected to grow at an annual rate of 40% through 2021 after all, with Mexico, Chile, and Argentina leading the charge.
Amid the many interesting facets of solar development and investment in Latin America -- transmission constraints, locational variability in price, currency and credit risk, new renewable energy mandates and policies, etc. -- the real braintickler is how are all of the auctions going to play out over time. Auctions have consistently returned remarkably low prices - $45/MWh in Mexico, $29/MWh in Chile, and $59/MWh in Argentina. With falling solar module prices, there is some room for developers to deliver projects that can meet investor hurdle rates at those prices. But the competition is tough, and some investors have grown wary of playing the auction game.
All the while, do not forget about Central America and the Caribbean. El Salvador and Honduras, among others, are paving the way for solar expansion with a range of promising utility-scale projects.
5. Community solar is the real anti-establishment energy choice
Even though SunRun wants you to think that “roof-top solar is the anti-establishment energy choice” (Source: GTM), it is not a choice available to nearly half of all U.S. households. Enter community solar, the renewable energy choice for the masses, including the often forgotten low- to medium-income households.
The benefits to offtakers are obvious -- access to clean, reliable electricity from solar farms built at a much lower cost than their roof-top solar siblings ($2.00-$2.50/W vs. $3.00-$3.50/W). And based on a simple savings-to-investment ratio, 35-48 states are attractive locations for community solar. No wonder NREL projects that community solar will make up half the distributed generation market by 2020 (Source: NREL).
Once investors can get comfortable underwriting the somewhat unique risks of community solar projects, there will likely be a fairly attractive risk-return profile and a largely untapped market if and where policy falls in line.
(Source: DOE Office of Energy Efficiency & Renewable Energy)
Postscript. Elephant in the room -- No one knows what the Trump era holds for solar
Policy support at the federal level, most notably the ITC, has been essential in accelerating the growth and maturation of the solar industry. The ITC appears safe for the moment, but may end up on the chopping block in a larger tax reform bill. Nobody knows.
What we do know is that the solar industry is here to stay, federal incentives or not. The value propositions for solar -- clean and affordable source of electricity, economic development and job creation, and attractive investment opportunities -- are not going to change. There may be bumps in the road if the federal government attempts to resuscitate the coal industry at the expense of support for renewables, but the industry will navigate them and move on. Coal's downward spiral is unlikely to be something that Trump can avert despite his grandiose promises (Source: Yale Environment 360).
I’ll leave you with one heartening statistic - there are more clean energy jobs in the state of Ohio than there are coal industry jobs in the entire U.S. (Source: Renewable Energy World). If President-elect Trump holds to his promise to focus on job creation, the answer should be clear for all to see.
The Mainstreaming of Renewable Energy Infrastructure Investing - Risks, Returns and Emerging Sectors
If you work in renewable energy or infrastructure finance, then you might like this...
Yesterday, I published an article in the Real Assets Newsletter for Preqin, a global leader in market intelligence for the alternative assets investment industry, serving 40,000 investment professionals in 90 countries.
See the link below. It's on page 8.
"The Mainstreaming of Renewable Energy Infrastructure Investing - Risks, Returns and Emerging Sectors"
Here are two highlights...
Figure 1 shows the attractive risk-return of infrastructure vs. other asset classes. Note that renewable energy made up 54% of all infrastructure deals globally in Q3 2016.
Figure 2 illustrates that solar projects in the developing world tend to be larger (i.e., allow for greater volumes of capital allocation) and generate higher IRRs (albeit with more political and other country risks).
What does it all mean for investors?
It's time to look forward, not backward. Most perceptions about renewable energy are outdated because the sector is changing so quickly. Those wait run the risk of being late to the (raging) party.
It is easy to relegate a discussion about electric vehicles to Tesla toys for the affluent.
But that would not be the whole truth.
As an illustration, I recently served on the Advisory Board for Vulcan in its Smart City Challenge partnership with the U.S. Department of Transportation, which jointly awarded US$50M to a single U.S. city to support transportation innovation, including electrification.
In all, 78 cities competed. The enthusiastic response, impressive potential for scale, and wide-ranging innovation were a pleasant surprise.
Although there are only about two million electric vehicles on the road globally today, that estimate is expected to grow to roughly 100x if the Paris Climate Accord has its targeted impact (International Energy Agency, 2016).
Electric Vehicle Projections, 2010-2030
(Source: International Energy Agency, 2016)
Although these vehicles are often deemed to be “too expensive,” many electric vehicles actually offer a lower total cost of ownership than conventional vehicles when assess over their entire lifecycle.
Moreover, by 2022, the average first cost of electric vehicles is projected to be the same as the average first cost for conventional cars.
With cost concerns removed, plus the other benefits of less noise, no gasoline smell, fewer moving parts, and the “cool factor,” this market is expected to grow quickly from this point forward (BNEF, 2016).
In fact, the growth of electric vehicles is expected to be so meaningful that Fitch Ratings recently stated that the sector’s rise presents potential for “investor death spiral” negatively impacting the oil sector (Financial Times, 2016).
And at the Oil & Money Conference last month, Statoil’s CEO noted that electric vehicles could catalyze oil’s peak sales within five years, with a steady decline thereafter (Climate Home, 2016).
Considerations for infrastructure investors:
You’ve seen many headlines touting “record new solar panel efficiency.”
We get excited seeing those, too. But they don’t matter.
Alright, that was shock value. Let me explain.
First, take a gander at the mind-numbing chart from the US National Renewable Energy Lab (NREL) below. This is one of my favorite figures in the whole world.
Now, please memorize it -- there will be a quiz later. (Or so I tell my corporate and military executive students. They laugh at my false threats.)
What does this figure say to you?
Three potential takeaways:
1. There are way more types of solar panels than you thought, right?
2. Solar panel efficiencies have improved considerably between 1975 and 2015. Duh.
3. The guys doing the stuff in red font should get new jobs given their low efficiency. (Not really. Those are super cheap organic polymer-based solar cells. Their future will come one day.)
OK. Now forget that graph. Look at these two more important charts from Bloomberg.
Do you see any relationship between these the red and blue lines? (I hope you do.) Cost falls. Solar installations go up.
And now for the next chart.
Yes, you are reading that right. A 99% drop in solar panel prices since 1976.
I know, I know. I hear the devil’s advocate: But doesn’t greater volume of solar installations drive down costs?
Yep, but the opposite is more true. Cost drives volume.
China got in the manufacturing game just as the recession of 2008 hit and EU solar demand fell off. Solar panel prices fell faster and haven’t really stopped, resulting in an 80% drop prices in the last 8 years.
For more data and graphs about solar's falling costs and coming world domination (insert dramatic music), see energy rockstar Joe Romm's piece "You’ll Never Believe How Cheap New Solar Power Is."
In case you fear that my ponytail is getting in the way of my PhD and love of private equity (insert humor), and that I'm being too kind to solar, consider this projection from Bloomberg:
By 2040, global investment in solar will total $3.4 trillion, while fossil fuels and new nuclear will only receive $2.1 trillion and $1.1 trillion, respectively.
One word: Yikes.
The next time you hear a sales pitch about panel efficiency, praise them for their ingenuity. They are real wizards.
But just keep asking: What is the resulting $/kwh and Internal Rate of Return of the solar project?
Efficiency is the finger point at the moon. Please go after the moon.
You may have heard of phrases such as “The Internet of Things” (IoT) or the “Smart Grid.” Both terms are defined differently by many people.
According to IBM, the IoT refers to the “digitization of the physical world.”
According to the U.S. Department of Energy, the smart grid can be defined as “a [new] class of technology to bring utility electricity delivery systems into the 21st century, using computer-based remote control and automation.”
The investment opportunities in improving the intelligence of our electricity generation, transmission, and generation system can be summed up by a joke reserved only for energy geeks (like me).
It goes like this: “If Thomas Edison were alive today, and you showed him a smart phone, he would be blown away by the innovation. In contrast, if you showed him how we produce and distribute electricity, he would say, ‘Oh yeah, I recognize that.’”
As an example of the scale we are talking about, estimates suggest that the U.S. alone needs to invest US$2.1T by 2035 to upgrade its electrical grid and integrate the massive surge in renewable energy and the need for greater resilience. (International Energy Agency, 2016)
As an example of what is coming, consider analyst predictions that the number of internet-connected devices globally will grow from approximately 13 billion in 2015 to almost 39 billion in 2020. (Juniper Research, 2015)
Or consider the scale of the opportunity in the infographic below.
Source: Mario Marales, IDC
Considerations for infrastructure investors:
sign up for ironoak's Newsletter
Sent about twice per month, these 3-minute digests include bullets on:
Renewable energy | Cleantech & mobility | Finance & entrepreneurship | Attempts at humor (what?)
Photo by Patrick Fore on Unsplash