As the U.S. solar energy market has developed, many utilities and IPPs are waking up to a new reality — their customers want solar. That means utilities need to figure out their role in this sector or risk losing their customers for 50 to 90% of their energy needs.
So how does a utility look at the U.S. solar market? What are the considerations for entering into the market as an owner as opposed to a provider? What part of the market should utilities be looking at — large-scale, distributed generation or residential?
Given the nature of today’s solar market, let’s ignore large-scale projects and save that discussion for another day because large-scale projects are going to require large tax-credit appetites. Few utilities have it, so they will need to find a way to secure it.
For the distributed generation and residential solar markets, the utility companies must decide between two things:
- Buying a platform; or
- Creating a platform through organic growth.
For most of them, No. 2 is not an option. Why not? Here are a just few considerations if you are trying to create the business from scratch:
- You must hire employees.
- Who do you hire? There are few people with the required experience.
- How many employees do you need?
- What is the cost of these employees?
- Do you put these employees into the utility, or can they stay in a separate unit?
- What does the platform look like?
- Where does it sit geographically?
- What is the corporate make-up?
- How do you create all of the documentation needed to establish new customers and process credit applications (for buyers and internal credit committees)?
- How does it fit into the corporate organization?
- How do you brand this new platform to gain marketshare? You are entering a fragmented but well-established market.
- How do you manage systems once you own them? Who does the O&M?
Now, let’s consider purchasing a platform. Here are the major considerations in such a scenario. Naturally, some of these are also critical to growing a business organically as well.
- Who do you buy?
- How do they fit into your corporate culture?
- Can you maintain their business as a separate entity?
- What companies have actually executed the development of more than 25 MW and hold decent market share?
- Are you looking for a nationally or locally successful company?
- How much money are you willing to spend for a platform?
- Most developers and their owners tend to overvalue pipelines and portfolios of solar assets, so are you willing to overpay to gain a foothold into the business?
- How will you integrate the business into yours?
- How do they currently finance their projects? How efficient are they in securing financing for their projects? Will you need them to continue securing tax equity, or can you provide the tax capacity needed?
- How have they succeeded in the market to date? Can they continue in the same manner, or did their prior success depend upon unique factors – e.g., operating in markets with high SRECs?
Both of these options are starting to seem rather intensive, aren’t they? So let me make another suggestion. If you are a major utility or IPP, why buy the business in the first place? If what you want are solar assets, then it would be easier to provide a pool of capital to many of the established players, create a box that defines specific criteria and let them go out and source the deals for you.
This is already being done by several large players, although we could probably argue as to whether they are models of success or failure. Yet I continue to believe that with the right amount of guidance and oversight, creating a financing vehicle for ownership significantly reduces the number of headaches that would be incurred by anyone looking to create an entire platform and provides many of these players with the greatest probability of successfully growing ownership at a rapid pace.
Robert Sternthal is president of Reznick Capital Markets Securities and has extensive experience in financing renewable energy transactions, whether they are in the wind, solar or biomass sectors. Working alongside CohnReznick LLP and CohnReznick Think Energy, Reznick Capital Markets Securities offers one of the most comprehensive financial advisory platforms in the industry.
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