Solar Energy, Not Technology - September 2010
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Solar Energy, Not Technology
September 2010
Confidential
Overview
I. Development, Construction, and Operation of a Solar Project
II. PPA Pricing and Capital Requirements
III. Solar Strategy and Valuation
IV. Q&A
2 Confidential
I. Development, Construction, and Operation
of a Solar Project
3 ConfidentialThree Stages of a Solar Project (10MW Example) 1) Development 2) Construction 3) Operation
Solar Development: Not Very Hard
• Well-known and free fuel resource
Decades of data from NOAA and NASA
Same as 3D seismic, except much lower-risk
P-99 vs. P-50 = 5% resource difference in solar
P-99 vs. P-50 = 20%+ resource difference in wind
Siting is easy and property owners have little leverage (12kV
Example: 8 x 160,000 miles of >230kV lines in the US
Solar has minimal NIMBY issues
Just follow grid operator’s process – usually takesConstruction:
Operation: 25+ Years Steady Cash Flow
Permanent Funding Serviced by Electricity Sales
IOUs, Insurances Companies, Banks, Pensions, and Other Investors
Buy Turnkey Systems from Construction Finance Company
Permanent Equity Off-Taker
(L-T System Owner) (Electricity Customer)
–Captures incentives –Buys power under
Buys completed turnkey –Operates & maintains fixed-price 25-yr PPA
solar installation from system –Typically with utilities
construction sponsor –Non-recourse project or investment grade
debt companies
Example: Annual Cash Flow for a 10 MW Solar System
15,000 MWh/Yr Electricity from System
x $0.20/kWh Price from Customer (Utility)
$3,000,000 Annual Revenue to System Owner
- $200,000 Annual Opex from System Owner
$2,800,000 Annual EBITDA to System Owner
7 ConfidentialOperating System Valuation
System Value = Electricity Output x Electricity Price
IRR – Growth Rate
• Electricity output
More sunlight = more value
System design (positioning, wiring, temperature, etc…)
• Electricity price (PPA or Feed-In Tariff)
Prevailing local rates, carbon regime, etc…
• Cost of capital (IRR)
Customer credit profile, technology, etc…
COC will eventually decline as the market understands solar better
• Growth rate
Panel degradation
Power price escalation
8 ConfidentialII. PPA Pricing and Capital Requirements
9 ConfidentialSynthesizing Capex into Rates (PPAs)
$0.40
Reflecting actual costs of capital
$0.35 ($0.10)
(debt, tax equity, equity) is critical to
$0.35 provide real project economics (PPAs)
Cost of Solar Federal
$0.30 Electricity Grant
without ($0.05)
Incentives
$0.25
(Assumes MACRS
Front Year PPA ($/kWh)
($0.04)
~$4.00/Watt) Shield $0.03
$0.20
$0.15 Cost of
Capital
$0.15 Economies
of Scale (Supplier Cost of
“Winning” PPA Price Levels & Installer
Solar Electricity
Relationships)
$0.10 Before COC
$0.05
$0.00
** Indicative economics only, exact numbers will vary from project to project.
10 ConfidentialProject Liquidity: Solar Bonds Are Not Working Capital
• Solar bonds must be non-recourse and off-BS
Secured only by project assets
How good is a warranty from a panel maker who burns cash on projects?
• Govt. loan guarantee takes a long time and is not repeatable
Only one transaction since inception in 2005
Ends Sep. 2011
• We estimate the cost of a solar bond to be 6-8%
+ 5% Yield on PG&E 2034 bonds (A3/BBB+)
+ 1-3% Spread (Non-Guarantee, New Issue, Oper. Risk, Liquidity)
Fully amortizing*
* CdTe, not c-Si, must be decomissioned after 25 years
11 ConfidentialCorporate Liquidity – Growth Isn’t Free
• Must bring inventory on BS in order to book sales
• ~$2.5B of working cap needed to sell 1GW of projects
$2.50/Watt System Cost x 1GW (12-month turnaround)
• Should debt be issued to fund 10% EBITDA activity?
$2.75 System Sale Price / ($0.75 Panel Cost + $1.75 BOS Cost)
Credit metrics: 10x leverage, 1.7x int. coverage (6% note)
• What is the EBITDA?
12 ConfidentialIII. Solar Strategy and Valuation
13 Confidential‘06-’07 Solution: Grow at Any Price into a Commodity Market
• Solar developers inappropriately funded by VC
VC demands for high growth – at any price
VC demands for capital efficiency – insufficient equity for project loans
IPO exits never materialized (SunEdison, MMA, etc…)
• Yet, the growth drum continues to beat
Overpaying for pipeline (sales channel), at least in the US
“Underwater” PPAs
Vendors operating at a loss
Buying market share may work for tech and consumer products, but there
is no “network effect” or “brand value” in commodity markets
14 ConfidentialHow Solar Fits into the Big Picture
• Solar is an elegant asset
Long-term, lightly depreciating asset*
Free fuel provides hedge against rising and volatile natural gas
Consumers eventually will know peak power value – smart meters
Solar is an onsite (T&D) gas well and peaking unit rolled into one
• Solar is cyclical and capital-intensive
US solar activity will boom and bust with natural gas prices
Panel-makers who sell to cyclical customers are also cyclical
Energy companies survive in down-cycles by conserving cash
• Signing low PPAs is a clear misunderstanding of your market
• Price-taking in a down market – not getting “it”, etc…
• Solar ENERGY companies can’t be like Oracle
* CdTe, not c-Si, must be decomissioned after 25 years
15 ConfidentialHow to Make Solar Work in the US
• Get utilities and project investors on the same page
Undercapitalized developers have set PPA expectations too low…
…because they have to show growth (sign contracts)
• Fix the liquidity problem
Energy investors, with cash-on-cash demands, are needed
Equity market cap does not imply liquidity
“Asset Light” energy growth examples: Enron, Calpine, AES, Conergy
• Solar ENERGY must comp to conventional energy
Solar won’t displace conventional energy anytime soon
Cash flow multiples are inevitable
16 ConfidentialPowerFin’s Business Approach
• We are energy investors
We are not married to a growth strategy
We don’t think US “pipelines” are valuable
We price PPAs based on real economics
We only care about cash-on-cash returns
• We bring discipline to the solar industry
We don’t “pump and dump” pipelines…we just execute projects
No “Greenwashing”
Don’t call us unless you want a completed project in the next 6-12 months (not in 2-5 years)
We want our vendors, investors, and customers to make money
Our investors know what they’re getting – cash flow
17 ConfidentialThank You
Q&A
www.powerfinpartners.com
18 Confidentialc-Si Projects Have a Very Long Tail
c-Si Panels Observed to Degrade at
0.4% to 1.0% Per Year
• Panels last for 25+ years
• PPAs last for only 25 years
• 80% output warranty for 25 years
• Long-lived (renewable) assets
Source: Manuel Vazquez & Ignacio Rey-Stolle, “Photovoltaic Module
Reliability Model Based on Field Degradation Studies,”
Progress in Photovoltaics Research and Applications,
Published Online March 3, 2008 www.interscience.wiley.com
19 ConfidentialYou can also read
