MIT Energy Conference Explores Efficiency and Yieldcos

Academics, entrepreneurs and CEOs convened at the MIT Energy Conference held on Feb. 27-28 in Cambridge, Mass.. In the opening keynote, Robert Armstrong, director of MIT Energy Initiative, laid out the challenge: “How do you double energy production by mid-century and lower the carbon content?”

Known for bringing together visionaries and innovators at the knowledge frontier, the conference featured panels on how renewable energy, energy efficiency, distributed generation, and digitization can meet global energy demand. Some speakers emphasized disruptive innovation while others recommended incremental progress.

A Macro View of the State of Clean Energy Finance

In a panel titled “Securing the Future of Clean Energy through a Stronger Transmission Backbone,” Raymond Wood, managing director and head of United States power and renewables at Bank of America Merrill Lynch, painted a picture of his macro view of the clean energy finance sector.

The costs of renewables – particularly solar – have gone down dramatically.

“It’s nothing short of transformational,” Wood said. “We haven’t seen these types of price declines for a utility-scale energy provider in the history of my career.”

Wind price declines are also astounding, Wood said. The efficiency of wind farms has doubled.

Wood said he is excited because renewable power projects are capital-intensive and it is his job to finance them. “And now they’re economic. The financial innovations are coming.”

The challenge in the past, according to Wood, was that investors perceived this as a subsidized industry and were concerned the subsidies might not last. “While the government subsidies are very helpful, most investors don’t want to pay a high multiple. Whether it’s cash flow, earnings or dividends, they don’t want to pay a very competitive price for something that could be antiquated in time.”

Innovation can emerge because the capital market is being very efficient right now, Wood said. “Across the spectrum of finance, there is a lot of liquidity sitting there ready to invest at a pretty efficient level.”

Now, with 20-year contracts and solar power approaching grid parity, structures have been developed that allow deployment of capital to fund solar resources via public equity capital markets.

“We’re calling these yieldcos. If you can come up with a better name, I’ll buy you a cup of coffee,” Wood said.

Wood describes yieldcos as total return vehicles similar to master limited partnerships (MLPs). “You take this annuitized asset base that is very large and bundle it into a c-corporation that pays taxes. Why do you want it to pay taxes? It doesn’t pay taxes because the subsidies from depreciation are so high there won’t be taxable income due for over 10 years.”

Do that with a sponsor who is adept at deploying this technology, has a track record, and has a visible backlog of projects that are going to continue to deploy, Wood said, and someone will pay you for that growth.

“This means we have a currency that reflects the stability of the asset coupled with the growth, so it has a very low dividend yield but – ironically – a very high total return because the growth outweighs the initial dividend," Wood said. "We have this happy circumstance where investors think they’re getting a 20 percent return – and those deploying the capital and issuing the equity have a cost of carry of around 5 or 6 percent. It really has revolutionized the way people are looking at renewables.”

“There are a lot more financial innovations coming and it’s more imperative than ever that we get the grid policies right so we do not have a binding constraint to the market – which is the reliability of the transmission grid,” Wood said.

A Vision of Solar in 2030

It comes as no surprise that Ahmad Chatila, president and CEO of SunEdison, is optimistic about solar power’s future.

By 2030, Chatila said, solar generation’s cost will drop 60 percent. His conservative estimate is that solar will cost 3-4 cents per kWh in 2030.

Chatila said cost reduction drivers include technological improvements and new financial mechanisms like securitization, yieldcos, and foreign exchange (forex) management.

Chatila pointed out that solar is currently in a key transitional phase. “With solar perceived as a new technology, people are willing to give you money at early stage. Now we’re at a middle point between higher and lower cost.”

Citing a benefit to investors, Chatila says that solar poses lower risk. “A solar cell is a diode. A diode is a very simple thing. And [solar is] distributed. There is a lot lower risk of having a 1-GW failure.”

Plus, in some cases, there is no transmission needed for solar.

Chatila believes the economics of solar can work without government subsidies in countries with a large, growing GDP. He said solar will expand in countries like India. “People told me it’s impossible. Don’t do it. Don’t work there. It’s too expensive.”

“In India today, solar is the same cost as imported coal,” Chatila said.

Chatila briefly acknowledged the challenges of solar being an intermittent source of power and the need to drive down customer acquisition costs. “In the United States, customer acquisition for solar is around 50-55 cents per watt. In other industries, like with refrigerators or air conditioners, it’s only 8 cents per watt. Yet there are technologies emerging that will drive it down to 8 cents per watt for solar.”

A Scalable Model for Energy Efficiency

Harvey Michaels, lecturer at MIT, spelled out a key challenge involved in scaling up the energy efficiency industry.

“When prices are going through the roof, it’s a lot easier to sell energy efficiency,” Michaels said. “We don’t have that and we are not going to have that for some time. We don’t have the benefit of a market that has a hurt point associated with energy use.”

So what is the answer? Michaels said he suspects it involves making energy efficiency “timeless, riskless and costless.”

As an example of how this can be done, Michaels said, SolarCity has struck all of these chords for the solar industry.

“How can we do this with solar if we can’t do it with efficiency?” Michaels said.

Dhiraj Malkani, partner at Rockport Capital, highlighted the commercial and industrial energy efficiency market’s potential and challenges. Rockport Capital is a venture capital firm that invests in “energy, sustainability and mobility,” largely for enterprises that provide business-to-business services.

Providing a counterpoint to panelists from Nest Labs and Opower, which focus on the residential sector, Malkani discussed the unique challenges facing the commercial and industrial energy efficiency market.

“Trying to sell energy efficiency one building at a time is not scalable,” Malkani said.

He highlighted several of his firm’s investments that are focused on scalable energy efficiency solutions, including FirstFuel, Ecofactor, Enlighted and Renovate America.

Enlighted, a lighting savings platform, has developed a proprietary financing instrument that allows customers to have zero upfront costs to deploy the company’s LED lighting and controls technology. The Global Energy Optimization program, GEO, is a Saved Power Purchase Agreement targeted at customers with global real estate portfolios. This instrument helps solve the problem of constrained budgets in the commercial and industrial market.

“I think there is a lot of room for innovation in financing. It’s still a big problem – more so on the commercial side than it is on the residential side,” Malkani said.

Echoing Harvey’s comments, Malkani said, “New business model innovation is needed, like consumer lending models around helping peer-to-peer lending – maybe a SolarCity for energy efficiency.”

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