Posted on March 6th, 2014 by Mercatus
Looking for a sign that solar has arrived? One need look no further than the flock of attorneys and bankers in attendance at this year’s Infocast Solar Power Finance and Investment Summit, held in San Diego on February 24 to 27. Investment bankers and attorneys were out in full force, which is yet more confirmation that solar is on a rapid track to become the next big asset class. Some industry heavyweights have even suggested that the ramp for solar could parallel that of mortgage securitization, or possibly even exceed it.
That should be good news for everyone in the solar industry, but it also presents a challenge…
How do we meet growing investor demand for solar-based securities?
Over the course of the four-day event, we had the opportunity to sit in on meetings, workshops, and executive briefings with some of the industry’s thought leaders. The summit is broken up into three segments. The first is the Solar Workshop, which was held on Feb. 24 and focused on financing small-scale solar projects. The idea couldn’t be more timely as it echoed two of the recurring themes throughout the conference: how to transition to distributed generation and how to win the competition for low-cost capital.
The second component of the summit was the Executive Briefing on Feb. 25. The briefing offered two tracks: one on finding new solar opportunities and another on obtaining low-cost capital. The second track delved into the details of some of the latest innovations in project financing, namely yieldcos, MLPs, and REITs.
The third component was the summit itself, which took place over Feb. 26 and 27. The Infocast Summit has established itself as the premier conference for solar investors. During the final two days, the summit serves as a central connection point for investors, developers, and dealmakers throughout the industry to share insights and best practices and to actually get deals done. The summit is an invaluable experience.
As we met with investors, we found three recurring themes. The first is that there is currently more money than ever chasing projects. It’s a seller’s market. The surging demand for quality projects will eventually drive down the cost of money.
The second predominant theme was the ongoing search for low-cost capital. While panel pricing and balance of systems cost have come down, soft costs like project acquisition and cost of capital have not budged. That’s led to the development of yieldcos, REIT, and MLP’s which offer promise as securitization vehicles with low costs of capital. The demand is certainly there on the part of investors. The challenge is in getting the private letter rulings needed for those vehicles to accommodate renewable energy. A private letter ruling for Hannon Armstrong last year may have cracked the door for solar REITs, but more work is needed to blow the door wide open.
The third theme that came up repeatedly in our meetings and conversations was the transition from investing in utility-type scales to a distributed generation model. Distributed generation may be the future, but many investors aren’t in position to leverage the opportunity effectively.
Many investors cited several challenges presented by the shift to distributed generation. One of the biggest was handling the sheer volume of possible solar projects. We heard investors say that they don’t have the staff on hand to properly analyze and underwrite the number of projects available. That means they’ll either have to hire more staff or come up with a more efficient process.
Operating more efficiently is certainly a requirement if an investor is going to be successful in the world of distributed generation. In the meetings we attended at the summit, investors spoke of the need for a repeatable process that allowed them to quickly and easily weed out bad projects. Of course, there has always been a need for this type of process, but distributed generation may have made that need more obvious for some investors.
We’ll dive deeper into these issues in some upcoming posts. Looking back on Infocast Solar Summit 2014, though, the challenges for the industry are clear. Investors who can obtain low-cost capital and develop efficient systems will be in a prime position to profit from the surging growth in the distributed generation segment. Investors who fail in those two areas may find that solar investment will become significantly more challenging and unprofitable.
National Real Estate Investor – Mercatus CEO Haresh Patel discusses Solar as the next big asset class
Posted on February 11th, 2014 by Mercatus
Is Solar the Next Big Asset Class? Trepp and Mercatus Think So.
Feb. 10, 2014 – National Real Estate Investor
By : Susan Piperato
Mercatus Inc., an enterprise-level investment analysis and decision-making platform serving as a core operating system for solar energy investors, recently had its Series-A round of financing closed by Trepp LLC, a provider of information, analytics and technology to the CMBS, commercial real estate and banking markets. Trepp rounded out other Mercatus Series-A investors, including Vision Ridge Partners, Augment Ventures and Shah Capital.
Over the last 18 months, the costs of renewable energy technology and installation have fallen dramatically, while the costs of financing remain high. Developers are facing a challenge when it comes to attracting capital. Meanwhile, energy investors are lacking in resources, best practices and domain expertise and as a result are not deploying capital.
The Mercatus platform features an information database and analytics engine consisting of over 10GW of commercial, industrial and utility-distributed generation solar assets. This cumulative database tracks 570 unique attributes on each project that has driven the broadest pre-investment dataset available.
NREI spoke with Mercatus CEO Haresh Patel about how his firm’s platform can help elevate solar as an asset class, and the impact of Trepp’s investment. An edited transcript of that interview follows.
NREI: There are several new financing vehicles for solar projects coming to market. Where do you see this going?
Haresh Patel: All of the financing vehicles are fairly new, so in this early phase key measurement points will require more time. The solar securitization by SolarCity has had the most impact. First, it surprised the market, and while it was a relatively small amount on the Richter scale, it has created a tsunami effect. Several banks have indicated that if another deal came along, they could easily sell $1 billion worth of solar secularization portfolios. It is rumored that there are currently four to six future securitization deals in the works.
We just announced our new Mercatus 2.0 platform, which includes new and enhanced features such as portfolio analysis and automated ratings for both the residential and commercial segments. These additions are expected to be major enablers for the onslaught of distributed generation solar securitizations expected to occur in 2014.
NREI: Mercatus has already appraised and rated over 1,400 projects. Could you talk a bit about what sorts of projects? What is your main property market?
Haresh Patel: Since its 2009 inception, Mercatus has assessed over 11 GW of solar projects, and currently serves 40 percent of the distributed generation U.S. solar market with some of the industry’s top global developers, institutional investors and independent power producers as customers. Subscribers to the Mercatus platform are currently targeting $1.2 billion in dedicated capital deployment for distributed generation solar investments in 2014 alone.
Our focus has been commercial and industrial segment and our projects range in the size of 250KW to 30MW. The average project size of the 1,400 projects we currently rate is 3MW, which equates to roughly a $10 million project. From a geography standpoint, 90 percent of our projects are U.S. based and spread widely across the country–the California and Northeast regions are the most active markets. However, while only 10 percent of our projects are international, it is one of the fastest growing markets as U.S. investors are finding attractive internal rate of returns overseas.
Mercatus has also recognized that residential projects represent a strong growth segment and as previously mentioned, our current Mercatus 2.0 release includes features such as portfolio analysis and automated ratings specific to the residential segment.
NREI: You founded Mercatus in 2009 as the critical interface for investors in solar development. That was a fairly bold move as solar development was really still in its early stages. What made you think the time was right? How has the pool of investors grown?
Haresh Patel: Our team came from the semiconductor industry and lived through various market sectors that enjoyed spectacular growth over the last 25 years and that growth came with lots of jagged peaks and valleys. We learned a lot about what happens with early market adoption by observing the growth of PCs in the ’80s, the onslaught of workstations in the early ’90s as well as networking during the late ’90s, and the adoption of Internet and mobile technology over the last decade. Early markets typically have a lot of “cowboys and Indians” and we have seen similar early market behaviors in the solar sector. Solar is expected to undergo massive growth over the next 25 years and at Mercatus, we believe we will bring some of the best business processes and IT solutions to help solar achieve scale.
Today there are about 200 investors, but we remain extremely bullish that solar is the next big asset class. When it hits its stride over the next three to seven years, we are expecting it will attract over 5,000 investors and trillions of dollars in investments. This is exciting for us as we provide a solution that will reduce costs, reduce friction and get money flowing into the solar market. With Mercatus, our clients save millions in diligence and make millions in quicker profits–if investors can enjoy that growth through our platform, we benefit commensurately at Mercatus.
NREI: Could you talk a bit about your relationship with Trepp and what the firm’s investment means for Mercatus?
Haresh Patel: Mercatus recently announced that it has closed its Series-A round of financing with Trepp as an investor. The new relationship with Trepp helps bolster the Mercatus offering with additional data feeds, analytics capabilities and intelligence for optimizing revenue and profit margins in existing markets and enhancing the ability to enter new markets. The combined efforts of Trepp and Mercatus help provide the building blocks required to accelerate securitization and other low-cost capital financing vehicles to help make solar a major asset class.
One of the big reasons some investors are still on the sidelines is the lack of data in understanding their risk. Combining our credit rating and associated data with Trepp’s data and analytics will provide investors with a more complete risk/reward data set to make a more informed decision to invest in solar as an asset class. Trepp recognizes that Mercatus provides the platform and tools to streamline and standardize the solar investment process just as they do with their CMBS, banking and other commercial real estate research.
Posted on July 24th, 2013 by Mercatus
Published on Solar Novus Today
Last week marked the fifth Intersolar in San Francisco. And, despite the fact that I spent much of the week in meetings instead of on the show floor, the news that seemed to linger in the air everywhere I went were the epic fails of Gehrlicher and Conergy. For those of us that work closely with European developers, the news was a sharp reminder that even the most experienced players can be brought to theirs knees by a flawed entrance strategy.
So what happened?
Posted on July 19th, 2013 by Mercatus
Legislation and Logistics: a Cart and Horse Scenario
I experienced both a sense of déjà vu and an epiphany at a recent ACORE webinar that I participated in: “Aggregation of Renewable Energy Assets: Bond Pools, Securitization, and Other Financing Techniques,”
One of the speakers, Jeffrey Eckel , CEO of Hannon Armstrong, who’d recently received a private letter ruling from the IRS allowing the first innovative financing vehicle for renewable energy and yet he voiced the same concerns we’ve all come to know so well. While the initial structure obviates some of the aggregation problems, transaction cost remains a critical issue. Simply put, the asset size of solar “is frustrating securitization” which in-turn inhibits volume, which then ultimately inhibits the ability to do meaningful traunching.
Posted on July 18th, 2013 by Mercatus
25+ meetings later at REFF 2013 and everyone is asking the same two questions:
First, “how do I survive and thrive in the market consolidation phase” and second, “can you help me source good projects or partnerships in a effort to find good projects?”
On the survival front, two things are changing. Market consolidation is happening much more rapidly than we all anticipated and market segments are evolving. Utility grade projects are a dying breed and companies that have traditionally been focused on that segment have demonstrated a wide variety of reactions to this news. Some panic. Some are adjusting, and others are just deer caught in the headlight.
These two changes will have a major impact on the industry. There will be winners; there will be losers. As the Darwinian rule goes, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
Posted on June 19th, 2013 by Mercatus
Published on Greentechsolar
The shift from the centralized utility model is forcing utilities—for the first time in their existence—to figure out how to compete.
For years we’ve likened the energy sector to the computing world, holding up Moore’s law as a guiding example proving that renewables will achieve grid parity.
Today, as panel costs have dropped 90 percent and adoption is at an all-time high, the analogy between the two seems even more fitting. Just like the massive mainframe disruption spawned by personal computing, distributed generation has already begun to challenge the centralized solar model favored by utilities, with no end in sight.
At an industry level, the evidence of a new distributed era is all around us. Fuel cells like Bloom Energy’s are enabling the C&I transformation to self-made energy. Combined natural gas power plants are on the rise, and microgrids are popping up in states across the nation.
Posted on May 9th, 2013 by Haresh Patel
On Friday, I attended the first inaugural New Sunshine Bond Conference. Over 200 attendees participated representing some of the top investors, developers and service providers. (Pretty impressive considering the declining attendance at other conferences in an over supply of clean tech conferences.) Solar City’s recent IPO, ABB’s 57% premium on its PowerOne acquisition, and solar stocks rebounding in the last couple of week definitely provided some much needed “New Sunshine” and positive energy.
And there’s even more good news for the downstream, according to Bank of America’s Head of Energy and Power. He expects the US residential and commercial and industrial segment to install 2GW in 2013 resulting in $8B in new capital structures and concluded that ”the demise of upstream players and the ensuing drop in cost of installation is creating a downstream installation and financing boom, creating very attractive returns for capital structures.”
I was honored to be a panelist with the 3 top rating agencies (Kroll, S&P and Moody’s) Since the conference theme was solving for securitization, this panel session was the most anticipated of the conference and attracted a standing room audience.
Posted on May 3rd, 2013 by Mercatus
Last week I joined 800 participants for the Bloomberg New Energy Finance Summit in New York where the theme was: THE NEW ENERGY ROI: RESILIENCE // OPTIONALITY // INTELLIGENCE. The BNEF blog provides an excellent summary of the theme: Link.
Though the conference was set-up along three themes (Resilience, Intelligence and Optionality), it was the discussion around optionality that lingered with me. Barclays’ Jeremy Wilson’s made a compelling argument that traditional Discounted Cash Flow overlooks flexibility and as such, energy companies are not being valued correctly because there is no optionality involved for those with flexibility. The silver lining is that, while investors may not yet be correctly valuing companies, rating agencies are. Evidence of this is the large majority of utilities that have recently seen their credit ratings drop, which according to Wilson, is due to the lack of diversification of energy sources because optionality is most important from a portfolio level.
Posted on April 11th, 2013 by Haresh Patel
A few weeks ago, the Climate Policy Initiative (CPI) released a fairly pivotal white paper highlighting the key pain points preventing investors from deploying capital into renewable energy projects.
Reading through my notes again, it occurs to me that just as everyone in the industry shares the sentiment that our industry needs standardization of renewable energy projects, we also understand that the move towards it is a means to an (incredibly profitable) end. As the CPI paper states:“ The big prize is institutional investors — pension funds, insurance companies, and other long-term investors — whose $71 trillion in assets form one of the largest pools of private capital in the world”
As an industry we need to work collectively to unlock the $71T and have it flow to the renewable energy asset class. Current deal templates are stressed or broken and the historic 2/20 fund structures that have long been the industry standard are in danger of becoming just that–history. Funds are still only trickling into solar project finance and the dam must be broken.
The paper can be found here, but here are a few of the quotes that spoke to me:
Posted on April 5th, 2013 by Sam Brown
Last month I spent four sunshine filled days at the annual Solar Finance and Investor Summit in San Diego. While the weather was sunny, the mood was simply matter of fact. No one is expecting any silver bullets from State or Federal governments to spur growth. There is no expectation for additional solar incentives or for the removal of subsidies for competing energy feedstocks (e.g. natural gas). There was some tempered hope that some tweaks will be made to the tax code to allow for alternative financing vehicles (e.g. SREITS, MLPs, etc.), but even then, very few seemed to be betting their business on it.
This is a favorite event of mine because of the quality of the attendees which consists of the cream of the crop investors and developers all focused on transacting – The key word being “transacting”. While it is important to look to the future and maintain a level of long-term enthusiasm for the industry, I appreciate this focused approach from the attendees. To that point, I think that the lack of potential regulatory or legislative change has a silver-lining in that it has the industry focused on the present. The industry is now forced to find creative ways to get projects done and continue to grind down costs to parity without additional subsidies.
There were a number of consistent themes in the conference focused on this premise:
- Standardization, standardization, standardization
- Increasing velocity (speeding up the development and financing process)
- Lowering soft costs and managing fragmentation (can’t be done without standardization)
- Lowering capital costs (alternative financing models and increasing the investor pool)
- Increased focus on Distributed Generation (can’t be achieved without all of the above)
Nothing new here; however, the fact that they were the primary themes of the conference highlights my point, which is that the industry is rightly focused on getting things done with the hand it’s been dealt. The industry seems to be focusing on inefficiencies it can control versus being bound to legislation.
I could see that the industry has come to the realization that the path to long-term success will be achieved through a “silver-buckshot” approach focused on helping ourselves rather than a “silver-bullet” approach of waiting for additional outside help. By focusing on micro-changes both from a DG perspective and an inefficiency standpoint, a more collective approach can be used to push the industry forward.
That is not to say the industry shouldn’t keep pushing for additional regulatory and legislative changes that will propel the sector; it’s more to stress that the industry must continue to stay focused on the many things, silver buckshot, that are currently within its control.