Sep 22, 2014

How to Tap the Medium-Scale Clean Energy Market

Recent attention and growth in clean energy development has largely been focused on either the household scale or the utility scale, leaving the medium-scale market to languish. Despite significant challenges, a growing number of players in the industry are beginning to recognize this untapped potential.

Village Power Finance, based in Palo Alto, Calif., uses a model that engages community organizations, small businesses and investors to streamline the development and financing of solar and energy efficiency projects.

Michel Puckett from the Clean Energy Finance Forum recently spoke with Ty Jagerson, founder and CEO of Village Power Finance, to learn more about the challenges facing medium-scale green energy development. They discussed what Village Power Finance is doing to overcome these obstacles.

Jagerson has had a long and varied career in energy. He started one of Ukraine’s first energy service companies (ESCOs); co-founded SolFocus, a concentrated PV manufacturer; and was president of HelioPower, a provider of integrated renewable energy solutions. He left HelioPower in 2013 to found Village Power Finance.

CEFF: Could you talk me through what inspired you to create Village Power Finance?

Jagerson: In 2009-2010, while I was at HelioPower, the residential market was really taking off because of the FICO score basis for investing in residential solar. And the utility-scale projects, the ones that made sense, had plenty of capital. The large commercial deals on the big-box retailers and other high-credit entities actually were also reasonably well-financed. But the small-to-medium-enterprise operations were typically way under-capitalized.

That financial scarcity was actually growing more acute because the solar industry was growing faster than the supply of tax equity in the market. And yet at the same we found that we had a lot of customers, great projects, and great individuals who wanted to do these projects.

We wanted to service the engineering, procurement and construction (EPC) service providers who install the solar equipment. We wanted to help these community organizations and other small-to-medium-sized commercial projects get funded. We developed this model for tapping into the communities. So in 2013 I left HelioPower and created Village Power Finance.

CEFF: What is Village Power Finance’s business model?

Jagerson: We work on small-to-medium-sized projects. We start initially with the community and we see how much the community can invest or donate. If they don’t have enough resources internally, then we go to external investors and we have them invest as well. Everybody invests on the same basis and everyone gets the same terms.

One of the unique things about our structure is that we bring both tax equity and non-tax equity investors into the same structure, and we flow all of the tax benefits through to the investors. This is a pretty unique structure. It makes for a slightly tax-inefficient structure, but it allows us a lot greater flexibility. It allows us to pool capital in ways that you can’t do using other, more traditional means. It also allows us to use a project finance structure that doesn’t have the complexity of the larger project finance deals.

CEFF: Are you finding that it’s equally easy to bring both tax equity and non-tax equity partners to the table?

Jagerson: Nothing about the solar finance industry is easy. What we’re finding is that bringing people to the table is not that hard. What we’ve done has simplified the project structure, which means that our documentation processes are both simpler and more scalable as the project grows.

The interesting thing about the mechanism is that it is that ultimately the institutional capital does play a role here. And what we’ve found with our institutional investors is that enormous pent-up and rapidly growing demand for green, cash-generating assets. There’s just not that much liquidity in the market for people who want to own, basically, yieldcos. It’s just hard to get supply.

We’re finding the bigger challenge is the bigger guys who are committed to this space, who want to put capital to work, can only put capital to work in bigger chunks than we initially had available, so we’re now scrambling to service them.

CEFF: Does that mean introducing bigger projects or aggregating smaller projects?

Jagerson: Well, there is project aggregation, but it’s done in a very homogenized way on our platform. Every project that we do is a project LLC. For institutional or other loan programs, we create a program LLC that provides the aggregating function.

But what is very important for us is that all of our deals are structured exactly the same way. We’re taking the LEGO block approach to our portfolio. We don’t really think that this model works unless you’re doing a lot of these deals, unless it scales very well and unless the paper work and the decision making process on the part of the investors are really simple.

A good analogy and a good model for us has been Lending Club. They’re a peer-to-peer engine, but a lot of their capital comes from institutional sources. It’s important for the quality and the spirit and the brand essence of our projects that for a lot of them there be community participation, but ultimately we suspect that most of the capital on the platform is going to come from institutional sources.

Something else that we do, which is a little unique in the sector, is that we’re actually technology-agnostic. Most of the projects that we’re working on are solar, but we think that solar is best deployed in conjunction with technologies like insulation or LEDs or HVAC. That’s important because a lot of the capital sources that are now financing solar are these large, conservative financial institutions that only have technical comfort with one technology at a time. We believe, and we think our investors believe, that if you’re doing a window upgrade or a boiler retrofit alongside your solar, that is only a plus.

CEFF: One of the hesitations people encounter is the difficulty of scaling up some efficiency measures. Do you run into that issue?

Jagerson: One of the challenges with energy efficiency projects is that they’re hard to scale to get them to be as big as a solar project for any given building size. They’re just not big enough to bother financing. In our case, we’re already going to the hassle of financing. We’re typically starting from the point of solar. The nice thing about energy efficiency is that even though the projects tend to be too small to finance, the financial returns tend to be much better than they are for solar. So going from efficiency to adding solar is usually complicated and reduces your financial returns. Going from a basis of charging for solar and adding efficiency actually improves your economics.

CEFF: Could you talk a little about the project development pipeline? Are these projects typically driven by facility owners, communities or investors?

Jagerson: Most of our projects come from EPCs. We love engaging with our customers directly, but the sales cycle is a little longer if we have to explain to them what solar is. So we like it when EPCs come to us with a community organization that’s bought off on solar. They’ve thought about whether they should do cash or not; thought about whether they should get a bank loan; and thought about whether they should go to one of the large, big-name solar finance entities. By the time they get to us, they realize that those other options either aren’t good or aren’t accessible.

CEFF: Do you see your model as a permanent feature of the industry, or as correcting a short-term imperfection in the market or filling a gap that current exists as we scale things up?

Jagerson: I think it’s a big gap that grows into a gaping maw later on. One of the things that is going to turn the industry over is the reduction of the Investment Tax Credit from 30 percent to 10 percent in 2016. One of the good things for the industry is that the yield on capital actually may come down a lot. That’s good because it’s a sign that people appropriately perceive the projects as lower risk and that the capital is getting out to a broader range of investors.

We believe that in a universe where the hegemony of the big tax equity investors ends, the little investors and the larger investors that are purely interested in this sector for its strong cash-generating attributes are really going to want a good conduit to good projects. One hold-back in the industry is how to get consistent credit structure for investors to invest into.

We think this truSolar initiative is a good one and we’re complementing that with our own internal credit-scoring tool. It’s an open source credit-scoring tool, where we allow different investors to create their own credit-scoring criteria or scorecard. People have all sorts of great reasons for investing in different things and we make that available to investors to deploy on a programmatic basis.

CEFF: So you don’t take a stand or an opinion on that, you just create the tools and put those tools in the hands of investors?

Jagerson: Actually, we do take a stand on it. We collect all the data for every project and we say, “Here’s our ranking methodology and here’s how these projects scored based on that methodology.” Almost all credit scoring tools are proprietary, but part of the reality is there just aren’t enough data in the sector to be able to accurately compare the performance of a solar project on a church vs. a club vs. a small municipality somewhere.

We found that different investors just have different ways of looking at it and you’re not going to necessarily be able to convince them to change. So what we realized was – let’s let everyone create their own credit scorecards.

What we hope is that certain organizations will make their credit criteria public. Ultimately once you get enough data on the platform – and once you get other organizations coming in and running their own data – we’ll constantly improve the Village Power Finance index.

CEFF: Do you expect investors to be open to that level of sharing of information?

Jagerson: I think very few will be. But that’s probably good, because you only want very few doing it.

CEFF: Can you talk about some of the challenges and hurdles you’ve run into? The idea of community solar isn’t new, but there aren’t many companies that have really made it work at this stage. Why do you think that is?

Jagerson: The first reason is that, if you look at why the large commercial and residential have taken off, you have a large homogenous basis for executing these deals, and that homogenous basis has paved the way for capital to enter in a standardized way. When I was president of HelioPower, the industry went from being pretty good to selling residential to being hyper-competitive. It went from a slow, folksy type of selling process to the industry standard of closing deals in a day. The free flow of capital on a standardized financing basis is hard to overestimate as a gating factor for capital.

The other factor is that, when you sell to residents, they hem, they haw, and then they say yes, boom, you’re done. You sell to a community organization, and you’re selling on board cycles. We deal with gruesomely long sales cycles. You have to have a hard stomach to survive that.

So that’s one of the reasons why we’ve built the web platform that we’ve built. One of the key features is that the project dashboard that we create for the development cycle – the early-stage development cycle, the late-stage development cycle – it’s the same exact page. That process of stitching the project together from early inception through to final asset management conclusion is actually really helpful.

There are a lot of cool new technologies coming out in terms of energy analytics and energy management and lighting controls and all sorts of other things, and what we do is build this engine for integrating the APIs for all those technologies into our web platform.

CEFF: What sort of relationships do you have with the building owners or operators?

Jagerson: We create these project LLCs, we manage the contracts, and we are also the asset manager for the life of the assets, so we have a very important relationship with them. We have a web platform that allows us to make that data available to them. We think that there are a lot of opportunity in the sector to improve the viewability and usability of solar data in a lot of these institutions.

CEFF: It seems like most of your projects tend to be in California, New England, Hawaii, etc. Is that because demand is there or because the regulatory environment is friendly?

Jagerson: It’s primarily a demand function. We love the JOBS Act – however, we have specifically built our platform to not require JOBS Act legislation to operate. We’re very concerned that there may be JOBS Act blowback at some point in the future.

CEFF: But are you finding that some regions are easier to work in than others?

Jagerson: Absolutely. The solar industry in the United States is very much a whack-a-mole experience. Managing solar subsidies is hard. What happens a lot of times is either is they do it and it’s too rich and it goes away too fast and doesn’t generate new economic sustenance, or they do it too skinny and nobody actually uses it because it doesn’t get anybody over the hump. I would say California has probably done the third best job in the world after Germany and Japan of managing that subsidy. I think the first New Jersey boom was not a great example of how to do that. But people are learning. It always amazes me how many different ways people can find to subsidize renewable energy projects.