Woodlawn Associates

Management Consulting

Josh Lutton

About Josh Lutton

Josh Lutton is managing partner of Woodlawn Associates, of which he is a co-founder. He specializes in strategy and finance and has extensive experience in renewable energy (including solar, wind, and energy storage) and technology (including cloud communications, mobile, and cable TV).

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Listening to the Voice of the Customer

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Strategy is a hard thing to define.  People often ask me what we do as strategy consultants.  A simple, but unsatisfying, answer is that we help companies figure out what to do to create value.  But that’s not especially elucidating, either.  How do we help them determine what to do?

Among other things, we talk—and listen—to customers.  We have delivered valuable, actionable insights to clients by doing voice-of-the-customer (“VOC”) research.

For example, consider one of our clients, which had dutifully built its products largely on the basis of customer feedback.  We recently interviewed a cross section of their current and potential customers.  Our client was started to find a large difference between what customers and non-customers valued.  They hadn’t realized that, by designing their product to be desirable to current customers they had ended up with a product suited only to one segment of the overall market.  They are now designing a refresh that should allow them to reach a much larger effective market.

Here’s another example of how voice-of-the-customer research can create value.  A few years ago, we were interviewing channel partners for a consumer products company.  Asking about the relative importance of various product attributes, we kept hearing about the importance of one particular attribute that our client was not even aware of.  After reviewing our findings, our client decided to make performance on this attribute a key part of its product development and marketing investments.  This client has gone on to become one of the largest and most successful companies in its industry.

It’s surprising to me the number of companies that try to make big, strategic decisions without having a crystal clear understanding of what buyers value, what they are struggling with, or how competitors are addressing their problems.  This is where VOC research can really add value.

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Tax Equity 201: Partnership Flips in Detail

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Our primer on tax equity investments (Tax Equity 101: Structures) explains that renewable energy project developers often use structures such as the partnership flip, sale-leaseback, and inverted lease to monetize the federal tax benefits for such assets.

Here, we dive deeper into the actual mechanics of and accounting for partnership flips. As we will see, the structure has several built-in inefficiencies relative to a single owner that can monetize all of the tax benefits internally. This is not an indication the structure is undesirable, but an acknowledgement of the imperfections in what is often the best available alternative for an owner without its own tax liability. [Read more…]

Tax Equity 101: Structures

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This post was updated on February 9, 2017. The original version was published in March 2013.

The three main pillars of competitiveness in the solar industry are the ability to acquire customers at low cost, install inexpensively, and achieve low cost of capital.  To realize a low cost of capital, solar developers must often partner with so-called “tax equity” investors due to the structure of federal solar incentives.  This paper summarizes the main financial arrangements used for such financing: sale-leasebacks, partnership flips, and inverted leases (which are also called lease pass-throughs).

The examples in the paper are from solar, but many of the same principles apply to the wind industry as well.

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Modeling 101: Clear, Accurate, and Auditable Spreadsheets

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Spreadsheets are important tools for all manner of organizational analysis and decision making.  Considering their importance, it is critical they are clear, accurate, and auditable.  We’ve built hundreds of models and in the process we’ve developed a set of guidelines that help us ensure our models reach these goals.  Here are our top seven recommendations:

1. Focus on Organization

A fundamental question for any model is how to organize it.  Starting with a well-organized structure can save many headaches down the road.

First, ask yourself:

  • How can I break the model into logical sections?
  • How should I label sections?
  • Who is my audience for this model? Would this make sense to him or her?
  • Would the user understand if I moved certain sections to different sheets?

Once you have the basic outline, work your way through the calculations linearly.  We typically build models with logic that starts at the top of a sheet and works linearly downward.  Enforcing a structure like this ensures the modeler’s logic is sound and makes it easier for the user to see that A leads to B leads to C and so on.  Models with logic moving higgledy-piggledy over a worksheet or workbook are easy to foul up and hard to understand.

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YieldCo Cost of Capital

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Large renewable energy project developers often use a type of financing vehicle colloquially known as a “YieldCo” to finance portfolios of assets that are expected to have stable cash flows over relatively long periods, such as solar or wind farms.  In theory, investors should be willing to accept lower returns on investments in these “safe” assets than they would on investments in the developers themselves, thus reducing the cost of capital for such assets and increasing their value.

We thought it would be useful to see how this has worked out in practice.  In this post, we show how we determine the cost of capital for a yieldco using 8point3 Energy Partners, a yieldco formed by SunPower and First Solar to own and operate solar systems, as an example.  Then we show the results of using the same methodology across a number of public yieldcos with a variety of asset types.  On average, we find a cost of yieldco equity is 7.01% levered and 5.46% unlevered.

This relatively low cost of capital has implications for the value of projects held or purchased by yieldcos.  It should allow developers that have yieldcos to sell their projects at attractive prices, and allow their yieldcos to pay more than many other project investors for projects they purchase from independent developers.

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