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Financing Returns in Residential Solar

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Happy 2014 everyone.  The deep freeze here in the Midwest is making me wish I was in California this week.  By the way, how much better do solar panels perform when it is 15 degrees below zero?  (Assuming they aren’t covered with snow?)

We’ve had several organizations ask us over the last few months about the returns for financing residential solar.  Before we get there, however, let’s make sure we understand what’s included in the returns.

Essentially, there are only two places to earn returns in residential solar: from installation or financing.  Installation (or “dealer”) businesses earn profits much like any contractor does, by finding customers and getting them to pay for an installation of equipment.  Financing businesses earn money by investing money in solar systems up front and collecting fees over a long period of time.

Some companies, like SolarCity and Vivint, are vertically integrated in these business. Others, such as Sungevity, acquire customers and provide financing but rely on others to do installations.  However, these variations don’t create new profit pools, they are just different ways of splitting up the profit pie.

We’ve discussed the profits in the dealer part of the business before.  But how much profit is there in the financing part of the business?  This depends on a few key factors:

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Preparing for a Successful IPO

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Twitter will soon go public, but more than 100 companies have completed IPOs in the past six months or so. Many of those newly-public companies have struggled as stocks. They are up an average only 2%, while NASDAQ is up 13% over the same period. Nearly half of those IPO companies are actually trading below their offering price.

We have directly participated in 17 IPOs and supported many more.  In our opinion there are three main stumbling blocks for companies going public in today’s market:

Stumbling Block 1:  Public and private investors have very different expectations

Most companies that IPO started with venture capital backing. These and other private investors in high-growth companies tolerate of a lot of uncertainty. They value a company’s “story” and have long time horizons. By contrast, public market investors have quarterly, monthly, or even daily time horizons. They hate surprises and value consistency. This is not to say that venture investors have infinite patience, nor that public investors are short-sighted, but that there is a very real difference in the pressures on each of them.

Stumbling Block 2:  The IPO process does not help management bridge this gap

The IPO process itself can become all-consuming for management. Preparing forecasts and offering documents and going on roadshows can consume a major portion of management’s time. And, there is tremendous pressure to get the deal done. There may only be a limited time in which the IPO window is open. The board, which typically represents the company’s venture investors, wants a liquidity event. The bankers’ incentives are largely aligned with completing a listing. In this environment there is little time for management to learn about the needs of its new investors. In fact, at the very time the company is shifting from investors who value the long-term outlook to those who value quarterly consistency, management is pulled far away from actually operating the business.

Stumbling Block 3:  The IPO is only a first impression

Public investors have grown skeptical of IPOs to a degree and are looking to see whether management can meet expectations for several quarters after being public before really committing to a stock.

We advise our clients considering IPOs about five major solutions to these stumbling blocks:

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Releasing our Tax Equity Financial Model

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Woodlawn Associates has just made a version of its tax equity financial model available for sale at its web store.

The model can be used to answer questions such as:

  • Residential solar dealer-installer: How much value do third-party financiers get from systems I sell for them? How much value would there be for me in a captive finance solution?
  • Utility or power company: Distributed solar seems to be growing fast. What kind of returns could I get if I entered the residential or commercial solar market?
  • New tax equity investor: I’ve been approached by a solar and wind energy developer requesting that I provide tax equity funding. They’ve given me a financial model, but it is hard to audit and I would prefer to have one of my own.  Is this investment a good deal for me?
  • Solar module or inverter manufacturer: I have a product whose operating characteristics are superior to those of my competitors’ products. What premium could I charge for my product and still given investors the same return? Alternatively, if I price at the market rate, how much of a return premium does this suggest for investors in the systems?
  • Commercial rooftop owner: I’ve been approached by a solar developer offering to sell me power from a solar system they will install on my roof. How fair is the offer?

The model was designed for residential and commercial distributed solar, but can be modified for utility-scale wind or solar projects.

Designed for ease of audit, the model eschews, to the maximum extent possible, “circular” calculations and very long formulas in favor of a linear flow and easily understandable formulas.

Please check out the model in the store, view some sample pages, or contact us about modifying it for your specific needs.

Also note:  We’ll be at REFF Wall Street this week and at Intersolar in San Francisco in early July, so let us know if you want to meet at either event.

Utilities and Distributed Solar

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Large utilities seem to be increasingly interested in distributed solar as a business.  Consider the news from the past 60 days:

These aren’t the only such companies looking into the business.

Here’s an overview of significant, publicly announced activities in distributed solar by the 20 most valuable utilities and power companies:

Figure 1: Top Utilities’ Investments in Distributed Solar

Top 20 Utilities and Distributed Solar

Why are they making these investments?

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Defending against Aereo: Can Broadcasters and Multichannel Operators Come Together to Fight off the Latest OTT Challenge?

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Aereo, the internet TV start-up that allows New Yorkers to watch live and time shifted content from broadcast networks over the internet, is in the news again as it seeks a declaratory judgment against CBS.  Simply put, the Aereo lawsuit asks a federal court in New York to explicitly rule Aereo’s service does not violate broadcasters’ copyrights and that the court’s ruling applies nationwide.

The legal battles between Aereo and broadcasters are likely to continue for years and seem destined for the Supreme Court.  (See Figure 1.)  While we wait to see what happens in the courts, we think broadcasters and their cable, telco, and satellite distribution partners should do more to undermine Aereo’s value proposition.  However, they are hamstrung by broadcasters’ uncertainty about whether to partner with multichannel operators in the age of internet TV or disintermediate them.

Figure 1: U.S. Federal Courts and Aereo Lawsuits

Aereo Court Graphic

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