CLEANCAPITAL, ALCHEMY AND BASALT INFRASTRUCTURE DISCUSS AREAS FOR HIGHER RISK ADJUSTED RETURNS, INCLUDING STANDALONE STORAGE

For larger investors like banks and major financial institutions, this year has been relatively business-as-usual with utility-scale solar continuing to thrive. However, for some smaller investors and asset owners, 2020 has been a year of uncertainty and risk.

For Jon Powers’ CleanCapital, which manages investments in mostly smaller solar projects, the key to mitigating that risk has been maintaining a diverse portfolio in terms of project capacity and geography.

“There are a lot of efficiencies in our industry that are bringing more efficient capital to the market, which is a significant tailwind,” Powers said during a recent panel discussion. “A lot of the opportunity comes in understanding the state-by-state game. For me, distributed generation (DG) is really important because you can have a very diverse portfolio across many different states to protect your downside risks while finding new opportunities.”

Lacie Clark, the CEO of capital provider Alchemy Renewable Energy, says diversity is also going to be a key factor in deciding where to invest over the next few years as the state-by-state market continues to evolve.

“When we’re looking at investments over the next couple of years, our intentions are to create diversity,” Clark said. “We’re willing to take certain risks as long as we have the projects on the other side of that profile.”

While larger institutions have stuck mainly to investments and loans for developers constructing utility-scale projects, Basalt Infrastructure Partners have found success in focusing on smaller projects in the rooftop and residential arenas.

“We’ve found that smaller scale utility and rooftop solar has the best return profile for us right now,” BIP Principal Jason Kahan said. “We’re seeing a lot of people come into that, so we’re trying to keep ahead of the curve on what people might find interesting."

“Our inaugural investment out of our third fund was buying a portfolio of residential solar assets. There you have long-term PPAs. For us, it’s about finding those commercial opportunities where you might be able to get higher returns and aren’t taking [significantly more] risk.”

While Kahan says his firm is “constantly evaluating” the larger utility-scale projects that remain lucrative investments for banks and the largest tax equity lenders like JP Morgan and Goldman Sachs, it’s more difficult for firms like his to see a return without taking on marginally more risk.

Meanwhile for Powers and CleanCapital, larger utility-scale projects limit his firm’s greatest assets: aggregation and management across multiple distributed projects.

“A lot of money is going into utility-scale projects,” Powers said. “The capital market is already efficient there. Whereas our advantage is our ability to utilize our software to aggregate and bring down capital costs across DG projects.”

But while large investors are eating up most of the tax equity market and interest in utility-scale project investment, there is another burgeoning industry that they, for the most part, are barely touching: standalone storage. And investors like Powers are eager to make inroads into that market as the largest players drag their feet due to uncertainties regarding revenue streams.

“As much as we have talked about it, institutional investors are still skittish on understanding all of the revenue streams and risks around [standalone storage],” Powers said. “There’s a lot of customer interest in it, but we have not gotten there in terms of seeing the flood of opportunity yet. But the cost of storage is going down significantly.”

Emerging Energy and Investment Group Partner Anadi Jauhari notes that while storage costs are dropping, the cost of utility-scale standalone storage still “doesn’t pencil out.” That issue is compounded by another: selling offtakers on the value of the energy security that goes along with bringing storage onto the grid.

“Energy security as a whole is a challenging sale,” Powers said. “It’s a long process. Data centers and large corporations like Walmart love it. But more traditional players are just starting to wrap their heads around how to budget this stuff. That’s where the struggles are going to be over the next two years or so.”

While virtually everyone seems to agree that the cost of storage will continue to decline and become more viable for widespread investment, Clark highlights the importance of bringing that resource onto the grid in a timely manner as demand for solar continues to explode.

“We can’t keep bringing solar in at the rate that we are and not have storage,” Clark said flatly. “We have to figure it out at a scale that will work for our integrated transmission systems. It’s a short period of time that we have to figure that out.”

For some, Biden’s victory in the 2020 election is an encouraging sign that federal policy may be utilized to help mitigate the cost of storage deployment and make investing in the large-scale storage projects more comfortable. Others are pointing to states like Massachusetts and New York that are incentivizing storage through state polices and tariffs. In both cases, Powers said it is up to those within the industry to work with lawmakers to accelerate the energy transition in a way that makes sense across the spectrum.

“A new administration that actually believes in these solutions may help accelerate [the transition],” Powers said. “But it’s up to us to be ready to engage [with lawmakers] and be able to provide solutions to accelerate what’s happening in the market today.”