CleanCapital CCO discusses direct pay, seeking development partners

Last week, project investment, acquisition and development firm CleanCapital promoted Julia Bell as its new Chief Commercial Officer, a move that is meant to further accelerate its M&A and internal development operations following a USD 300m investment from Manulife into the firm back in April.

Since that investment, CleanCapital has accelerated its deployment of this capital into about 100 MW of projects in the C&I sector. While most of this comes from acquisitions, the firm is also getting its feet wet overseeing new project development this year, which Bell is also helping to facilitate. With another USD 100m still waiting to be deployed and some major developments on the federal level on the horizon, NPM spoke with Bell about where the firm is putting its focus and the potential ramifications of direct pay on the project financing market.

NPM: Last time I spoke to CleanCapital back in April, you had just closed a USD 300m investment from Manulife. Where have you invested since then?

Bell: Every time you go into a new financing capital partner, there's always a little period where you have to see how it goes. I'm thrilled that Manulife has just been a fantastic partner. The level of commitment, teamwork and partnership in achieving our mutual goals has been above and beyond. We've put about USD 200m to work since we closed with them. That's about 100 MW. It's been a busy couple of months, and we are still very focused on getting funds out the door. One of the big impetuses behind my promotion is my focus on acquisition, construction and development work. It's a really exciting time and it's really great to be a part of a company that is accelerating its growth. So, we've only gotten more excited about the work we're doing since that close.

NPM: Are there any new markets CleanCapital is looking to get into at this time?

Traditionally we've always been focused on what we call the solar middle market, so that's projects from 500 kW up to 25 MW. Traditionally we've invested in operating solar but starting this year we've really branched out into new build solar. Our next step is storage. We announced a partnership with STEM about a month ago to work together to invest in storage projects in the same space. We expect storage to be a significant portion of our portfolio going forward.

We are looking to put money out the door; we're looking for good projects and strong development partners. Our favorite structure is to have repeat developers that we have an efficient working relationship with bringing us good projects. So, we want to talk to folks in various phases of development from operation, construction and late-stage development. And now we're looking for storage development partners, as well.

NPM: The M&A market has accelerated for renewable developers, what are some of the contributing factors to this trend?

Bell: The cost of capital is still pretty low these days, so cheap debt encourages increased investments. We are in a market where larger companies are looking to diversify their revenue streams, which has brought a lot of them into renewables as they step away from their legacy investments. So, you have a lot of different kinds of capital; you have long-term patient capital, short-term capital looking at solar and storage and various new types of technologies flooding the market. The intermix of all of these factors means that there's a lot of people and money here, which is great. We need more renewables in order to satisfy this demand.

NPM: The middle market has probably been more heated than other spaces. Why is that and do you see that continuing?

Bell: One of the reasons the middle market is so hot right now is because it was a little slower to take off than residential solar and utility scale. Utility scale is so attractive to folks that had been traditional utility scale energy investors in less-clean energy. Residential took off because of the scale of the number of homes that were applicable; the idea is to make it cookie cutter across all those homes. So that's where we saw a lot of folks jump in.

CleanCapital got into the middle market initially because we felt this area was underserved. I think that now, other folks are recognizing the value of this market as a key piece in the energy transition by creating generation close to where it's being used. I think that it is a really interesting time as we watch the different states figure out what works for them. It's wonderful to see the number of thoughtful and creative legislative and industry folks come together to drive the clean energy transition.

It's a weird market. When you're buying utility scale, you have one huge project so you're digging into all of the details of it. You know where every nut and bolt is and has been. With residential, you learn the form of the projects, the contract structure, the installation process, and then you just repeat that out. In some ways, the middle market is a little bit of the trickiest of both worlds because we have a lot of volume similar to residential, particularly in a lot of the bundled portfolios that you're seeing today. But unlike residential, it has that quality of utility scale where each project tends to be unique and has its own qualities, risks and upsides. So, it's a market that requires a bit of a balance between how deep you dig on any singular project and being able to spread that attention across a portfolio of many projects. It's an art form that has taken folks a bit of time to understand.

NPM: What sticks out to you about the ongoing federal infrastructure proposals?

Bell: The infrastructure bill is incredibly exciting. The moves that our federal government is making to increase incentives are getting everyone jazzed. We're still figuring out how exactly it's going to play out and affect things, but it is creating a lot of momentum. The fact that we're talking about this much attention on renewable energy is incredible. We're not back-dooring this through some sort of tax process; we're straight up talking about this at the highest level, which is fantastic.

NPM: Direct Pay in particular has been cited as having the potential for major growth across renewable sectors. What do you think the ramifications would be if that provision were to pass?

Today we think of a deal in three components; acquisition, debt financing, and tax equity financing. Cutting that last piece out would not just be an administrative relief, it's a cost relief. There are transaction costs related to tax equity financing. And tax equity financing comes at a very awkward place at mechanical completion. That pauses people from starting construction. What we see a lot is developers that have projects that are shovel-ready but can't start because they're waiting for tax equity. Earlier this year it was two-thirds of wind projects and over half of solar projects that were ready to start construction but were waiting for tax equity. So, it would remove a barrier that has been shown to be pretty significant.

Tax equity in its current form has been really helpful. It has helped push renewable energy forward. But it's clunky. It's a backdoor approach; it's a workaround. It requires having folks with significant tax liability that they're looking to offset and smaller companies like us to enter into complicated financing transactions with them in order to benefit from something that is really supposed to be a government incentive. Direct pay is key in lifting that and getting money out the door and down to developers. It would be such a lift to the industry overall. Obviously, ITC extension help as well, but direct pay, I really think, is the required next step to get us where we need to be; it will have a really catalyzing effect on the market.