A Compelling (and Complex) Opportunity: Creating Value as a Solar Developer in 2020

7 Feb 2020

When we started Sol Systems around a dinner table in 2008, PV modules cost $3/watt – and that was a recent breakthrough. Those same modules now cost 30-40 cents/watt and they are significantly more efficient. As we noted last year, solar energy technology continues its path to global dominance. Costs have fallen by 89% in the last decade, even as modules and balance of systems (BOS) increase in efficiency, and solar is now the least expensive source of electricity in two-thirds of the world.

Solar pricing will further fall in the next five years as multi-busbar modules increase harvest and reliability, wafers get both thinner and larger and drive efficiency, raw silicon declines in value, silver use falls by 40%, and manufacturing facilities become more efficient. Our previous annual letters described many of these changes in more technical detail. All of these changes are occurring at a time when natural gas exploration and production firms are beginning to stabilize their businesses and focus more on cash flow to meet large amounts of debt and focus less on growth. When natural gas prices go up as a result, so too will the price of electricity, since natural gas is the primary source for electricity in the United States (38% in 2020), further driving demand for cheap solar power.

As a result, the U.S. and global solar markets will continue to scale. Solar composed around 40% of all new capacity in the United States in 2019 and it will compose an estimated 32% in 2020. Wind will provide 44%. Solar generation is projected to expand globally from 571 TWh in 2018 to an estimated 1,263 TWh in 2022. Bloomberg New Energy Outlook estimates that solar and wind will provide 50% of the world’s electricity by 2050. Couple these changes with an electric car fleet that is 30x what it is today, utilizing around 10% of the world’s electricity, and a very interesting picture of the future emerges. The times, they are a changing.

These changes are dramatic, and they are impactful for our industry. Their impact is at the heart of why so many of us got into this business to begin with and we all have much to be proud of. But good changes can be challenging too. Running a solar company has always been a bit like competing in the World Series on a shifting field a la the ‘89 Giants. It’s either fun or crazy, or both. Your call. 2020 arrives with its own unique opportunities and dynamic market changes for solar developers.

Large Developers + Institutional Investment = Even Larger Developers

2019 served up a super-sized array of mergers and acquisitions as the solar industry looks increasingly like the more consolidated wind industry. Recent examples include Canada Pension Plan Investment Board’s acquisition of Pattern Energy, BlackRock’s majority investment in GE’s renewable energy platform, Ares Management Corporation’s majority investment in Heelstone Energy, TerraForm Power/Brookfield’s acquisition of the Washington Gas/AltaGas portfolio (platform), and Green Investment Group’s acquisition of Tradewind Energy. And it’s not just developers that are consolidating; asset management platforms like AlsoEnergy and Power Factors are growing through acquisitions, and oil majors Ørsted, Shell and BP are all doubling down on investing in renewables via acquisitions in the United States.

That drumbeat will continue in 2020. Institutional investors like pension, insurance and infrastructure funds will increasingly invest in renewable energy development platforms (not just projects). They will make these investments because the infrastructure market is increasingly crowded and competitive and project returns are historically thin (generally hovering at 6-6.5% unlevered after-tax internal rate of return, with some merchant tail risk thrown in for good measure). These institutional investors don’t necessarily want to run a development company; they want a project pipeline and potentially a partner to help them. The more creative buyers can structure their platform investments or acquisitions to mimic a pipeline acquisition.

This institutional investment and scale enable developers to offer differentiated customer products. Investor demand for yield is also forcing developers to get more creative in how they structure projects. An estimated 20% of all new utility builds in the United States will be offsite PPAs. The traditional contract for differences (CFD) is a financial swap that avoids some of the complexity of physically delivering electricity to customers. It’s rather elegant in design, but sometimes less elegant in practice. Locational and temporal basis risk mean that customers or project owners (and sometimes both) aren’t swapping electricity at the same price or buying electricity at a price that corresponds with what they contracted for.

As a result, some customers are asking for a firmed and/or shaped product that matches some or part of their load, and sometimes requesting that developers combine solar projects with batteries or other technologies and market the ancillary services and capacity associated with production and storage. For example, a customer may request physical delivery of a firm on-peak block of 200 MW to be delivered at a Dominion hub starting in January 2021 for a 12-year PPA. The customer may even want to swap the RECs and has no interest in the capacity, which means the owner needs to manage this asset.

A solar developer that wants to meet that demand may need a license to market electricity, additional thermal generation to firm and shape the block it is delivering, an environmental commodity team that can manage SREC and REC exposure, and an active electricity trading team that can hedge, block, and deliver into PJM. Or they need a partner. For those retail energy suppliers that have this capability (our friends at Calpine, NRG, Direct, or Tenaska to name a few) there is tremendous opportunity to collaborate with the solar industry and serve their customers. What has been less successful for some of these businesses is offering these products directly without partnering with a solar developer. In short, we all need one another to build the industry we all want to build. Which is why this is not only an opportunity for retail electricity suppliers, but solar developers and project owners as well.

But Wait Up…Local Developers Still Create Much of Our Industry’s Value

While the industry is both scaling and consolidating, skilled regional developers will continue to play a critical role creating value in 2020 and beyond. As they should.

Institutional-backed development platforms that scale will rely upon these more regional developers to aggregate pipeline and achieve scale. Large institutional funds take razor thin economics and are incentivized (required) to deploy capital in hundred million-dollar chunks.

That may be a perverse incentive, but it is a real one. One primary value differentiator for smaller developers is their deep understanding of local political conditions, sensitivities and knowledge around land acquisition and land use, and a connection to local communities and customers. There are therefore tremendous opportunities to create value on the ground with market-specific strategies for highly focused developers. 

Full disclosure: this changing landscape does require significant discipline and planning. Last year we urged caution around packing peanuts and filling pipelines with non-tenable assets. We reiterate that caution here. Because many markets are saturated with projects, creating differentiated value is mission critical. It is imperative that before grabbing a bourbon at the local well with a perspective landowner, a development team first evaluates congestion risk and locational marginal pricing and monitors the queue to understand where other projects are coming online. It is also imperative that developers are mindful of historical land use and work closely with communities. As solar scales, the relative attractiveness of another 20, 50, or 100 MW project in a nearby field goes down for many communities. Coordination with environmental non-profits and community interests is key.

Stay Focused

All of these moving pieces are specific to one geography. Although scaling from a regional developer to a national development platform and fully integrating both appeal to our innate sense of purpose and mission (“hey look, it’s awesome, we’re 100 people!”), it’s a path fraught with challenge. That’s a lesson many have learned the hard way (we certainly have).

As developers move from one market to another, they must adjust to different incentives, different timelines and very different regulatory regimes. These new markets mean significant changes to individual project and portfolio development timelines. These changes can also magnify risk implicit in one asset across a dozen assets, fundamentally altering the risk-adjusted return for a developer and its capital sources. In a simple example, a development financial model in the Massachusetts SMART program does not translate into Maine given the vast differences in interconnection. And vice versa.

New markets also often mean different customers, which mean different sales strategies, which mean fundamental corporate organizational changes and maybe even new corporate funding sources. Community solar in Minnesota is not community solar in Maryland. EPC in the Southeast is not EPC in the Northeast. O&M in the Southwest is not O&M in the Midwest. We all endeavor to grow, but we urge you to harness your ambition incrementally…don’t let it harness you.

We offer similar advice around vertical integration. In the early years of Sol (2008-2012) the industry grappled with determining the best means to create value, to maintain control and certainty, and to select where to invest to enable success. Almost every large developer has gone through one or more gyrations of vertical integration and then specialization, either to capture margin or because they were concerned about relying on third parties (or both). Recently, many developers that made large investments in building out construction teams are paring those teams down, or in some cases splitting them into two different businesses and forcing them to compete on market terms.

Similarly, module companies that were focused on both production and development/construction are changing their strategies as they realize that they don’t need to develop proprietary pipeline in order to maintain market share. In 2019, First Solar downsized its EPC and development efforts. Meanwhile, Sunpower split its company in two so that its module business (now Maxeon) could focus on module production and its development business (which maintains the brand) can focus on customers.

Instead of attempting to vertically integrate, developers can use their resources to identify new markets or market niches and create value within these markets. Developers can actually build new markets (like Maine, Virginia or Pennsylvania) through policy intervention. And developers can build stronger and more integrated relationships with key customers. Further, early-stage developers can narrow their focus on where they maximize risk-adjusted value for their balance sheet and capital partners. Developing early-stage assets is both incredibly challenging and critical for the solar industry. These assets are the seeds that our industry will eventually harvest in the next decade.

Collectively, these market changes de-risk the development cycle for the industry, which leads to a lower cost of capital, which in turn leads to a more competitive product for the customer, which leads to scale for the industry. So while they’re sometimes challenging, they’re generally good.

So…Where to Play?

This industry transformation means making a very purposeful decision about where to play in the development, aggregation and ownership cycle.

The earlier in the market and the development cycle and the more localized the effort, and the greater the advantage of a local or regional player. A localized presence is a differentiator when speaking to a city council. This development strategy may lend itself to an early-stage “flip” model where developers focus on getting the project papered with a lease option, feasibility studies, and maybe an interconnection study. Focus local, create a solid team, build a reputation, then sell your assets to a developer partner or long-term owner you can trust. Then scale responsibly. And while this is a good place to start as a new developer, it’s not just small companies that pursue this business model. Some of the most successful developers in the country do this. If done correctly, it’s highly capital efficient.

For those developers that are aiming to commercialize their assets by securing a PPA, there are not only the long-standing financial barriers of development spend between initial development and securing offtake; there is now an additional challenge of creating and shaping the financial and energy product customers are demanding for offsite projects. The combination is a potential barrier to entry that will increasingly drive the solar industry towards consolidation. If developers can dedicate the resources to become sophisticated players here, there is certainly an opportunity.  On the other hand, those resources may also be a significant distraction.

And for those developers or funds that are aiming to own semi-merchant, community solar, CFD, physically hedged, or other complex assets long-term, the challenges are perhaps more myriad. Evaluating and managing environmental commodity and electricity risk long-term requires a significant investment and deep knowledge of policy, electricity demand, technical trading, and fundamental trading. Consider what these assets look like post-PPA as you strive to create value.

If you have questions around corporate offtake, financing semi-merchant assets, managing environmental commodities, or building your development business give us a shout. We’re always happy to help the industry grow and a rising tide lifts all boats. Thanks to all of you for building this incredible industry with us these last 11+ years. We’re excited to build the future with you


Sol Systems is a leading national solar energy firm with an established reputation for integrity and reliability across its development, infrastructure and environmental commodity businesses.To date, Sol has developed and/or financed over 850 MW of solar projects valued at more than $1 billion for Fortune 100 companies, municipalities, counties, utilities, universities and schools. The company also actively shapes and trades in environmental commodity and electricity markets throughout the United States. The company was founded in 2008, is based in Washington D.C, and is led by its founder. Sol Systems works with its team, partners, and clients to create a more sustainable future we can all believe in. For more information: www.solsystems.com

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Yuri Horwitz

Yuri Horwitz