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Transaction complexities and costs, along with “lumpy” revenue streams tied to financing closings, remain an inherent aspect of solar photovoltaic development, and they are driving the distributed solar PV industry’s evolution into more specialized segments. These emerging segments appear quite rational in hindsight, as they guide developers to the competitive fields that best suit their inherent strengths. Each solar developer increasingly must confront this question: What am I exceptionally good at?

Solar developers need to know the answer, because they are in a race - a race between the daily burn of administration and development costs and investor equity return demands on the one hand, and on the other, revenue from closings on project financings. If you can’t stretch your capital to the next closing, you are going to come apart, and if you can’t do enough closings to satisfy investor hurdle returns, your own equity in the enterprise will evaporate away.

 

Learn while you burn

So the goal is to execute a business structure that consistently beats those burn rates. Interestingly, in solar PV, it appears that industry segmentation and disaggregation, rather than consolidation, will be the larger response to that business imperative.

To see why, let’s start by breaking down a common model for a solar installation developer - the “integrated customer solution” model. Here, the solar developer dedicates itself to making it easy for a retail customer - residential or commercial - to get connected with a rooftop or on-site solar installation. The developer distills all the complexities of solar installation into a comprehensible power purchase or lease agreement, requiring only monthly payments from the customer for solar power deliveries.

That distillation process is a tall order. Let’s look at the skill sets that the “integrated solution” solar developer must master:

• Project acquisition - sourcing/acquiring new third-party customers.
• Legal/regulatory - checking through all local permits and regulatory programs, customer contracts, general corporate and transactional requirements, and researching/advocating for critical federal and state public subsidies.
• Accounting - dealing with sometimes very complex financing impacts and corporate reporting.
• Financing - covering both the general overhead needs of the organization and the highly specialized requirements of project and portfolio solar project finance, inclusive of tax equity.
• Project design - adapting sets of basic designs to new locations.
• Equipment procurement - locating, inventorying, and moving panels and other equipment that fit the designs/permits/customer agreements.
• Construction - managing the installation of final projects as permitted, contracted and financed.
• Operations and maintenance (O&M)/customer care - addressing both routine maintenance and non-routine repairs; billing and data management.
• Insurance - covering all segments of active business activities.
• Human resources - handling payroll, benefits, taxes and reporting.
• Dispute management - managing disputes with third-party customers/vendors/contractors.

Those are a lot of bases - and a lot of overhead burning up cash. The structure is also vulnerable to the “weakest link” problem, in which a single team or department can slow the productivity rate of every other team down to the lowest common denominator.

 

Race to the bottom line

Given how most solar projects are financed, solar developers realize an unusually large portion of their created value up front from development fees and monetized future cash streams, while recurring income from project operations is either far off or just a relative trickle. The solar development business becomes a race - to book enough financings to fund overhead and development cost and quench investor return demands. Fall behind, a few key people leave, and the business unravels.

This pattern is evident in the growing pile of wrecked business plans up and down the solar industry chain, and the resulting bankruptcies, reorganizations, acquisitions or restructurings. A quick Internet search will pull up increasingly long lists of defunct solar companies of every stripe. A shakeout is typical in any young industry, and solar is no exception.

But it is the solar sector’s reaction to these pressures that we find very interesting, especially the move away from consolidation and vertical integration and toward simplification and narrow focus within discrete business units. The solar PV power generation business is looking less like industries that evolved toward a set of fewer vertically integrated enterprises designed to capture efficiencies of scale (e.g., oil production/refining, nuclear power generation), and more like the general construction industry featuring a relatively few ombudsman general contractors and armies of more specialized subcontractor shops.

In that kind of highly segmented industry, simplified units with a limited business mission link to other units that take on other aspects of the development chain. Through repeated transactions, these units form standing relationships that can effectively move project developments from shop to trusted shop, with something of an ombudsman tying them together, compressing the project development period. In solar PV, the first generation of integrated solution providers must increasingly compete with highly specialized units at each stage of project development, leaving the integrated providers with a dwindling number of business opportunities - while their overhead burn keeps them up at night, and their investors schedule countless conference calls to discuss disappointing investment returns.

 

From many, one

Specialized solar shops appear to be forming around the basic links in the development chain - site vetting/procurement, interconnection, site engineering, installation and tax-­advantaged finance. The resulting business units include the following:

Fieldcos/pipelinecos focus on very specific geographical segments, quickly sorting potential sites through local interconnection/property/regulatory screens to identify good sites, option them and potentially permit them. They often go a step further and pursue power sales arrangements under standardized programs, or bid entire site lists into solar requests for proposals. They have a very limited - and focused - field sales force, and standing relationships with title companies and attorneys. The best have sophisticated document/data organization systems that quickly get buyers up the learning curve on the site assets. These shops then exit via sale of site rights and move on to the next portfolio development.

Interconnection managers focus on the interconnection application and queue process that in many parts of the country is difficult to understand or manage. We are aware of new business units devoted simply to master these complexities in a single area - even within a single utility service territory. They typically are retained by fieldcos/pipelinecos to further screen their development sites - or even initially, screen areas - for optimal interconnection potential and then manage the interconnection process.

Bridgers/fixers are intermediaries between less sophisticated fieldcos/pipelinecos and the sponsor financial firms and term owners, described below. They screen through less disciplined developments, culling gems that can be moved onto sponsor financial firms and term holders. They may provide some interim bridge financing to acquire or fix opportunities.

Designers have an emphasis on readily adapting a few tested designs/equipment sets to a variety of site layouts, minimizing the need for incremental creativity. These can be small, independent shops capable of serving multiple clients, and they sometimes hold payment for services until a financial closing.

Equipment, procurement and construction (EPC) firms manage the traditional EPC function - typically, a team from an existing veteran construction group. This group can also be a source of construction financing and bonding for customer protection.

Sponsor financial firms have access to deep balance sheets, bank relationships and ready tax equity that can efficiently capitalize a well-planned site development. They have standing accounting/legal teams capable of quickly processing site opportunities, and working within a few preferred financial models. These entities typically fill the role of ombudsman or “general contractor” in the emerging industry model, connecting capital to the EPC/Development chain.

Tax equity providers are the specialized set of larger financial and insurance institutions with federal (and sometimes state) tax credit appetite that absorb transaction tax benefits while playing a relatively passive development/operational role.

Term holders often overlap with financial firms and tax equity providers; this group typically consists of utility subsidiaries and public companies that are long-term hold investors in power assets. A new class of “yieldcos” falls into this group, aiming to link predictable solar project after-tax returns directly to the public capital markets.

O&M/customer care firms form an active niche focused on managing long-term maintenance needs and customer interfaces.

All of these segments, up to the final term holders and O&M providers, struggle with solar’s “lumpy” revenue streams, largely dependent on construction/term finance project closings. But by becoming increasingly specialized, they are able to reduce, flatten and control overhead burn and increase productivity. At the same time, they can work with several other shops located elsewhere on the development chain, diversifying their project failure risk. That is, each specialized shop can create several discrete paths to more project financial closings - hedging against the “weak link” problem and associated closing delays.

The upshot is that through increased internal efficiency and a diversified set of external ties to other development units, each solar shop can increase the volume of installed solar MW that its team touches each year. And that, we suggest, is the true bottom line metric that produces actual cash for any solar PV business unit - and it is the metric that management must make priority one. So, another way to phrase our opening question is this: What changes do I have to make in my business in order to increase the annual number of financed solar MW to which my business adds value in some meaningful way?

Once you can answer that, you will have better insight into what you do well, relative to others in the marketplace. This is a crucial understanding. To make money in the solar sector, you don’t need to do it all - but increasingly, you need to do at least one aspect of it very, very well. R

 

Curtis Whittaker and Paul Burkett are shareholders at Concord, N.H.-based law firm Rath, Young & Pignatelli. Eric Macaux is an associate at the firm. Whittaker is also a managing partner of New Energy Capital LLC, a renewable infrastructure investment fund based in Wilmington, Del. Whittaker can be reached at mcw@rathlaw.com, Burkett can be reached at pab@rathlaw.com and Macaux can be reached at ewm@rathlaw.com.