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  • Writer's pictureTodd Fryatt

Four Easiest Ways to Go Out of Business as a Solar Developer

Four fastest ways to go out of business as a solar developer? I am a contrarian by nature and do not particularly like to follow the crowds. Our clean energy industry, including DG and community solar is brimming with optimism now....and for good reason. Yet there are still significant red flags among us. In my experience, there are three sure fire ways to fail as a solar developer can earn a one-way ticket to insolvency. We have seen this on a large scale such as the $10Bn Chapter 11 bankruptcy with SunEdison in 2016 and on a much smaller scale over the last ten years with development platforms that are over-leveraged and out of time. So without further ado I present herein the big three:

○ 1) Spread to thin: as Tears for Fears says “Everybody wants to rule the world.” The problem here is that entering a new state market or new country equates to starting a brand new business subject to different laws, utilities, utility commissions/dockets, permit authorities, tax regimes, interconnection practices, host relationships, building codes and more. They say well over 80% of start-ups fail for a reason. The Onion said it best “statistics show that a rising number of completely deluded Americans are actually crazy enough to start their own business.” Before a Development platform has made any revenue in Market A or B to prove their business model, they want to also leap in Markets C, D and E. These transitions are often saddled with limited resources and over-stressed teams.[1] This can become a death spiral of mediocrity. Without the staff and capital to take on the vital functions of renewable energy development this risk is even more material. We think this is amplified if one does not actually spend physical time in the market opting for the whole just mail-it-in approach. It is a constant balancing but try to maintain a workable ratio amongst legal, finance, engineering and developers.

○ 2) Overly optimistic timelines: It is easy for Development teams to create glowing spreadsheet models with ambitious assumptions on timing and all the IRA adders. Among other things these pro forma can turn out to be comically over-optimistic for timelines associated with permitting, interconnection and financial closings. There are always supply chain bottlenecks as well, including but not limited to transformers and pad equipment. Our DG industry is completely reliant on regulated utilities and Utility commissions; which can move at their own glacial pace. Many utilities require over a dozen department approvals for an interconnection; including impact studies, dynamic studies, and ISO approvals. Does one really think your project can hit NTP in ten months? Has your firm accomplished this before with a proven track record? After ten years of operations, ECA SOLAR does our best to be realistic in calculating timelines; especially those involving AHJs and utilities.

3) Big Bets: taking big isolated gambles on equipment procurement end badly. Around five years ago our friends at a large national DG platform bought over $100M in PV modules to grandfather up to $2 Billion in DG projects for the sunsetting investment tax credit. It turns out no one wanted these low budget Tier II modules which cratered the Pvsyst output simulations and did not pass muster with independent engineers. This Firm paid net 30-60 days cash for at delivery of these Tier II modules. The equipment was soon depreciating in an expensive warehouse while this group grossly overestimated their success of their development and acquisition portfolio. I always love hearing from colleagues in the space that still have heard of the Section 1603 modules still kicking around.

I recently heard of another utility scale platform that bought over nine-figures of “domestic content” modules, before the “domestic content” IRA guidance came out. I’ve also heard of another Utility Scale platform that assumed a zero attrition rate in making a nine figure procurement bet for all their early stage projects. What could possibly go wrong? As an independently owned company, ECA SOLAR tries to adhere to just-in-time inventory and avoid mega bets on procurement. I

4) Debt: Our company has patiently grown over the last ten years by being methodical and recycling revenue. I am amazed with the a wide range of our industry counterparts that bet the ranch on a big pile of loans to launch or accelerate their platform. Even with SunEdison, their equity investors got completely wiped out by the creditors. If one cannot find equity investors to take true equity risk that it may be time to re-assess your business model. Any business stuck with floating debt instruments (no hedge, no swap) has a deeply concerning death spiral in today's market. Personal guarantees amongst the founders can significantly increase the risk levels. In short, there a lot of sharks in our space that tease "development capital" and exotic loan structures but folks should be weary at every turn. Of course all platforms in our space rely on project finance instruments such as construction and term loans but advancing these to the early stages of development is a different story.

Bonus Category: if there is another category that could hurt us all it is the systemic regulatory risk. At the end of the day, our industry still relies on federal laws, state laws, as well as byzantine regulations from public service commissions and quasi-government transmission authorities. We have been extremely fortunate, six times in a row, starting in 2005 for Federal legislation on tax credits. However, most all contracts have a change of law provision to memorialize mother regulatory risk. With that said, there are ways to diversify this risk on the state and transmission level (at ECA, we try not to take all our bets in PJM, ISO-NE. MISO, etc). We've been fortunate to bring on a wonderful full-time policy professional to assist in making calculated market growth strategies as well.

P.S. : picking the right partner is absolutely crucial to Developer execution. ECA has had some fantastic finance partners over the years; which are often large utilities, banks or finance platforms with deep track records. With that said, we have grossly miscalculated other partnerships that did not have the experience, team or executive support to complete meaningful size transactions. One really needs to measure nine times and cut only once when it comes to a mission critical partner.

[1] Development Teams have some inherent challenges without a legal team, finance team and without an engineering department, including electrical or civil professionals.

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