Podcast #85: A Financial Perspective on Energy

0:13        Good day, this is Ken Forster with Momenta Partners & Momenta Ventures, and today it’s my great pleasure to introduce Kristina Peterson. Kristina is CEO of Cleantech, Financial Advisor from Mayflower Partners. Ms. Peterson has led various solar energy investment companies, serving in senior investment development operations, and asset management roles, at companies like Brookfield Renewable Partners, and Terraform Power, and serving as CEO CFO and other senior management roles at EDF renewable energy, Suntech and Greenwood Energy. Ms. Peterson brings over 25 years of executive leadership experience in energy, investment, finance, and banking organizations of various sizes and types, in different growth stages, and with wide-ranging international corporate cultures, business models, and leadership styles.

1:06        Kristina, this is one real pleasure because you’ve had the opportunity to see this renewable energy, digital industry I should say, from many different perspectives as an operator, as an adviser, as a financier. So, first of all, welcome to the Momenta Digital Leader Series and thank you for taking the time and agreeing to do this. First question from me is, tell me a little bit about your professional journey, and how has it informed your view of digital energy?

Well, thank you very much Ken, I appreciate being invited and really appreciate all the support from Momenta Partners. I would say when I started in the banking industry with Citibank, a long time ago, it was a totally different time, we were doing coal-fired powerplants, nuclear was still very big and a lot of new nukes being built, and gas hadn’t really come into its own. What we’re seeing is a real shift in the power generation mix globally, and watching that change has been fascinating, and I think the whole topic of climate change of course has informed how investments are being done now, compared to when I started.

So, I think starting in banking I had financed every kind of power project but solar, and back then it was very-very expensive, I think probably above $20 a watt DC installed for solar PV. Today you’re seeing solar panels available for 20c – 25c per watt DC installed. So that change has happened within the last 25 years, and that’s an incredibly momentous change for the industry. So, I think coming from banking and having finance conventional power is a good background for going into the renewable space, because you can make the comparisons when you’re meeting with investors, or investment committees, as to what’s the same and what’s different, and, what are the advantages and what are the disadvantages. I’ve enjoyed that part of the shift to renewables.

I think solar started to make sense in the early-2000s, and I was watching the pricing coming down on solar panels; first of all, you couldn’t buy them because there wasn’t much manufacturing capability, and second of all it was really expensive. Then I started to see it go from that $20 a watt to $10 a watt, ‘Oh that’s half-price’. Then I started seeing it drop to $4 a watt in 2007, and I thought ‘Wow, this is starting to get interesting, because it has no fuel price risk, and no fuel availability risk’. So, that’s the great thing about renewables, especially for solar you’re generating where you need the power, and you don’t have any fuel delivery risk. Whereas with a gas pipeline, or gas-fired powerplant of course you are dependent on other kinds of infrastructure. So, this is kind of standalone and where you need it.

It’s really been fun to be part of this change. I think the companies that I’ve been involved with have been at the forefront of some of these changes. If you look at EDF they were some of the earliest investors in solar and PV prior to that, and wind. EDF started investing in the Palm Springs area in California back when no-one had even built any wind projects in the US, and that was 25-30 years ago, and now they’re of course one of the biggest owner-operators. They were also very early in solar both in Europe and other countries, and in the States. Suntech was a company that had never even been in existence prior to 2001, and within 7 years they were a $16-billion market cap company because we have polysilicon when nobody else did, and there was tremendous demand for the projects and for the products that we had.

I miss the good old days when we used to be able to charge deposits, large deposits for even taking an order, and then telling our customers, ‘Oh, we’ll deliver it when we feel like it, maybe 18 months from now’. So, it’s really changed the whole supply chain and so-forth for solar has changed in the whole investment landscape, it’s become a mainstream industry.

So, that’s been my coming from conventional banking of all kinds of power projects, to switching over from conventional to renewables. And then what I’m seeing is that solar is clearly now an accepted asset class, and that the industry has become very large, and indeed solar at the end of 2019 accounted for the largest portion of new power generation construction in the United States. Indeed, that’s expected to go from 2 percent of total power generation today, in the world, to 22 percent by 2050. So, if you think about that, in 30 years it’s going to grow 11 times bigger than it is today, if you believe the forecasts which I think are probably maybe even a little bit conservative. So, it’s going to be even bigger than this.

Does that answer your question there Ken?

7:35        Yeah, very much so, thank you. And given this rich background that you’ve had, tell me a little bit about Mayflower Partners, and how you’re culminating a lot of those perspectives in the work you’re doing now.

So, I advise a couple of funds who are investing in mid to early stage Cleantech companies, and I also advise some institutional investors and funds on their principle investments, and also buy and sell side for project level investments. Mayflower is my firm, I’ve been doing advisory work and board work through that company for quite some time, and I’ve worked primarily in the solar PV space, but also do work with waste-to-energy investments, and other types of direct investments, and early stage technology companies. So I have quite a few companies that come to me all the time, looking for me to help them raise capital, and I think having that broad background from empower perspective helps them get in front of the right kind of investors, and gets them a better deal when it comes time to sell or to buy.

My contacts are global, and I think Mayflower Partners you find a lot of advisers, but they’re really just focused on the US market or whatever. I would say I have a pretty broad international network of people that are in the energy space, and even just this morning I had a client coming to me for specific guidance on solar in Brazil, I know where to go to for them for the right investment advice. So, Mayflower is a way for me to help my customers raise capital in the best way possible, and I work with other advisory companies as well when necessary.

10:31      What’s interesting is, we’ve been following this area of digital energy for some time, one of the four sectors Momenta looks at, energy, manufacturing, smart spaces, and supply chain. You may know that we featured Tony Seba on the first of this whole podcast series on digital leadership, and we took some of the concepts Tony talked about, about the decentralization of conventional energy if you will, conventional energy generation distribution etc., and to look at the decentralization of it as a pattern of disruption for other industries as well, including how we think manufacturing will end up going.

11:11      So, energy has been going through quite a transformation, at least in California, you could say disruption as well.  What are some of the key trends you are seeing relative to energy generation, distribution and demand? I know you covered a few moments ago, but generally across the whole grid when you think about the full end-to-end.

I think it really is going through a massive change, and I think the simplest thing to think about is just in general, there would be less massive investment in transmission technology, because like I said, the thing that makes solar special is you’re generating where you need the power, it can be on your roof, it could be on the roof of a Costco or any other big bucks store, and you’re generating where you actually need the power. So, I think there would be a lot less transmission investments.

I think when you see what’s happening with the California investment around utilities, like PG&E, they’ve got into a lot of trouble because they have not made the investments in keeping the transmission lines that have been necessary in the past, where you’re generating power at a central location, and then shipping it to wherever you need it, that’s dangerous over long distances with dry brush and so-forth. PG&E could very well end up being taken over and broken up, that’s what my contacts have said. So, if that ends up happening that has massive implications for other invest around utilities, and I think California has been at the forefront of encouraging investment in energy storage doing RFPs for energy storage, they’re really trying out different things, seeing what works, seeing how things can be financed in innovative ways.

So, it’s both generation, ownership of generation, distribution definitely, and then on the demand side, you’re seeing customers fighting back against demand charges; why should they pay these huge demand charges to the utility when they can peak shave by putting rooftop solar on their buildings, and always just dispatching their own generation to their own storage facility, and avoiding peak demand charges. So, I think customers are adjusting to whatever new tariffs are getting thrown at them, and you’re seeing a lot of changes there.  

Back to your question on digital energy, we’re really changing not just from centralized power generation to distributed, but also from 24/7 baseload, always on centralized power generation, to intermittent renewable generation. So, at least with solar you know when the sun comes up in the morning, and you know that when it goes down at night, with wind it’s a little less predictable in terms of when you’re going to get high production. But solar is good that way because even for things like working with software companies that have to do updates on their predictive analytics, and their software databases, they know the solar is going to be off at night, so they can actually do things and plan it overnight. Whereas with wind you don’t know when the power is going to be generated.

It really makes a big difference I think when you have these intermittent resources, the whole concept of maximizing and optimizing production is very important, and being able to predict what power demand is going to be, and how you’re probably going to build the next day, that’s the new frontier for us in terms of actually being able to make the right bets, and make money in those markets. It’s not like something new under the sun, but people haven’t actually done it as much with renewables, because the whole space for solar the industry is effectively 13 years old in the United States, and for wind maybe 25 to 30 years old, so it’s not like it’s been around for a long-long time.

16:23      It did. It’s interesting when you look at the shift from conventional to renewable energy, in some sense it’s the chicken and the egg, the move to renewable has helped bring more digital patterns in case, but more digital technology in some case has also reinforced the move to renewables, decentralization as an example in that case. I guess some thoughts relative to which one is driving the other in your mind.

Now that we have all of this additional intermittent generation, I think now people are saying, ‘Well, let’s be smarter about using it’, I think it’s the generation that’s driving the optimization, rather than people saying, ‘Oh, well I know how to optimize it perfectly, let’s apply it to this new technology’. So, I think as an industry we’re growing in terms of understanding what works, what doesn’t work, how to figure out day ahead markets, how to hedge with those appropriately, and how to use that intermittency in our favor, rather than thinking that’s a negative because we get too much sun. As you all know, the California duck curve that people talk about.

When solar started in California in a big way, utilities scale solar there was no duck curve, but now there’s just a huge amount of influx of solar generation as a portion of the total production, in the middle of the day, in the middle of the summer, and it ends up for people who didn’t set up their PPAs the way they might have liked to, they’re curtailed. So, you have to consider curtailment production, the market requirements, and also how to optimize all of those and make the most money.

The world is awash in data right now, and the whole idea is to figure out how to make more money, and how to save money. I think that’s where the predictive analytics of digital energy really end up making you a smart operator, or a dumb operator, and I think the existing utilities have been the only game in town, and now we’re seeing independent private power producers are actually making those investments, and maybe becoming a little more sophisticated even, than some of the investor around utilities of muni’s or co-ops that they’re selling to. That’s how you make outsized returns.

Back to saving money, what I’m seeing is that the insurance companies are saying, ‘Well, wait a minute, how do I insure myself against claims risk?’ They’re getting more inventive in the way that they get into risks that they’re insuring in the market, not just property casualty, but production and revenue we’re seeing some insurance companies basically in the Solar Revenue Put market, where they’re banking that a certain project will make a certain amount of production, and if it doesn’t they have to pay. So, with that kind of thing you really have to understand where to make your bet, and understand how much production you can say, ‘I’m going to bet that it will definitely be able to meet or beat that particular level of production’.

So, it’s really interesting, I think we’re seeing companies start to optimize the assets that they have, by running them better, by doing some data mining of the analytics of the data that they have on the projects, and being able to understand, ‘Hm, if I did this or that in terms of my OPE and CapEx budget, perhaps I can drive higher revenue’, and the utilities are sending signals to us, I think they could be even better in terms of saying, ‘This is what we want or need’. I think California is at the forefront of signaling to independent operators what they’re wanting, but I don’t think we have completely exhausted all the potential optimization channels basically, for improving and using solar production on the grid.

A lot of new projects are coming on, like I’ve said it was 39 percent of all the power generation under construction in the United States last year was solar, so it’s big and there’s a lot of utilities that don’t even have as a percentage a very large portion of their power generation coming from solar, so they’re having to learn how to use it better with what is it they can avoid turning on that gas-fired peaking plant that costs a lot of money. They start making those decisions in their ERP planning, and they end up saying, ‘Hm, the stuff is pretty good’.

At least with solar you know the sun isn’t shining at night, its relatively predictable in terms of power generation, less-so in a cloudy climate or a coastal climate, more so in beautiful desert south-west of the United States it’s pretty predictable, but in certain places it’s a little bit more of an unknown. Also, you get storms, hurricanes etc. and you need to stow trackers or things like that, and you end up actually getting a bit less production.

Other than that, I think the whole idea of using weather data is only just starting really, in terms of embedding that in the predictive analytics of your production, understanding how weather is going to change your generation, and being able to use that to make more money, that companies are still at the beginning. There are weather data companies, and then there’s software companies that do predictive analytics, or monitoring and controls, and SCAD, and in reality, bringing that together. The weather data, the operating, monitoring, control software, and also financial in general ledger software, all three of them are separate right now, and what we’re seeing is that people for who the future is, being able to bring that data into your accounting system so you can use it in a better way, so that it’s not always every once a month, or whenever it is that people do their operating planning. They’re pulling it together and saying, ‘Oh, if I had noticed these patterns, I could have made more money’, in terms of making bets, selling to utilities.

We’re seeing more merchant risk in the market, people are building solar with a project that’s what we call a merchant nose, meaning one or two years upfront they’re selling merchant, and then they’ve got a power purchase agreement, or some other type of revenue contract later, and then the rest of it and there’s a merchant tail. So somehow, you’ve got to model what the production is going to be from those things. In certain markets like ERCOT, it’s very clear what they’re buying by the five-minute increment, and so if you’re a smart power trader, and a smart owner-operator, you could potentially end up getting outsize returns by understanding weather, congestion, curtailment, and what the demand is in a particular location.

So, I think that’s very exciting, we’re not there yet as an industry completely, but I think all the software companies that are providing products to the energy industry, my hope and dream is that the financial software is integrated with the predictive analytics software, which is integrated with the control systems and monitoring systems, and that everything is as accurate as possible. We all know that these sensors, pyranometers in the case of solar which basically tells you how much sun you’re getting at a particular location, then you get a smaller subset of that, wouldn’t it be great if all of that worked perfectly all the time, and the grid was always on, and there were no snowstorms and no windstorms, and no hurricanes where you have to turn things off! But that’s not the way it works in the real world, but to be able to predict those kinds of events and actually work around them and make more money off of them, we’re getting there I think as owner-operators.

26:30      Well, as you know we helped a large wind turbine generation company acquire their analytics capable, and I think you’ve made an absolutely beautiful case for really what was the acquisition thesis that went into that, and where some of the opportunities sit with that as well. Where do you see most of the innovation coming from these days, in the energy sector?

Well for the moment I’m going to talk about the investment side, because I think the innovation right now is people were afraid when they first started investing in solar, ‘Oh, is it going to work?’ ‘Are these solar panels going to blow off in the wind?’ ‘Is the tracker going to break?’ Now, it’s become an accepted asset class, very easy to fund, you’re seeing relatively low returns on the debt side for conventional operating projects. Lenders are lending 3 to 4 percent for 25 years, they feel very comfortable with that. Well that wasn’t the case even 13 years ago, that people didn’t really know what they were signing up for, and prices were a lot higher.

So, the innovation is coming from, what about building PV Plus storage, storage of all different types, whether you’re talking about flow batteries, or lithium ion, or other types of battery technologies or storage technologies, including pump storage hydro etc. For the stuff that’s newer, meaning flow batteries or lithium ion we’re still seeing, the only folks that are investing in that is on either big utilities that have big balance sheets, and are investing in the storage technologies on their own balance sheet, or preferred equity investors that are charging relatively higher returns, because there’s that technology risk. There’s no clear front runner in terms of, these are the types of technologies that people are investing in, that they know they’re going to make a high return. So, it’s more the preferred equity side.

And flow batteries, I think the consensus is that it’s probably going to be about 10 percent of the global storage market for batteries, and 90 percent is still supposedly going to be through lithium ion etc. I think there’s going to be investors that like one versus the other, and they like a certain kind of use case versus another, and at the end of the day people with big balance sheets and a large amount of capital to provide guarantees, are going to be the ones who are the earlier investors. But as time goes on and people start to see the technology works etc. I think the prices will start coming down, the innovation will be that you’re going to have more debt providers moving into that space, doing longer-term and accepting lower returns than what we have now, where people are still not comfortable to say, ‘I’m going to invest in x-type of flow battery for 10 years, and I know it’s going to work. It will work for this particular use case, and that’s what we expect’. That is indeed what happened.

So, I think the innovation on the finance side is kind of interesting. I think you’re seeing more innovative financing structures in terms of merchant offtake, financial and production hedging. You’re seeing companies that are insurance companies, big institutional investors that will do different kinds of merchant hedges, for solar farms that wasn’t even considered 13 or 14 years ago. Also I think the operational technology standards today, meaning literally the skater and the control systems managing all of these sensors on solar farms and so-forth; those operating technology standards are evolving, it’s still a cottage industry I think for a lot of these types of technology, for the meters, for the pyranometers and all the different data systems that we collect the data from the various projects, it’s still in its early days. I think making them more robust, making them more hardened so that things work in bad climatic conditions, and really just transmission of data even, it’s crazy.

Having Wi-Fi and modems, when that goes down you don’t get that data from that particular project, it’s a problem, and then you have to try and backfill that data, but that’s not the actual accurate production. So, there’s no standards yet for the industry, and solar in and of itself is modular, it’s quite different I think from wind in that with wind you’ve got one big turbine with many different parts to it, but generally speaking that turbine is built by a creditworthy company that can stand behind all the pieces of that piece of equipment.

With solar it’s a modular, it’s totally modular, inverters are made by certain companies, and solar panels are made by others, and trackers are made by others, and there isn’t a big appetite to wrap that whole thing and guarantee production by any single large creditworthy entities. And so owner-operators are definitely trying to get that kind of production guarantee, where there’s a full wrap on a pool of assets and so-forth, but I think the jury is still out as to whether or not the folks that are offering those are actually going to be making money, or losing money on that, because again it’s such a hodge-podge of different types of equipment, and not big companies.

33:23      Along the same lines, we’ve invested via Momenta Ventures in several companies in the Cleantech space, including ones like Jelly, and 3WIRE. Beyond these, which startups do you see as the ones to watch in this space?

Specifically, well, I’m going to be a little bit broader. I think not just software but hardware plus software together. I think the combination of distributed generation of all different types, not just solar, not just wind, but DG where the production is onsite where it’s going to be used, plus electric vehicle charging, plus software to control those systems. In the past its always been the utility buying power from a big solar farm, or as I said before, a client putting solar on their roof with some battery storage to avoid a peak demand charge.

I think the future is going to be where it’s much more transactive energy, where you’re going to have instead of us paying to the utility, the utility paying all these different entities as a generator, and being paid for the services that they’re providing, to smooth out demand, smooth out production, provide power where it’s needed, avoid congestion, and avoid their need to curtain other producers. I think we’re all going to start realizing that its more of a two-way flow of power generation and payment. I think even the payment structure right now, you’ve seen a few smaller companies experiment with payments in crypto-currencies or bitcoin, tokenization where power generation and payments are truly free flowing transactive energy, and I think that will be the future.

I think electric vehicles, the whole electrification of transportation is going to happen, it’s going to happen sooner than people think, I’m with Tony Seba on that one for sure! And I think that should be co-located with power generation, and right now there’s no incentive for automobile manufacturers to put the invertor inside an electric vehicle, but to put an invertor inside an electric vehicle is $300. Whereas if you put it in an invertor in a bollard for an electric vehicle charging station, it costs $1200. Well why do the auto manufacturers not put the invertor in the car? It’s because no-one is incentivizing them to do that, people don’t want to pay that extra $300 to be able to do V to G (vehicle to grid) sale of their electricity and their car to the grid, they’re not getting paid for that right now.

But in reality its more efficient to put the invertor in the car, and to allow vehicle to grid charging, so that eventually the utility will be able to say, ‘Park your car in this location, I’ll pay you more to park there, because I actually need to firm the power coming out of that particular part of my grid’. That kind of control system, it’s all based on software, and that’s where digital energy is going to hopefully make this all hang together in a better way, so that we can do more predictive analytics in terms of what demand there’s going to be, what’s needed in terms of production and generation, and then also to optimize use, and it all comes out of the control systems and the software.

Back to your question about who I like. Companies like NUVVE which is here in the San Diego area doing some interesting things, trying to figure out what I was just talking about, which is vehicle to grid charging, and optimization. On the storage side for the flow batteries I like the guys ESS up in Portland Oregon, they have a good flow battery technology. I think the guys that are early stage that have investments from companies like the Gates Foundation, Breakthrough Energy Ventures, those kinds of companies that have a good solid financial backing, have some dry powder for a few years to get through, weather the storms that are happening right now in the financial markets, those are the ones that are probably going to survive.

They’re providing a different kind of technology that is useful for certain kinds of use cases, and also avoid some of the issues that we have with lithium ion batteries from a fire code protection perspective, the jury is out in terms of safety on a large scale. Like why some of these larger fires have happened with some of these projects, it’s still not out in the open why that actually happened, and how to avoid that in the future. So, I think some of these flow batteries that are very benign technologies where stuff can’t catch on fire, from an insurance perspective both for property, casualty, insurance, and also for hedging, financial hedging for storage, you’re going to see perhaps a little more interest in that because its viewed as safer. So, those are a couple of the names I like.

I think anybody who’s combining the hardware and software in a way to support distributed generation where it makes sense, DG put the power where you need it, don’t bring it across thousands of acres of dry land with dry trees, where you’re going to set states on fire, which is what we’re seeing here in California in the last few years. That just makes a lot of sense to me.

40:09      Thank you, that has been a really good combination to a great conversation. One final question we always like to ask is, recommendations of books or resources, in other words what inspires you and informs you day-to-day?

I find that I keep track of Bloomberg New Energy finances resources quite a bit, they tend not to be the most aggressive in their predictions, they’re not the highest – not the lowest, but they tend to be pretty much right and in the middle of the road. I also keep up with Greentech Media, which is now owned by Wood Mackenzie, they I think do the best research in terms of investment, whether its VC or private equity in distributed energy resources, or DURs and storage investments, I think they do a great job. So those two sources really inform a lot, I watch their reporting because if you look back, they’ve tended to be right, and I think investors appreciate that over time, and they didn’t make a big mistake.

Those two sources are inspiring to me, and I keep track of those guys.

41:38      Perfect. Well this has been Kristina Peterson, CEO of Cleantech financial adviser from Mayflower Partners, and Kristina thank you so much for taking the time to opine on our digital leadership series, especially around digital energy. I really appreciate your focus as an operator and adviser as a financier  and like that practitioner, so thank you so much for participating.

I really appreciate it Ken, thank you for having me.

42:07      Take care, thank you so much.                                                                                   

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