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In our previous article, we looked at the increasing potential for investment in the C&I solar market, with CBRE IM's investment into Green Peak Energy highlighting the rapidly progressing nature of the C&I sector both in Australia and internationally.
Matt Baumgurtel - New Energy lead at law firm Hamilton Locke, sat down with the key individuals who lead the CBRE | Green Peak Energy transaction; CBRE Investment Management (“CBRE”) Managing Director, Direct Private Infrastructure Investments Asif Hussain and Director David Xu, Green Peak Energy (“GPE”) CEO Myles Carrucan and General Counsel Anthony Headlam, and Pottinger CEO John Sheehy and Senior Vice President Rodrigo Arias.
In this second half of our discussion with GPE, CBRE IM and Pottinger we explore the opportunities currently available in the C&I solar market, map how the sector is evolving (both in Australia and internationally) and discuss how investors and developers can stay ahead of the curve to capitalise on the impending growth of the sector.
Power prices, regulatory change, ESG goals, energy security, equipment and installation costs (including large batteries), all point in one direction – the C&I market is primed for exponential growth to become the next dominant influence in the National Electricity Market.
So how can you get into the C&I solar market?
Investors, developers, and customers alike can take advantage of the rapidly developing opportunities that are arising in the C&I solar sector. Where C&I solar has previously lagged behind residential and utility scale solar, a shifting perception of clean energy, uncertainty in wholesale electricity prices and a lack of resources available to build larger PV projects is driving investors (and customers) towards C&I solar.
Much of the C&I solar journey over the last four years has been focused on educating customers on the attractiveness of roof top solar and selling the benefits. Now that customers generally understand the benefits and want to have a system installed, the customer “sale” can focus on designing the best system for the customer at the best price, in the best contractual and commercial structure. The competition between providers is fierce making the customer experience and supplier reputation and experience key factors for customers when choosing the best supplier partner for them.
Consequently, C&I solar developers are now focused on providing a tailored, bespoke service to customers, including increased system design, product development and better after-sales service.
“It's that depth of familiarity across all of those stakeholders, and as that familiarity grows, you can jump to the important commercial issues and system design issues without needing to talk through the fundamentals of solar energy,” says Anthony Headlam, “When people understand what we're doing we can jump straight to what we should be talking about - how do we make this deal, and how do we tailor it for you?”
Increased familiarity with the solar market can also assist customers in their negotiations with landlords. “Customer” often includes tenants and their landlords, both with external legal advisors, and in trying to tailor discussions to one party, it is possible to alienate another.
By educating landlords as to the benefits of C&I solar, Anthony Headlam proposes, “a lot of your issues with the customers fall away because ultimately, you’re developing a good renewable energy product.”
According to Myles Carrucan, discussions can vary depending on the complexity of a customer’s business, however, increased knowledge of solar roof top products is benefitting all stakeholders, with customer engagement becoming less educational and more commercial. Myles notes “We recently signed our biggest project to date in three weeks from our initial conversation to signatures on a page, so that open-to close window is definitely trending down.”
And potential customers interested in the benefits that solar can provide are encouraged to take advantage of the economic savings now. “Green Peak Energy is a true long term energy partner,” says Myles Carrucan, “Electricity should be boring, from a customer perspective – it’s been around for a while, it’s not a new invention.”
For many customers, navigating the changing landscapes in terms of pricing, energy security, and environmental impact can be quite disruptive to business operations. By outsourcing that part of their business to forward focused developers such as Green Peak Energy, when market conditions and economics change, customers can trust that their provider will make those choices and come back to them with appropriate solutions.
Solar energy businesses looking to capitalize on the opportunities that are developing in the C&I solar sector will need to follow Green Peak Energy’s lead to address the main barrier to success in this sector – scale.
Every C&I solar developer will tell you scale is key, and that it will be scale that drives efficiencies, which reduces costs, resulting in further scale and increased efficiencies. However, successfully achieving C&I scale is challenging. Whereas utility scale solar developers can generate substantial revenue with only one or two large volume PPAs, C&I solar developers may need to enter over 400 individual PPAs to generate the same revenue.
Similarly, it is much easier to manage a single 200-acre piece of land with a single solar farm that has been designed and built to operate as a single plant. To achieve the same scale, a C&I solar owner may be managing 6000 geographically spread roof top sites with different installed equipment or varying age, and then some roofs are sunnier than others…
Being able to negotiate PPAs with hundreds of different counterparties, install solar products of high quality on to hundreds of different roofs and continually operate, maintain, and manage that portfolio efficiently, and regularly (even in real time) report to those customers is the key to success. Process, systems and automation are also key, and data management and analytics are fundamental to success. Scale requires systems, but systems are only economic at scale.
Myles Carrucan attributes Green Peak Energy’s success in this regard to several factors including product offering, project execution and operational capabilities “having the right people with the right market knowledge and the right market connections” is critical. Deploying roof top systems at scale is key; however, managing and maintaining those systems so that they continue to save customers money (and make the owner money) is critical. Happy customers are repeat customers (i.e. system deployment across multiple sites) and customer referral is a critical origination stream.
Hence a high level of customer service using scalable systems, including remote monitoring and artificial intelligence is critical to continued growth in a fragmented and competitive market. Innovative commercial structures to meet evolving customer requirements also differentiates competitors in a crowded market.
Consequently, generating scale requires developers to address several key requirements including:
GPE’s development over the last four years is a case study in these requirements. Myles Carrucan notes, “much of the last four years of our journey has just been educating our customers on the attractiveness of the PPA product and the benefits to their business,” he says, “You've got to have the ability to build a flexible, competitively-priced product, develop a distribution network to get it in front of potential customers and then be able explain it to them in a compelling way.”
A roof top solar transaction can be inherently quite complex, so developers need to build a flexible product that can be adapted to the various property and commercial arrangements that might arise. By offering a flexible product, tailoring it to a particular customer’s unique circumstances and thereby presenting a compelling customer solution, C&I solar developers can capitalise on a broader customer base and begin to generate the scale needed to offer a more bespoke service.
Presenting this product to customers can be a challenge though. C&I solar takes all the elements of a sophisticated utility scale deal with financing, PPAs and long-term commercial contracts but needs to be presented and packaged in a simple way to customers who don’t have energy at the core of their business. C&I customers aren’t buying energy every day, so developers need to understand the inherent information asymmetry and present straightforward offerings which make the long-term benefits of a roof top solar system easily understood and simple to measure over time.
Anthony Headlam, General Counsel for GPE, is confident that GPE has excelled in this regard, “I think that's where GPE, over the journey that we’ve been on over last four years, have succeeded. We've refined our product into one that simplifies the process for customers. But that's one of the inherent difficulties in this space.”
Institutional investors are moving from interest to execution at an increasing pace; however, investors are finding that bridging the gap between seeing the macro opportunity and finding the right C&I business is challenging. By partnering with GPE, CBRE IM have successfully navigated this opportunity and bridged this gap.
This is a key challenge for institutional investors – what is the right system, and can it be scaled? Rightfully, investors are looking to invest in established specialist C&I developers/owners, with those businesses that have invested heavily in scalable systems and technology (like GPE) seen to be the most likely winner in the impending C&I scale war.
Investors need a C&I partner who can both grow their customer base organically by the origination of green field sites and customers and have the skills to identify and assess project acquisition opportunities. Being able to technically assess systems and projects built by others is a skill that is in high demand, with investors partnering with experienced players to access that deep market knowledge and current, directly applicable C&I experience.
Once those opportunities have been identified and assessed, efficient transaction execution is critical. Smart due diligence is key, particularly the use of artificial intelligence and data analytics to assess documents and data across what can be hundreds of different sites with different equipment or varying age, with different PPA terms and customer profiles. Overall portfolio assessment is the goal however, identifying the outliers (and how they affect the standard deviation) is critical. This is where diligence not only informs the acquisition but provides a road map for successful implementation and integration.
Perhaps more so than most M&A transactions, the implementation and integration of acquired C&I assets are critical. The acquirer’s systems need to be able to absorb new projects efficiently and then assess and improve site performance. While acquisitions to create scale can produce cost efficiencies, it is improvements in site performance that really drive returns from acquisitions – and technology is the key.
Debt financing is slowly coming to the C&I party. Historically, access to funds has been tricky, and the process is still rapidly evolving.
“The use of project finance is, certainly for the larger banks, still a bit of an education process,” says John Sheehy. “Three or four years ago, the only way to get C&I projects debt-financed was through ‘mission-aligned’ debt providers. Equity interest around that time was smaller scale and there weren’t waves of institutional equity going into these sorts of businesses.”
Now, once they reach a scale of production that can generate 10 to 20 megawatts, that’s when C&I developers really start to capture the imagination of project finance teams. This level of scale produces consistent, reliable revenue streams that investors and financiers want to see, and have come to expect from the renewable energy market, as evidenced by the CleanPeak Energy acquisition of the Enwave Australia distributed energy business last year.
Batteries, VPPs and hydrogen – what’s next for the C&I solar market?
Batteries, like they are in utility scale solar market, are turning C&I solar on its head. The ability to economically store homegrown electricity potentially substantially reduces the amount of energy a C&I customer draws from the grid. And the economics are arguably easier than utility scale as energy produced, stored and consumed behind the meter avoids transmission charges completely – a 30% free kick straight off the top.
And the opportunity to “over build” roof top solar systems does not end there. Regulatory changes will promote the aggregation of C&I solar systems into virtual power plants – see our comments on energy reforms here. This is perhaps the largest opportunity of all for C&I developers and investors.
Often C&I solar sites will only use a portion of the roof space available to them because the energy generation from the system during the day only requires a certain amount of offsetting usage during the day. GPE is looking to push these limits, “right now, we can typically deliver a customer approximately 20 to 30% of their energy use over the course of a 12-month period,” says Myles Carrucan, “we'd like to substantially increase that in coming years.”
By allowing the consumption of energy produced by the solar system at times when the sun is not shining, energy storage allows larger solar systems to be installed, maximizing the use of available roof space to deliver a higher overall amount of behind the meter energy. This creates an enormous opportunity for both customers and developers.
Market leaders already see energy storage solutions as a key growth area for C&I business. Myles Carrucan notes “it’s not just batteries, it's also any kind of long duration storage solutions that could potentially allow you to shift excess energy across seasons,” he says, “The amount of people that I'm talking to about hydrogen opportunities is fantastic”.
The market overseas is even more focused on behind-the-meter energy storage. In places like Canada with long summer days and short dark winter days, seasonal energy shifting becomes particularly interesting. Market players see decreasing cost and increasing efficiency of energy storage systems will open significant opportunities.
“Lithium-ion batteries help in the short term, lengthening the day by three or four hours,” says Asif Hussain, “but we really need longer term storage solutions to facilitate seasonal shifting”.
Energy storage solutions open opportunities to expand existing roof top systems allowing not only increased generation but also revenue from wholesale grid ancillary services markets. As these markets expand, so do the opportunities for distributed energy storage.
Existing customers will be please to know that GPE isn’t sacrificing technological advancement for quality though. GPE prides itself on maintaining the quality of its products and services as it grows, installing high quality technological solutions on day one.
“Ultimately the value in our business is the relationships with our customers,” says Myles Carrucan, “if we're underwhelming them with our performance, that will be a constraint on our ability to grow, so we need to prioritise serving customers at a high level all the time.”
And the future is near. BESS costs are falling almost monthly, and technological advancement continues to improve efficiencies and cycle rates.
Where to from here for C&I solar?
The C&I roof-top solar is set for exponential growth. Rising energy prices, energy security fears, equipment cost reductions, ESG requirements, electricity transmission constraints - macro-economic trends all point to huge opportunities for C&I customers, developers, and investors alike.
Scale is key. Scale drives efficiencies in plant construction, maintenance, operation, and monitoring, thereby making roof-top systems more profitable for both customers and developers (and their investors).
Technology enables scale. Remoting monitoring, scalable systems, customer facing software, artificial intelligence, predictive maintenance – are all must haves for any C&I developer seeking to capitalise on growing C&I customer demand.
Experience and expertise are the secret sauce – C&I solar development has unique challenges. It shares similarities with a retail business, however, regulatory change and technological advancement mean the big opportunities are in aggregation.
Consolidation is coming. For a nascent sector, this would appear an odd prediction, however, scale is going to be king. There will be opportunities on both sides of the consolidation. Mergers and acquisitions will create instant scale, however, execution of implementation and integration will ultimately determine success – and who wins the C&I race.
The Hamilton Locke team advises across the energy market – from project development, grid connection, financing, construction, to the buying and selling of development and operating projects, platforms, and businesses.
Matt Baumgurtel leads the New Energy sector team at Hamilton Locke which specialises in renewable energy, energy storage and hydrogen projects and transactions as part of the firm’s Energy, Infrastructure and Resources practice.
Hannah Jones is a Senior Associate (admitted in England and Wales, not admitted in Australia) in Hamilton Locke’s Corporate M&A and New Energy teams and specialises in a broad range of corporate and M&A transactions.
Beatrice Drumore is a lawyer in Hamilton Locke’s Corporate M&A and New Energy teams and specialises in general commercial corporate advisory, mergers and acquisitions and private equity transactions.
For more information, please contact Matt Baumgurtel.