Originally posted on Greentech Media. In this #Solar100 interview, Richard Matsui, Founder and CEO of kWh Analytics, speaks with Benoit Allehaut, Managing Director of Capital Dynamics’ Clean Energy Infrastructure team.

Throughout his fifteen years working in renewables, Benoit Allehaut’s completed a number of ‘mission impossibles’: he's made a career in an emerging industry nicknamed 'the solarcoaster' for its ups and downs, he’s established himself as an expert on both development as well as financing, and he’s built up the second largest portfolio without relying on merchant risk.

In this #Solar100 interview, Allehaut discusses M&A in the post-virus environment, “detrimental investor behavior”, and advice for young people who want to work in renewables.

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FROM FOREIGN SERVICE TO RENEWABLE ENERGY

Richard Matsui: You have a surprising career background. It seems like almost everyone in solar comes from either real estate, finance, or law. You’re the first person I’ve met that started off in an embassy, which is also how I got my start. How did that become your first job out of college?

Benoit Allehaut: I was avoiding military service—in France it was mandatory at the time, and the only way you could avoid it was to either work for an administration abroad or a company abroad. I chose the administration option.

More interestingly, I had an opportunity to go to Guatemala, Taiwan, or Moldova. Moldova was probably the last place on earth  I wanted to go—so I chose it. When you’re in your early twenties, adventure is everything. And from a personal formation standpoint, if you take the easy path, you don’t learn. In Europe, everybody knows about Albania; nobody knows about Moldova. Moldova is the most economically challenged country in Europe. It’s a tiny country that’s split between the two regions of Moldova and a separatist region called Transnistria. My work was tough, but I learned a lot. The experience helped me get out of my comfort zone moving forward.

Richard Matsui: What prompted you to move on from that experience?

Benoit Allehaut: The embassy was very nice, but I was never going to be a civil servant. There was always an entrepreneurial side of me that wanted to work in the private sector.

During my foreign service, I had an extraordinary opportunity when the French president visited Moldova. People work in foreign affairs their entire lives and never have a presidential visit, and I got one. I was invited to decide who would be part of the presidential delegation and I chose Paris Mouratoglou, CEO of SIIF Energies, and Francois Roussely, CEO of EDF. Paris pitched to Roussely an investment in SIIF in exchange for the exclusivity in renewable energy. A few months later a deal was cut. And thus I played a role, albeit small, in the creation of what became EDF Renewable Energy!

Richard Matsui: Moving on to your work in renewables, you’ve been on the development side at General Electric (GE), then OptiSolar, which then subsequently became First Solar’s project development arm. Then you switched to the capital side with BlackRock, and finally Capital Dynamics. You have a wide range of experiences. How did you decide what roles to take?

Benoit Allehaut: I took the view that wherever I went, I had to give my best, make myself redundant, and move up. I prioritized learning, because I always felt that the day I stop learning in an organization would be the day I get bored.

Throughout my career, I also wanted to work for market leaders. I wanted to work for GE because when I first joined them, it was at the beginning of a J-curve in renewables. When I joined First Solar, similarly, there was an explosion in the solar market. Working with the dominant player in the market was incredibly useful at the time. That said, I also need an entrepreneurial environment to thrive. Now at Capital Dynamics we have both a market leader and an entrepreneurial team.

Richard Matsui: Having developed and financed renewables since the early days of this industry, what macro lessons have you pulled from those 15 years?

Benoit Allehaut: My biggest lesson is on alignment and investment behavior. Looking back at the wind business in particular, there was a lot of work being done with independent engineers to extract the most favorable reports to make an investment look good, and thereby extract the best financing terms. But when you’re a sponsor and long-term owner and you’re not flipping an asset, you’re a value-based investor. In wind, this has led to detrimental investment behavior.

 

STATE OF THE MARKET

Richard Matsui: Keith Martin says the “wall of capital” continues, which leads to behavior from sponsor equity that’s hard to explain. You were the first person to tell me about sponsors bidding negative IRRs during the contracted period, accepting aggressive merchant curves and IE “P50s”. This was already common behavior two years ago, so one would presume that it’s gotten progressively more aggressive. You’ve observed that there was a correction in wind. In solar, is there evidence that the coronavirus pandemic has fundamentally impacted behavior or are we still continuing on the same trajectory?

Benoit Allehaut: The economic theory of market equilibrium can be frustratingly long to realize. We still see ERCOT deals being done with hedge contracts marketed as “PPAs” and basis risk being presented as positive. One of my favorite books and movies is the Big Short. In the movie there are some epic scenes, including one where the S&P employee says, “If we don’t give the banks the AAA rating, others will.” There is a lot of truth to that. As long as the market of investors continues to expand, there will always be a chance that investments get made without an understanding of the risks involved. A huge part of my job is to understand and mitigate risks.  For every investment that we make, we take pride in the fact that we do so with our eyes wide open. 

Richard Matsui: So, if not during a global crisis, what event will force market discipline? Is it 10 years from now when these closed-end funds need to liquidate? Or does it happen sometime sooner?

Benoit Allehaut: This is the crystal ball question and my answer is “I don’t know”. We regularly see new investors arrive in the U.S. market, and it is not always clear they understand the idiosyncrasies of the U.S. market.  For example, investors in the European wind industry where asset performance is fine because the standard deviation is lower, come to the United States think it’s going to be the same, but it’s not. They don’t understand tax equity structures, and they don’t know that resource risk in the U.S. is much higher.

The market is dividing between folks who have a good understanding of the risks being taken, and those who don’t have access to the deal flow and are dependent on the conveyor belt of sell-side advisors. In general, when you look at the deals available in the market, it’s a mixed bag. It’s easy to say this, but it’s important that the entire industry makes good investments because at some point there will be reputational damage. I think everyone would benefit from more discipline in PPA pricing, PPA tenors, merchant assumptions, but when will it happen? Not too soon.

Richard Matsui: What’s a good investor to do in this environment? You’ve built up the second largest portfolio without banking heavily on merchant risk, which still strikes me as mission impossible.

Benoit Allehaut: First of all, you have to come at the right time. I think if you were to try to do this today, it would be very difficult. We were very fortunate on Moapa, California Flats, and Mount Signal. 8point3 was a one-of-a-kind transaction, and there is no other 8point3 readily available. That gave us the scale to then do proprietary origination. We took a view that, while we were “private equity”, we were really infrastructure investors representing large, long-term institutional investors.  It was not about flipping but rather about long-term cash flows and value. This industry needs to move to making solid investments with balanced risk/return targets. Finally, you need to work with the right people, and I think the world of each member at Capital Dynamics and our affiliate Arevon.

We have a value based mindset. Our team quickly learned that it takes a lot of time and energy to address a problematic asset. We do our best to avoid them. I know that teams are under a lot of pressure, but it’s a reckoning with the agency issue: Why is somebody selling? Why is somebody buying? There is a whole protocol that needs to happen to make sure that good investments are made.

Richard Matsui: I think the Principal-Agent problem is a big one, and only discussed with heavy drinks. I spoke with a banker recently who said the job used to be about applying best judgment to structure good loans that would get repaid. But now, there is so much internal pressure to do more renewable deals that the job is now simply about presenting deals to credit and letting them decide, because there are good odds that those loans won’t get repaid. It’s strange to hear a banker say “I’m no longer sure that we actually care about getting our money back”, but that’s where we are now.

Benoit Allehaut: That’s terrifying, but I hear similar observations. Tax equity historically created very perverse incentives for wind projects because tax equity is remunerated based on PTCs, cash and depreciation, but PTCs follow cash. When a project underperforms, tax equity earns a higher multiple on invested capital, so there was almost an incentive for tax equity to have assets underperform. You still want the asset to flip, but if you underwrote for 10 years and the asset flipped in 20 years, that’s actually the best outcome for the bank. You have a piece of the capital structure that is fundamentally misaligned. It’s scary when a tax equity investor will underwrite knowing that the asset will fail because it might facilitate the sale of a wind turbine. We have to hope that there will be a return toward more traditional and rational investments because that will benefit the entire industry.

Richard Matsui: Where is relative value in the solar market today?

Benoit Allehaut: In the past, we all lived with Unit Contingent PPAs, which means whatever the plant produces, the buyer buys all of the power. The market now can offer something much closer to what gas or coal has historically provided with the combination of solar plus storage or solar plus energy management. That’s better risk management and better value, ultimately, for buyers of the power.

Richard Matsui: Everyone says, “Storage is where Solar was 10 years ago.” First, I’d love to hear if you agree or disagree, as you have a massive storage fleet under construction. Second, every analogy has flaws. What are the major points of difference that you see?

Benoit Allehaut: First of all, storage is much more complicated than solar. It is not plug and play. Solar farms today are blocks of panels with inverters being throttled to the MPPT so that the farm achieves the maximum output at the point of interconnection. Now suddenly you have a battery that will take energy and then re-dispatch it. From a SCADA standpoint and from a system architecture standpoint, it’s a lot of work.

Second, storage complexity really varies with application. Load shifting is much easier than if you provide multiple services simultaneously. You also have multiple players that come with storage. You’ll have the asset owner and also the energy manager sending the signal as to when to charge and discharge a battery. I think there is truth in the saying that storage is the early days of solar, but it’s not just about a cost reduction curve.  It’s a more complex product and has varying applications. It’s true that the storage industry is piggybacking on the EV market globally, but how fast costs will go down remains to be seen. It is very important to look at quality, given what’s in the box varies from one supplier to another. We see a lot of people on the development side but again, as a long-term owner, we tend to be more conservative and think through all the implications of what is in the box over the life of the asset. 

Richard Matsui: In a year defined already by uncertainty and unknowns, what’s your biggest non-consensus bet for the remainder of the year?

Benoit Allehaut: I think that the outcome of the election matters much more than we want to believe. We need to navigate through regulatory uncertainty in our decision making. 

 

ADVICE FOR NEW GRADS WHO WANT TO WORK IN RENEWABLES

Richard Matsui: When you meet a fresh MBA or a college senior who says they want to get into renewables but don’t know where to start, what do you recommend? Looking at your background, fifteen years ago, wind would have been a really good place to start, particularly because there the solar industry did not really exist then. Where is that good place to start today?

Benoit Allehaut: I tell all students the same thing: This industry attracts a disproportionate number of talented people. Unfortunately, it also creates a lot of competition. Everyone wants to work in an industry with meaning. What I recommend to everyone is to just get in the industry. Don’t set requirements—you’re here to learn. Start somewhere, be great at what you’re doing, and then look for the lateral move and the opportunity to create something. Coming in with demands and expectations is very dangerous because it really impedes long-term growth. You can even work on something as boring as insurance—kidding, Richard—it really does not matter. Talent and hard work is always rewarded in the long run.