Originally posted on pv magazine USA.

If you try to recall the keynotes at the past five solar conferences you’ve attended, we suspect that at least one—if not all five—were given by Keith Martin.

With over three decades honing his craft, Keith has become known for his domain expertise and tireless work ethic. In addition to his day job as a transactions lawyer, he is also the editor of Project Finance NewsWire and the author of more than 160 articles and book chapters.

In this interview, interviewer-turned-interviewee Keith talks about: the best solar developers, his actual dream job, and the coming shakeout.

Among solar financiers, mentioning “Keith” only refers to this one person. Keith is the “Chuck Todd of Solar” and this month’s #Solar100 thought leader.

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Getting Started in Solar

Richard Matsui: I wanted to start out by learning more about you—before you created and established Project Finance NewsWire, before you became the go-to speaker at project finance conferences—how did you get started in solar?

KM: I was originally interested in being a politician or a journalist, but burned out too early on the political side. I worked on Capitol Hill for two U.S. senators, Senator Henry “Scoop” Jackson—he was a presidential candidate in 1975-76—and later Senator Daniel Patrick Moynihan from New York. Moynihan’s staff dispersed after it became clear that he was not interested in a run at the presidency—Tim Russert went to work for Governor Mario Cuomo, Mike McCurry went on to serve as White House Press Secretary for the Clinton administration, and everybody went off in different directions.

At that point, because I was a lawyer, it was easier to go into law than to start over on the bottom rung in journalism. I left the Hill right after the 1982 elections and joined some Joint Tax Committee staffers who were starting a small firm and who had invited me to join them. We were overwhelmed with work. We could not hire fast enough, so we merged with Chadbourne by May 1983.

When I joined Chadbourne, the firm represented the paper industry. Paper companies generated their own electricity and were interested in using PURPA, a 1978 statute, to sell excess power to utilities. Chadbourne litigated against utilities in 20 states to open markets and took a case to the U.S. Supreme Court in 1983 to establish the enforceability of PURPA. Chadbourne got in on the ground floor. Chadbourne represented most of the major independent power companies who were just growing up in that era. That’s how the project finance group that I co-head got started.

The project finance group was basically a bunch of misfits within Chadbourne, who were not part of any other group.  We built a new practice together that was focused on serving the new independent power industry.  It has been almost a 40-year effort.  The group did $53.5 billion in financings the last two years.  It has a wonderful esprit de corps. It did not hurt that I had also been working on Capitol Hill when the solar investment tax credit was first enacted after the Arab oil embargo as part of the Energy Tax Act in 1978. Knowing the history made it easy to shift to advising people on its application.

Developers & Successful Teams

RM: Having seen solar since the ‘80s, what traits do successful developer teams share?

KM: Four things: Versatility, focus, intellectual curiosity, and a manageable burn rate.

I read a piece in The New Yorker several years ago about Cory Booker, the New Jersey Senator. When he first started running, one of his fundraisers told him that in the business world, people bet on other people, not on the business plan. Business plans rapidly become obsolete. It used to take twenty years to build a big business. Now, a business model may be obsolete in five years, so you have to be versatile. My number one lesson is: Bet on a team that can figure its way through the changing market.

Focus is also important. Probably the worst thing you can say to potential investors is, “I have a pipeline of 25 projects.” You cannot possibly develop 25 projects if the answer to the next question is, “How large a team do you have?” and the answer is five people. It shows that the developer is just not focused enough. Investors want to see a laser-like focus in getting a project across the finish line, and then move to the next one.

Third, because there are a lot of sophisticated people in the market, it is important to know what you don’t know, and not be afraid to ask questions.  Be intellectually curious.  Learn as much as you can. There is always a learning curve, and you have to work hard at moving up that curve.

It is also important to keep an eye on burn rate. When you are starting a company, you can staff too many people with too many senior titles—all executives, no workers—and just burn through capital before you have anything to show for it.

RM: With these traits in mind, what team do you admire most?

KM: I spend a lot of time talking to CEOs, and it is interesting to hear how they got started, how they read the market, and the different business models each pursues. There are many highly capable people:

Ed Feo at Coronal—he is invariably impressive.

Tom Buttgenbach at 8minutenergy Renewables—he is a physicist by training. All disciplines, whether law, economics, sociology, physics, medicine, teach how to think through problems in a disciplined way. I like the exposure to people who come at issues from different perspectives; he is one of them.

Ryan Creamer at sPower—he just created something out of thin air. He managed to create a substantial company from a standing start.

Paul Gaynor and Michael Alvarez at Long Road Energy Partners. They built a substantial company, First Wind, sold it to SunEdison, and are now doing it again.

I have had the good fortune to run into many, many impressive people; it would be hard to name them all.

RM: Is solar development a commoditized service at this point?

KM: Gabriel Alonso, the CEO of EDP Renewables, said there are two things his grandmother could do—one is develop a wind farm in Texas, and the other is develop a solar project anywhere in the United States. He thinks it does not take much.

But I am not sure that is fair—there is a lot of knowledge and just pure grit that is required. Is it a commoditized service? There are people who offer contract development services. My impression is that there are probably easier ways to earn a living. If I were trying to jump into the business, I would be a true developer. I think that is currently the scarce resource in the market. There is plenty of capital; there are too few projects.

RM: Right. From our position in Silicon Valley, I like to say that if you’re in solar to make a quick buck—you’re in the wrong place. Finding the next ‘Instagram’ is easier. Solar is hard and chaotic.

Capital Landscape

RM: The “wall of capital” you often allude to now seems to be a double-edged sword: there is a lot of investment interest, but margins for all participants are razor thin. Do you see a massive shakeout coming if this continues?

KM: Among the developers, there are two trends: gradual consolidation and low barriers to entry for solar. Notwithstanding the gradual consolidation, there are not really any large pure solar companies like there are larger wind companies. The big balance-sheet wind companies are shifting resources to solar.  They may eventually come to dominate the sector.  At the same time, the low barrier to entry in solar, particularly for PV, has been a brake of sorts on scale..

Turning to the capital providers, I remember the last shakeout among the banks was when Enron collapsed. Prior to that, the banks had moved to finance merchant gas projects. It seemed toward the end of the cycle as if there was a merchant gas project on every street corner in Texas. There was too little product, and there were too many bankers and banks chasing deals. There are some parallels with the current cycle, but there are also differences.

Tax equity has always been somewhat scarce—the yields are frustratingly high from a sponsor perspective, so there is probably more room in that market. There is also room for more capable developers.  The deal flow has been pretty weak.

RM: In the utility-scale segment, I think we’re seeing 2 fundamentally different models of solar development compete. Fully vertically integrated firms versus a fragmented “network of specialists” comprised of part-time, hyper-local land developers, permitting specialists, independent EPC, and pension funds as long-term owners. Is that how you see utility-scale solar?

KM: I think of it differently—I think of tiers of developers. The tiers are a little easier to see in the wind industry where you have first-tier, balance-sheet players like NextEra, EDP, Avangrid Renewables, EDF, Enel. Then you have some that are just slightly below that: Apex, Invenergy, Long Road, Geronimo, Tradewind, Lincoln Clean Energy. These are substantial players who built scale. And then you have the smaller players, all the way down to the two guys and an Avis card who are out just trying seed projects. Maybe they will get a site. They used to be able to get a power contract, but they have had a harder time getting traction since the utilities began requiring large letters of credit be posted to hold interconnection queue positions. It is harder for the little guys to get the traction they used to.

In the solar market, you have different market segments:

First, you have residential rooftop. Several companies—SolarCity, Sunrun and Vivint—made concerted efforts to create national brands. They assumed that once they built the brand, they would be able to open up substantial distance between themselves and the nearest competitors. They have been facing challenges since the market got spooked after SunEdison collapsed.

Second, you have C&I, which has never really gotten scale. The reason is lawyers. C&I off-takers do not just sign form power contracts. They negotiate the terms. Every deal has its own power contract, which makes the transaction costs to finance portfolios of such projects prohibitive.

Third, you have utility-scale solar. There are a number of capable developers who know what they are doing—8minutenergy, Cypress Creek, Strata, Origis, Coronal, Recurrent, sPower—but it is hard getting to scale by building 20- and 30-MW projects.

Solar is a different animal than wind.

RM: At the last Infocast conference, a few mezzanine lenders describing their rates as somewhere between 9-11%. I was surprised to hear that number. What does the rise of mezzanine debt say about our industry?

KM: There are two types mezzanine debt. There is mezzanine debt offered by private equity funds that is being offered to companies that do not have the same options as the big players, and so they need to end up paying more for capital.

And then there is back-levered bank debt, a separate type of mezzanine debt that is for more established companies, who are pricing it below the tax equity yield, even though it is behind the tax equity in the capital structure. Back-levered debt might be 25 basis points over what a senior-level loan would bear, and senior-level debt for the best deals and developers is 162.5 to 175 basis points over LIBOR—it is very cheap money.

RM: As solar matures, it is interesting to see specialized forms of capital come in to take specialized risk. For instance, a sponsor can now buy a “wrap” on tax recapture risk. We use insurance capital to “wrap” energy production risk, through our solar revenue put. Over the long term, how do you see specialized risk allocation evolving in solar?

KM: That is an interesting question. Project finance is an exercise in risk allocation.  Nothing gets financed until the parties have catalogued all the risks and allocated them among the various parties at the table.

The basic rule of thumb is, “He who best understands the risk takes it.” Sometimes someone who is not at the table—an insurance company or other specialized party—has taken the time to understand a particular risk and is willing to bear it at a tolerable cost to the project.

An example of dividing up risks that is more transactional in nature is yieldcos. The idea was to create value value by separating higher-risk development assets from lower-risk operating projects. If both types are folded into a single company, the company cannot raise capital as efficiently as it could if it disaggregated the risks and raised different types of capital. There are other meaningful opportunities to create value, as you have found through your solar revenue put.

RM: Where will the next opportunities for specialized risk transfer be?

KM: A clear one is basis risk for corporate PPAs. Nobody feels able to quantify that at the moment. Developers usually end up bearing it, but it is not a comfortable risk for them to bear. Another area is merchant risk in solar projects—the price risk. You have merchant wind farms because people are willing to put a price floor under the electricity, but we have not yet seen deals close on a merchant basis in the solar market, although they are coming.

RM: What is your biggest non-consensus bet for 2018?

KM: The U.S. power market is a competition for market share among three big players: independent generators, utilities, and rooftop solar companies.

The independent generators and utilities had reached a stalemate in terms of the shares of generating capacity. For the independent generators, previously the only way to customers was through the utilities, but now they have bypassed utilities and are going directly to the large corporations. Until recently, the utilities had not been doing enough to try to retain these customers.  Meanwhile, the rooftop solar companies have been picking off the best residential customers from the utilities. Blockchain, or open ledgers, are opening up new possibilities.  People with rooftop solar can sell excess electricity to their neighbors and creating neighborhood microgrids. New business models are appearing.

The interesting question will be how this sector transforms itself. I do not think California with its CCAs is exactly the right way to do it—there are just too many frailties in that model and in the equities. But I think we are in a period of transformation as significant as after the Arab oil embargo in the 1970s when the independent power industry was born. It is a little difficult to see what emerges from it exactly, but it is a fascinating time.