The Democratization of Energy Distributed Solar Energy in Chile

The Democratization of EnergyDistributed Solar Energy in Chile

UC Berkeley Haas IBD TeamJune 2013

About us

2

Doug Peck Laura Tilghman

Ben Hamlin Maika Nakagawa

Four UC Berkeley MBA students International Business Development

• “Experiential learning” based class during 1st year of Berkeley MBA program

• Students are paired with client organizations in countries across the globe

• This spring, Berkeley has 25 teams across 21 countries

Overview

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Chile’s leadership in solar energy

Policy and regulation

Geographic and structural advantages

Business models

Financing Education and capacity building


4




Business models


Chile has a looming energy imbalance

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• Requires additional 8GW of electricity by 2020• Imports ~70% of energy (dependent on

unreliable suppliers such as Argentina)• Renewables are ~4% of installed capacity in Chile

today, though growing at ~12% annually

• Demand growth rates forecasted to be 4-5% per annum until 2030

• Demand growth corresponds to Chile’s economic development and rise in GDP

Renewables can plug supply gap and help Chile achieve energy independence

Installed Capacity (SIC and SIG) 2012; 100%=17.469MW

100

26

0

50

100

14

%

Hydro

22

Natural Gas

4

Diesel

34

Coal Renew-ables

Total

Demand is rising Supply is inadequate

Global solar PV growth forecasts are robust, Chile is positioned to lead in South America

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• Global PV market is nascent but quickly growing internationally

• For distributed PV specifically, 220GW of installation is forecasted worldwide through 2018, representing $540.3B in industry revenue

• South America is forecasted to have least installed capacity, creating opportunity for Chile to assume regional leadership position and change trajectory

Growth in solar PV can transform power markets

(Cumulative capacity additions, 2012-20, GW)

Distributed PV is increasingly attractive for Chile

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19951996

19981999

20012002

20042005

20072008

20102011

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Historical Nodal Prices($/kWh, 1992-2012)

Electricity prices are rising in Chile PV prices are falling internationally

PV module prices have fallen 80% since 2008 and 20% in 2012 alone

Chile is uniquely positioned for distributed solar

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1) Geographic– Solar radiation supply improves

economics– Energy transmission

complications2) Political

– Centralized decision making can reduce soft costs

3) Learning curve– Experience on utility scale solar– Second mover advantage on

distributed scale solar4) Competition

– Region lacks market leader

Advantages for distributed solarChile has strongest radiation in S. America

Renewable energy and distributed solar offer Chile many benefits

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Benefits of renewable energy Benefits of distributed solar

• Increase sustainable energy supply using Chilean resources

• Diversify energy mix for greater stability and security

• Reduce the country’s GHG emissions

• Provide Chileans with a direct choice about their energy source

• Decentralize energy production and limit transmission costs

• Create new industry in Chile for more diversified economy and quality, service-oriented jobs


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Business models


Policy choices will impact the rate of adoption of distributed solar in Chile

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Adoption (%)

IncentivesNet meteringNet billingChile today

Theoretical impact of select policy choices

Strong distributed solar adoption over the next decade requires a suite of proactive government policies and incentives

Time

Three policy objectives are required to quickly develop distributed solar in Chile

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Define a national vision and concrete goals for solar generation

Create incentives for utilities and regulators to support distributed solar

• Renewable Portfolio Standard• Grants for pilot projects

1

2

Seed market development through improved economics and financing

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• Decoupling• Mitigate soft costs• Utility cooperation

• Net metering and shared solar• Cash incentives• Tax incentives• Loan guarantees

Suggested policy Status

Define vision and concrete goals for distributed solar generation

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Renewable Portfolio Standard

(RPS)

• Establishes national goal to guide market for non-conventional renewable energy (NCRE)

• Increase the RPS to more significant level

• Adopt a solar carve-out • Ensure rooftop solar generation

is included

• $10 million fund for co-financing solar projects from CORFO

• Government grants provided through periodic contests for innovation

• Strategic, dedicated program for funding solar R&D to drive innovation and cost reduction (e.g. SunShot in the U.S.)

Grants for pilot projects

Importance Opportunities for improvement

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Amend existing law as little as possible to simplify process

Create incentives for utilities and regulators to support distributed solar

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• Rate set for fixed ROA• Aligns incentives• Reduces volatility

• Regulate costs of permitting, inspection, etc.

• Waive or limit costs for small systems

• Mandate data sharing to improve grid management

• Ensure grid reliability and safety

• Changes profit model of distribution companies

• Requires long-term business model innovation

• Requires political will to standardize costs at a national level

• Reduces autonomy of regional utilities

• Necessitates creation of public-private mechanism for information sharing

2

Decoupling

Standardize installation &

permitting

Utility cooperation

Structure Stakeholder implications

Seed market growth by enhancing project economics via financial incentive programs

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• Rebate or credit owner of system• Tier by income• Allow for new and retrofit

• Loan guarantee through multi-lateral banks or government funds

• Politically challenging• Build upon solar thermal precedent

• Positively seen by government, financiers, and industry actors

• Promote grid safety and reliability • Balance incentives with distributors’

costs

• Move toward net meter, at or near 1-to-1 price on daily interval

• Break out fixed cost in consumer bill, allow for differentiated rate structure for solar customers

• Allow shared solar installations

• Balances economics between early and late adopters

• Provides time limits, which incent earlier adoption

• Create a long-term cash incentive, that steps down with aggregate installed capacity

• Model after California Solar Initiative

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Net billing

Cash incentives

Loan guarantees

Tax incentives

Structure Stakeholder implications

Financing

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Business models


Three key hurdles for distributed solar financing in Chile

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High upfront cost and long payback

period

Small scale of individual systems

Unclear risk for financiers

• “Upfront cost of solar PV systems is not affordable given income levels in Chile.” – Chilean academic

• “Average payback period of PV systems is 8-10 years. Consumers want as short as 3 year payback period.” – System provider

• “The biggest problem with residential solar is the small scale. We usually look at projects bigger than 3MW for loans.” – Chilean bank

• “Need a scheme to bundle small scale individual projects.” – Chilean bank

2

1

3 • “Banks will join only when they fully understand the long-term technical risks.” – Chilean banks

• “Banks are unwilling to lend because the future risk of solar PV systems is still unclear.” – System provider

Interview insights

High upfront cost

Small scale of individual systems

Unclear risk for financiers

Financial mechanisms can help distributed market overcome hurdles

• Third party ownership (TPO) models (PPAs and leases) can minimize upfront cost and remove barriers for home and business owners

• Bundle individual projects to induce financing from banks and other institutions

• Aggregate community demand to drive down cost and achieve scale

• Introduce mechanism(s) to reduce financing risk (e.g. loan guarantees)

2

1

3

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Key hurdles What Chile needs

Stakeholders support leasing

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1

“We are thinking of solar PV leasing as a potential business of ours.”

- Distribution Co.

“Financing is common in Chile. You can finance many things, from leasing an automobile to payment plans on small purchases at the supermarket.”

- Int’l system provider

“As long as the cash flow is transparent, we are willing to participate in leasing schemes.”

- Chilean bank

“Solar leasing is not available yet, but we would be willing to consider the option. We lease nitrogen gas equipment and are considering leasing micro-hydro power.”

- Local winery

Distributor System provider Financiers Users

Several solar financing company bundling models exist in the U.S.

Models to bundle individual projects

Lead-Gen Sales Financing Installation Monitoring

Vertically integrated

model

IInstaller Partners(use sales software provided by

CPF)

2

Installer partnership

model

Financing focusedmodel

IInstaller Partners

IInstaller Partners

IInstaller Partners

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Models to bundle individual projects

Solar developers bundle small-scale systems for large investors

Tax equity structure (sale-leaseback) Tax equity investors

• Investors can benefit from commercial tax incentive available for solar

– Investment Tax Credit (30%)– Modified Accelerated Cost

Recovery System

2a

• Requires >$USD 75M, corresponding to 2,300+ systems

Benefit

Scale

Example Investors

• 10-15%Avg. return

Tax equity

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3 4

Lease

Lease back

Installation

Lease payment Sell syst-ems

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Group-purchaseprograms

Crowdfunding

(One block off the grid)

• Started by Portland area neighborhood association, now expanding nationally

• Interested neighbors come together to choose a contractor and bulk purchase, resulting in 15-20% discounted price

• “Groupon” model for solar• 1BOG negotiates with contractors for a ~15%

discounted price on behalf of users• The deal is posted on 1BOG’s website and

potential customers sign on

• Crowdfunding platform for solar projects• Can invest minimum $25 with a 4.5-6.5%

expected rate of return• For-profit, certified B-Corp

2b

Collaborating with a municipality is one bundling option for the Chilean

market22

Examples in US Description

Community-based initiatives also provide a mechanism for bundling projects

Education and capacity building

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Business models


Lack of education and capacity across the value chain impedes market development

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• Interviews revealed a widespread lack of education and capacity re: distributed solar in Chile

• Education must be focused on multiple stakeholders

• Education must be reinforced by experience

• Public incentives can accelerate learning curve“Government must be educated

across departments” – Gov’t official

“Gov’t-led education is currently overly complicated and too costly.” – solar customer

“Educating banks is critical so they can assess risk and understand industry potential.” – solar service provider

“There is no one who can do it [install solar PV].” – solar customer

“Gap between low-skilled labor and upper-class academics. Need technical installers in the middle.” – solar service provider

“Most communities know only a little about solar.” – environmental activist

“Bankers are uneducated due to no [distributed solar] industry conferences and not participating in the due diligence process.” – Chilean banker

“Government is in early stage of capacity building…next step is to start training programs.” – Gov’t official

Consumers Installers

Government Financiers

Key insights

Education requires a strategic, coordinated approach

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Vision: set by public sector at national level

Awareness: public campaigns with endorsements from trusted actors

Education: academic

Transfer responsibility: from public/private to private

Market maturity

Phase

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3

4

Foun

datio

nDe

ploy

men

t

6Publ

ic E

xit

Stakeholder buy-in and participation: contributions from actors across the value chain

5Capacity building: vocational, experiential

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Scal

e of

effo

rt

Consumers

Nati

onal

Loca

l

InstallersGovernment Financiers

Vision

Awareness Campaigns

Certifications

Primary School Prgms

Vocational Training

University Programs

Start-up Competitions

Industry Conferences

Community Workshops

Public Endorsements

Online Platform

Many education and capacity building campaigns are needed to affect multiple stakeholders

Targeted stakeholder group

Chile can emulate California’s successful education and capacity building campaigns

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Vision Awareness

Education Capacity Building

Business models

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Business models


Chile needs a strong solar provider to catalyze market development and prove concept

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Financing

Education and capacity building

Three pillars Fundacion Chile’s objectives

Lead Chile’s adoption of clean energy

Create a new economic sector

Incent foreigndirect investment

Sun Co.

Incubating a full-service solar provider alignswith Fundacion Chile’s long-term objectives

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Lead Chile’s adoption of clean energy

Create a new economic sector

Incent foreigndirect investment

Long-term objectives

• Connect currently disparate actors in the value chain (e.g. solar leasing, education)

• Go-to-market

• Leverage newly formed policies and provide proof of concept

• Train workforce• Connect ancillaries (e.g. software)

• Partner with reputable multinational(s)• Import equipment and technology• Seek foreign financing / capital through

growth story

Role of service company

Sun Co. needs to define four major elements of its go-to-market strategy

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Go-to market

Product / service offering

Target customer segments

Branding and communication

Partnerships

1

2 3

4

Sun Co. needs to define its product and service offering

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Marketing, lead generation and sales

Design, engineering, construction

Operations and maintenance

Utility scale synergies

Self-contained systems

Proprietary quoting software, solar leasing, connects customers to

installers

Integrated solar provider, includes boots on the

ground, financing solutions, O&M

Traditional utility scale developer, entered rooftop

solar through subsidiary, vision of autonomous households

Financing solutions (e.g. solar leasing)

1

Private, ~$40M+ VC fundingRecent $125M lease funding

9 U.S. states, 3 countries

$3B market cap~$129M revenue

15 U.S. states

~$8B market cap~$8B revenue

16 U.S. states, 9 subsidiaries

Sun Co. should target customers with clear economic case and low implementation barriers

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Barriers to Financing

Barriers to Implementation

Low High

Low

High

Light commercial

High income residential

Government buildings

Community solar

Lowincome housing

General residential

Relative market size

Wave 1

Wave 2

Wave 3

2

Brand building will be key to Sun Co.’s success

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This house ispowered by the sun

Sun Co.

xwlkasjfd

Interview insights point to the importance of brand

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“Market as a luxury item that is aesthetically pleasing.”– Chilean entrepreneur #1

“Chilean people are “style oriented.” In order for a new technology to be adopted, it needs to be recognized as “cool” for end-users. ”– Chilean entrepreneur #2

“Chileans do not trust entrepreneurs.”– community leader

“I’d probably hire a German company. I trust them [German companies] a lot.”– Chilean banker

Leverage consumerism

Make “green” trendy

Create reputation of

trustworthiness

Key partnerships will allow Sun Co. to rapidlybuild reputation and gain requisite scale

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Int’l solar partnerships Financial partnerships

• Sun Co. needs to partner with reputable equipment providers

• May partner with international service provider to bring best practices

• Int’l brands allow customers to trust Sun Co.’s quality early

• Int’l partnerships provide exit opportunities

• Allows Sun Co. to operate a lean funding model and focus on core competencies

• Minimizes transaction costs• Exhibits credibility• Provides breadth of offering to

customers• Facilitates knowledge exchange

and standardizes operating procedures

4a

View existing solar players as complementors; approach education and policy with one voice

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4b

ü

“Boost NCRE adoption, with special emphasis on solar.”

üü

üCreate public awarenessCertify partners and productsEncourage development of installer best practices

Promote favorable policyEncourage national requirementsAdvocate for NCRE incentives

üü

Education &capacity building

Publicpolicy

A strong foundation and strategic choices will enable Chile to lead in distributed solar

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Business models


Distributed solar brightens Chile’s future

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Chile’s Future

Reduce wealth inequality

Supply energy to support industrial growth

Reduce carbon footprint

SustainableGrowth

HealthyPopulation

Smartjobs

Environment Society

Economy

Environmental leadership

Diversify economic growthCreate service exports

Democratize energy generation

Insulate from price volatility

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Thank you

The Democratization of Energy Distributed Solar Energy in Chile

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