Taking solar asset management seriously
This article has originally been published in the issue 27 of PES Power and Energy Solutions.
The solar market has been growing at breakneck speed and the predictions for the future are getting growing bolder by the day. However today it is not just the project developers, hardware manufacturers, EPCs and banks and who are keeping busy supporting the solar industry’s growth.
As the global installed base for solar is expected to surpass 200 GW this year, there is already quite a significant base of solar assets to manage on a day today basis. Until about a year ago the concept of actively managing solar assets has always been a bit of an afterthought. Investors and banks had been sold the thesis that solar is a very low risk asset class with predictable cash flows. But this does not mean that solar does not require any asset management. Regardless if the sun shines or does not shine, the banks want to receive their debt service in time. And the PPA off taker wants their guaranteed solar energy delivery as scheduled. All the investor cares about at the end of the day is receiving the returns on investment they expect. And someone has to ensure that this happens.
Enter the solar asset manager. What does the asset manager do? In the industry there is still a wide spread conception that Asset Management is the same as operations and maintenance (O&M). But there are actually four distinct roles in asset management.
One of the roles includes taking care of the “wellbeing” of the physical assets. Activities include regular inspections, maintenance, calibrations and cleaning, but a can also include maintenance of the site on which the asset is located, for example vegetation abatement, snow removal or erosion control. A second role takes care of the active monitoring of the asset, taking care of any corrective maintenance and looking for performance improvements. Together these 2 roles are defined as O&M or technical asset management.
A third role manages the project company that owns the asset. This includes taking care that all regulatory and contractual obligations are met, ensuring that vendors and subcontractors are doing what they are supposed to do and making operating decisions that affect the profitability and cash flow of the project company that owns the asset. This role translates the kilowatt-hour into dollars. Initially the industry referred to this role as “owners representative”. Now it is more generally referred to as commercial asset manager or just asset manager. A fourth role manages the regulatory, financial and administrative dealings with end investors. This role includes conducting board meetings, sending statements to investors and making dividend distributions.
Until recently the activities many companies combined these four roles in the same organization. But vertical segmentation along these roles is starting, essentially evolving down the same road as many other more mature industries have gone. There are now a number of independent O&M and asset management firms in the market that each offer specialized services. Particularly the role of the asset manager is going through significant transition. For the first time ever, there are a number of conferences dedicated to the solar asset management this year, reflecting the increasing interest in and importance of this activity. But other than just the growth in the underlying market, why is solar asset management becoming so important?
One of the drivers behind growth in importance is that the market is changing rapidly from a regulatory driven industry to a market driven environment. The days of sitting back on the couch waiting for feed-in-tariff payments to arrive are over. Many of the solar projects today involve selling energy to a third party and monetizing one or more forms of environmental attributes. Perhaps the energy is sold at a floating rate and the asset manager needs to swap it to fixed rate to be able to qualify for project finance. Or part or all of the energy is sold on an energy exchange and the asset manager may use storage to make smart trades. The same storage may also be used to create an additional revenue stream by selling services to the grid, such as capacity or frequency regulation. As multiple revenue streams from solar energy are stacking up, it creates the need for additional commercial and administrative resources.
Another factor driving the importance of the role of the asset manager is the change in type of investor in solar assets. Early investors in solar were often individuals, family offices and private equity funds. As the asset class is getting more mature, it is attracting new categories of investors. In general, these are professional investors who expect the same level of professionalism from their asset managers as they are used to with the other asset classes they invest in. For asset managers this means increased diligence, focus to compliance, more in-depth reporting, and increased focus on generating cash. Probably the most demanding investor out there today is the so-called YieldCo, who is taking asset management requirements to a new level. The YieldCo’s key metric is “CAFD” or cash available for distribution. The more CAFD the solar asset produces, the more successful the YieldCo will be and the easier it will for the YieldCo to be able to fund future acquisitions of solar assets. This is why YieldCos will measure the success of the asset manager directly in form of this metric. The rise of community solar also is an interesting space to observe, as the community solar company most certainly will outsource asset management to a third party to deal with the different needs for the different types of shareholders. Lastly the emergence of crowdfunding platforms creates entirely new challenges: some of the newer crowdfunding platforms offer investors the ability to invest in specific solar panels. This investor model is expected to tap a whole different type of funding. But it will also generate a significant additional administrative burden on the organization that administers the crowdfunding platform as asset managers will need to be able to track cash generation on individual panel level.
Cost factors are another important reason why asset management is getting into the spotlight. Distributed generation assets cannot be managed in the same manner as large power plants. The asset management workload is directly related to the number of sites, the type of solar assets, their geographical dispersion, the complexity of the project documents and the financing structure - and not to the MWh that the plant produces. This is why distributed generation portfolios are often bundled in portfolios to make the numbers work. Industry is trying to create standards for project documentation, which should hopefully create efficiency gains. But by far the most effective way to manage costs is to create efficiency around asset management workflows, such as performance analytics, invoicing, accounting and reporting. Successful asset managers will be very organized and will need to automate these asset management workflows as much as possible to keep costs down.
If the sun shines or does not shine is not something asset managers can control (yet). But pro-active and efficient asset management will certainly help generating the returns that investors are expecting, which will stimulate further investment in the solar industry.