USING DATA TO REDUCE THE COST OF CAPITAL FOR SOLAR
Written By: Stratton Report
September 19, 2016
An interview with Richard Matsui of kWh Analytics
On September 7, kWh Analytics, a risk management platform for the solar industry, announced it had launched a new financial product called PowerLock, aimed at reducing the cost of capital for solar projects by providing A-rated insurance company guarantees for solar project cash flows. To learn more about this new product and its impact on solar project finance, Stratton Report spoke with Richard Matsui, CEO and Founder of kWh Analytics. We discussed both the product and the company’s business model.
Stratton Report: What was the inspiration for kWh Analytics business model?
RICHARD MATSUI: The motivating vision for the company is to be the CoreLogic of solar. We were a bunch of solar guys who knew that the cost of capital in the home mortgage market was much lower than the cost of capital for solar projects. We saw that one reason for that low cost of capital was because there was a company, CoreLogic, which had put together data on 99 percent of all the home mortgages in the US, and provided a lot of tools to analyze that data. All that data and analytics meant that the risks and opportunities in the home mortgage market were very well understood, which allowed mortgage lenders to price their loans relatively inexpensively and still make money. So maybe three years ago we met with the chairman of CoreLogic and talked about solar finance, and how the presence of one company in a field that pulls all that data together, and provides the analytics could really help investors and lenders to get comfortable with solar as an asset class. And he said, “Look, if solar is as big of an opportunity as you guys think, you should get after it because someone will do for solar what we at CoreLogic did for mortgages. Because every mature asset class turns out has a quote unquote CoreLogic for that space.”
RM: Meaning if you look, that there’s a third party company that aggregates the data on commercial mortgages, and there’s one that has the data on aircraft leases, and there’s one that knows everything on student loans. There’s even one that has data on 95 percent of all the world’s oil and gas refineries. To give a more accessible example there’s Experian, which aggregates data on you and me for unsecured personal credit. They’re a third party company that’s collecting all the data, doing the analytics, filling in the credit scores and enabling credit card companies to deploy capital against the risk of our credit card bills. And it turns out, the chairman of Core Logic had also been the CEO of Experian. So, that was a really big conversation for us, and it then helped us to understand how data can play a transformative role in helping an asset class to mature.
SR: So how did you respond to this insight?
RM: We went out and assembled the largest repository of data available today for solar. Which means, that we have roughly ten percent of all the data that’s available for solar power projects here in the United States. And, of course, we’re not resting on our laurels, we’re working to get to the 99 percent level.
SR: How did you secure that data?
RM: We provide software for solar investors to help them be more intelligent about the investment they’re making. And part of the deal is that we get to use their data.
SR: Can you take us through the reasoning behind your new product, PowerLock?
RM: The high level idea for us is to make solar bankable. Of course, bankable is a terrible word to use, because as you’ve probably aware in the solar industry, the word bankable gets used so often that it has been rendered virtually meaningless. Everybody and everything claims to be bankable. However, when we use it, we mean “acceptable to a bank.” And in THAT sense, we’re bringing to the table two A-rated insurance carriers, with an A-rated balance sheet behind it, which provides a guarantee for the cash flows coming out of a solar project that will be used to pay off project debt. And, our guarantor can credibly promise to do that for the life of the project financing, even though solar projects are 30 year assets and financed with long term loans. In the solar industry it’s hard to see any company that’s been around for 30 years. But it’s a good bet for a lender that an A-rated insurance company will be around for 30 years.
SR: How did you get the A-rated insurer to do this for you?
RM: First we assembled performance data on ten percent of all solar projects in the US, and then we built a predictive model on top of that data. If you came to us with a solar project, and you told me it’s using ABC panels with XYZ inverters, and this construction company, and in this location, and with this kind of pipe, we can draw out for you a probabilistic graph of the energy outputs for your solar project. And that’s the sort of actuarial analysis that an insurance company needs to really feel confident about deploying capital against a given risk.
SR: How will your guarantee make solar finance more efficient?
RM: If you go to ten banks with a typical solar project, most of them would tell you they don’t understand solar and turn you away. Eventually you’ll find someone who will lend to you, but at a high interest rate that is going to reflect the fact that the lender is one of the relatively few games in town. And because the lender doesn’t really have good data on solar projects, it is going to protect itself by forcing you to put in 30 percent of the project capital as equity, and to keep that money in the project for the length of the financing. Having that capital tied up in your solar projects for the next 30 years is far from ideal, because there’s a lot of other things you want to be doing with that equity, like build new solar plants. We’ve seen an opportunity to change the game because we’ve been able to guarantee between 90 and 95 percent of the energy output from solar projects (and, of course, the cash flows therefrom), and have that backed up by A-rated balance sheet. So now, you could go to all those lenders who admit to not understanding solar and tell them they don’t have to believe anything you’ve told them about how great your project is, they just have to believe that Swiss Re is going to be around for 30 years, and that Swiss Re is standing behind the project’s cash flows. And not only should those banks lend to you, they should be willing to give you a larger loan, with less equity tied up in the project and at a cheaper rate (because there will be more competition among lenders for your loan). Our vision over the last five years has been to use data to drive down the cost of capital for the very capital-intensive industry that solar is, and we think that this is going to be a really exciting way to do that.
SR: When the cost of the guarantee is factored in, will this always result in cheaper financings?
RM: Not every project is going to pencil out. We have data on thousands of projects and not every system performs equally well, and obviously the cost of insuring the poorly performing ones can be quite high. But to your point, we do think there is enough of a difference in the cost of the financing relative to the cost of the guarantee that for average projects or high quality projects that there’s a really interesting opportunity to lower overall financing costs.
SR: When you explain that you have this product that involves insurance, do solar financiers respond well?
RM: It can take some explaining. There are a lot of insurance products in the solar space, but they tend to insure very narrow risks and that doesn’t really give lenders much comfort. They insure the performance of the solar panel, or the weather, or the inverter, or the quality of construction but as a lender you really don’t want five different insurance policies on a project. If something goes wrong, you’ll be stuck in a legal blame game between the various insurers. And so what we’ve done here is we’ve rolled them all up into a single policy and which really gets to the main point, which is cash flow. Of course, the only reason that the insurance companies will accept this risk is because we have all this data, which is an insurance company’s lifeblood. Historical, actuarial data is in an insurance company’s DNA.
SR: So how do you and the insurer work together?
RM: Insurance is about three things. One is the balance sheet, two is the underwriting and three is the distribution of the product. Our two insurance carriers, both rated “A” or higher, have balance sheets that are credit worthy by anyone’s definition, and that’s their part of the deal. kWh does the other two pieces. We do underwriting using our large database and models to help us quantify the production risk (that is, the cash flow risk) associated with a solar deal. And we do product distribution. Because we’ve been selling risk management software to solar investors for four to five years, we now can use ourselves as a sales channel. Our customers are the exact type of people who are interested in buying a policy that will help them get better terms on their debt. In the insurance business the term for what we’re doing is an MGA, a Managing General Agent.
SR: is this product designed for all solar projects of all sizes from utility scale down to through commercial to residential rooftops?
RM: We do all three. And we can do them around the globe. The US represents somewhere between five and ten percent of the global solar market and everybody’s got the same issues. So we’re also talking to a couple of solar project owners in foreign countries such as Japan and India.
SR: Does your product only insure the cash flows from physical equipment, or could it be applied to financial transactions like solar securitizations or yieldcos?
RM: The categorical answer is yes. Anytime you’ve got someone who is trading in solar cash flows, our product can bolster the credibility of those cash flows and that bankability of those cash flows.
SR: Is there any upward limit to how much exposure the insurance companies will bear?
RM: If you include the reinsurance market, the insurance industry is a multi-trillion-dollar affair. And insurance companies are very hungry for new risks to underwrite. The question for them, of course, is can they do it profitability? If they are confident that they understand the risks and the opportunities, they would love to get involved with a multi-billion-dollar asset class that is going to double in size over the next four years. So it always comes back to the data. Without the data there’s no way that you’re going to create the trust needed for an insurance company to do this sort of business.
SR: Have you discussed this product with real live lenders and borrowers?
RM: The conversations we’ve had to date have been very positive. The fact is, no one involved with the solar industry would disagree with the statement that solar finance is very inefficient as it is currently structured today. And if we can help make the process more efficient, people are quite supportive.