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Management in Practice

Can better financing make solar hot?

Soltage is one company looking to finance the widespread adoption of clean, cheap solar power.

By Ted O'Callahan

As Route 1 ribbons across Connecticut, it is packed with big-box stores and strip malls. Pilgrim Furniture City in Milford sits across from a Costco and a La-Z-Boy store. The roughly 1,500 solar panels on the roof of the 80,000-square-foot furniture retailer implicitly point to the untapped opportunity in the millions of acres of unused roofs across the country.

The breakthrough that got Pilgrim Furniture to go solar wasn’t technological but financial. The company got assistance from the New Jersey-based startup Soltage, one of a number of regional solar power providers mixing the environmental expertise and business acumen to provide medium-sized businesses and municipalities with renewable energy that is economically competitive with non-renewables.

Rather than confronting customers with millions of dollars in upfront costs, Soltage buys the solar panels itself, and designs, installs, and maintains generation systems. The company provides the expertise in tax incentives to make sure nothing is left on the table amid shifting local, state, and federal rules. And it offers the brokerage skills to manage the emissions commodities that are now traded in some areas. Customers provide the roof space for the array and sign a 15- or 20- year contract for electricity, at rates that are typically less than those charged by the local utility.

Soltage COO Vanessa Stewart '08 says, “I think of it as a mutant company taking the best from all the different industries: finance, engineering, construction, sales, technology evaluation, and advancement.” She adds, “It's about fine-tuning models that have worked for other industries into something that is really tailored to the customers that we work with.”

Brad Gentry, director of the Center for Business and the Environment at Yale, says, “The innovation is not so much the solar panels but the financial structures and business modeling. A lot of municipal or commercial buildings would love to find an alternative to the local utility.” In some parts of the country, high energy costs make solar cost-competitive even before various incentives are figured in, but spending anywhere from $2 million to $30 million to purchase a commercial solar array stops many organizations. “Even if they have the money for that sort of capital investment, most companies prefer to put it into their core competency,” Gentry adds.

Because Soltage is taking on the costs of the many systems it installs and makes the money back only through ongoing electricity production, the company has to operate on an extended time horizon. Stewart says, “We consider these large, long-term investments. Based on the criteria these projects have to pass through within Soltage, we’ve got a good level of certainty that the bets we’re making will realize, if not greatly exceed, the value we’re expecting.”

The systems Soltage uses work best on large roofs and, because of installation costs, don’t make sense for businesses that may shift locations every few years. But for many warehouses, schools, and commercial properties it is an opportunity to save money while choosing an environmentally-friendly power source. “Energy costs can account for 17% of operating costs for many businesses,” Stewart says. “We offer our clients a way to diversify their energy procurement strategy and control that aspect of their costs. They're fixing their rates. They've got predictability for years into the future, which is something that no other energy source can provide. For a lot of businesses, that predictability is nearly as valuable as the savings themselves.”

The energy supplied by an array ranges from perhaps 20% of what an energy-intensive business like a cold-storage warehouse might need to 80% of what a retail space uses. For solar arrays that are hooked into the electrical grid, regulations cap average production at 80%. But by integrating with the grid, a company can sell excess power from the solar panels, typically produced during the peak hours when electricity rates are highest, to the utility — further reducing overall energy costs. And if a system is ever underperforming text messages are sent to Soltage’s operations and maintenance crews before the customer would ever notice.

The idea for Soltage came out of a business plan class at the Yale School of Management which Stewart took along with Jesse Grossman who is now Soltage’s CEO and a graduate of the Yale School of Forestry and Environmental Studies. The pair began raising funding for the venture immediately.

A 2008 McKinsey study describes the global solar industry as being in its “infancy.” The report forecast growth from the current 10 gigawatts of installed solar power to 200-400 gigawatts by 2020. Such rapid growth is expected to bring a slate of organizational, financial, and technical challenges.

Nancy Pfund ’82, a San Francisco-based venture capitalist who has invested in several solar companies, has seen a change in the solar power providers springing up in the last few years. “It has been a mom-and-pop industry to this point. There has been little optimization of the various aspects of the business. The level of sophistication is rising quickly.”

Another company working on the problem of upfront costs is SolarCity, started in 2006 in California. The company offers long-term power-purchase agreements similar to Soltage’s, as well as leasing arrays. Thirty percent of its business is commercial, but residential work is its primary focus. CEO Lindon Rive says, “We’ve grown from 2 employees to 400 and we’re now the largest residential installer in the U.S.”

Soltage has also prepared itself to scale. “We spent a lot of time setting up the equipment supply partnerships and sales strategies to be able to respond to rapidly growing demand,” Stewart says. That approach is paying off: with the company’s first few projects operational, “the floodgates have opened, and we are really ready to respond.”

The company also put a great deal of effort into educating investors who, even if they were experienced in energy, generally hadn’t worked with solar power. Energy-sector investors are generally accustomed to high levels of risk; over time solar is a very predictable energy source. With maintenance, installed systems produce reliably for 40 years. “Everyone investing in these solar projects, up and down the supply chain, has that predictability, which is unique,” Stewart says.

Solar power isn’t yet as ubiquitous as the big-box stores on Route 1. But Stewart is seeing a shift, driven by the change in business model. “The commercialization that we're pushing for, along with the rest of the industry, is driving down prices. We're right on the brink of being able to compete in retail energy markets without incentives. We are getting to the point where solar power is what it can be: predictable, reliable, essentially free electricity.”