Ep328: Optimizing Distributed Generation Assets

(upbeat music) Welcome to Currents, the Nordro's Fulbright podcast. Today we're recording with Barrett Alada, CEO and co-founder of Agilitas Energy. He joins us today to discuss his vertically integrated energy business for developing renewable energy projects in the US and give us an update and why he picked the business model. He did and anything else that happens across his mind today. So thanks for recording with us. - Pleasure, Todd, thanks for having me. - Okay, so one, there's so many developers out there and there's a lot of different strategies for developing. What is your strategy and why do you settle on it? - No, it's a definitely thoughtful question, especially given the current market circumstances. So we are a mid-market energy company. So we look at the world as an energy company does specifically within the distributed generation sector, which means that we have always built, owned, and operated our assets. Many people within what I would call the DG mid market have specifically focused on one aspect of the project life cycle, whether that's developing a project and selling the paper or building the project as a EPC or end up being the end asset owner. There's not really many integrated companies and in the marketplace. And so we are fully integrated. We do our own development, both M&A of projects operating and notice proceed as well as green field of regeneration. We have our own in-house engineering and procurement and construction management capabilities, which allows us to go ahead and optimize the project that we're gonna eventually own and operate. And then fundamentally we have a strong power markets background where we have a team of people with decades of experience coming originally from the thermal generation side of the business and being able to take that ISO regulatory kind of framework and knowledge and being able to put them on operating sleep. And so with that we're able to go ahead and I believe have the best outcomes as it relates to project performance as well as just overall. - I can't say this for certain because I don't know that every company is confirmed this to me, but I think I always thought at least looking at these companies, I agree with you that there were a lot of companies that were out there that kind of got the project ready to be built and then they flipped it. There were other guys that would buy from them and then take them to the construction and then there are other guys who just really wanted to clip coupons and they'd buy operating assets. And to me it made sense to do it that way because the cost of capital and the risk you're taking is very, very different than any of those stages of the life cycle. And what you're throwing out there is somebody who's got the skill set to see the project through all life cycles. So how did you manage to raise the type of capital that worked at all those different risk points and keep everybody happy? - That's it. - Yeah, so it's really interesting. It's definitely as with all business chasing the lowest cost of capital. And fundamentally a lot of what we do is by having it all in house and all within the platform itself. We're able to de-risk across all of our projects and assets from the beginning to the end in terms of what ones go ahead and achieve success versus what ones end up failing. And so what I mean by that is a lot of the counterpart is in the market that are going at and doing development and selling the paper. We'll go ahead and throw spaghetti against the wall for lack of a better term and try to shop an approach to finding assets to then go ahead and sell. With us, it's more of a disciplined approach. We're only targeting markets, programs, and specific types of incentive structures that we want to own because we're not ever doing a development to sell to another counterparty. We're doing a development and then a bench will build for something that we're gonna own on our balance sheet. And so it's surprising that when you're able to be in every type of value creation point within a project and have a disciplined approach in terms of what you're looking to develop for yourself versus just trying to maximize the flow of paper and market, you're able to go ahead and have a very attractive outcome, right, and then the cost of capital becomes less important because you've had assets made money every step of the way and able to just have an overall higher success rate of projects to actual commercial operation. - So where do you see in today's market, kind of the best opportunities? I think there are from what I know, it seems like there's several developers out there who need to unload projects. So maybe there's some good opportunities there for you. So somebody like you who can kind of, I guess mitigate some of the risks that maybe they couldn't do and maybe has enough capital staying power to hold onto the asset and turn around somebody's pipeline, but you tell me like what for somebody who has the skill set and the capital that you do, where do you see the best opportunities? - Yeah, that's been a shifting environment, I should say over the last several months, right, especially with the OBBA and just even before that interest rate adjustments that the entire market kind of sell. So what I would say is that over the course of our history, we've primarily ended up acquiring projects at Pre-NTP or NTP, but over the last year, so we've seen a huge opportunity with operating portfolios and projects that have already been in existence for some time. I think that, you know, generally speaking within the distributed generation sector of renewable energy, the market has always been focused on new asset generation, but the way that we see it is that, fundamentally, maybe the dirty little secret is a bunch of the distributed generation assets that are already operating and built in the marketplace aren't working to what they were originally supposed to do and they also have just been either mismanaged or neglected or the business model of, I'm going to go ahead and buy a bunch of operating projects, hold them for the tax equity period and then sell them outside a recapture to the guy with the next lowest cost of capital, doesn't exist anymore because there isn't a lower cost of capital because most of this origination has been in the zero interest rate phenomenon period. And so what we've been focused on as of late is actually buying operating projects and portfolios and then optimizing them. And that's primarily because, you know, there's risk involved and there's time involved bringing an NTP project to life. But fundamentally, from a risk adjusted returns basis, being able to buy and optimize, repower, reprogram, existing operating steel is just a better in a quicker flash department. So over the last 12 months, and I would say probably for the next, you know, 24 to 36 months, we see a massive dislocation within the DG market in particular, specifically in operating portfolios and that's where we're gonna focus a lot of our attention. - Have you seen the value that people are willing to pay for operating portfolios changed over time? Or is it really just that you guys think you can through your own kind of proprietary knowledge, eke out more value from what than other of your competitors? Or do you think the pricing just generally in the markets gone softer? - I think it's a combination of both. I would say that yes, the pricing in the market has gone softer. And I just think that is because fundamentally the underwrite scenarios that new buyers are doing, they're changing availability assumptions, they're changing say, community solar delinquency and credit rates, they're changing operating expense. There's just, it's just, they're the rose colored glasses of what the spreadsheet business looks like has changed. And so people just need a higher return because I think that originally what we saw was people really searching for yield when there were very, very low interest rates. And people thought that in particular, solar was gonna act like a bond in terms of just a steady stream of cash flows. But in reality, solar is a machine. It requires a lot of care and seating, especially if you want it to operate properly. And that takes a lot of effort. And fundamentally it takes individual companies that know what they're doing to make them actually perform. So one, yes, hurdle rates have increased. And then two, yeah, we wouldn't just go ahead and buy a project or look at a particular portfolio. Unless we thought there was substantial alpha that we could uncover. And that can be a variety of different things that can be either repowering the system. I'm using that as a broad term, by making changes to inverters. Or if it has a couple of energy storage, making changes so they work properly and making sure that uptime and availability increases, it could be about changing programs that the system participates in. It could be buying out existing PPAs, replacing them with new PPAs that we already have, kind of off the shelf. But doing a combination of things that we believe can add substantial value to get to a higher chart. I'm switching not from the M&A of operating assets and more either to M&A of pre-NTP or just developing stuff on your own. You mentioned the shifting landscape. I mean, clearly that's happened. Kind of taken them one by one. How much additional friction do you think the FIAC rules are going to add to development? We definitely are having to go in drill to the center of the earth to make sure that we're going to be FIAC compliant on our assets. I think that in some ways, it's one of the reasons why it's a thin market on buying NTP or pre-NTP projects at the moment. It's because there's just still some ambiguity around FIAC, around what these long-term services agreements said how that's going to get captured into the FIAC rules outside of just the capital, let me components and the start of construction is going to play in that. So as we're looking at it right now, we have a bunch of batteries, energy storage systems that we are greenfielding, we are under development. By the time that those become NTP, we understand and we have the comfort that we will have the ability to have FIAC compliant systems. We definitely are with some of the larger companies, such as LG and Tesla. Those are in our primary main vendors as it relates to energy storage technology. But if you're bringing a system online within, I would call it the next 12 months, or right post four, kind of the July 4th, 26th, eight, it's definitely one of the things that people got to look at harder. And fundamentally, when we're buying projects that we didn't originate and have maybe different energy storage platforms or products, that aren't going to be FIAC. We then have to take a step back and usually redesign that system with that equipment that we believe is going to be best suited to meet that federal regulatory requirement. And so that's a delay to interconnection and that's a delay to start a construction, which has never been easy to begin with, but this is just another rental. So that does affect what I would say bottom line is it affects pricing in the market and it affects who's going to be the buyer of projects in the market and how to deal with that. - And how big of a chilling effect do you think the loss of the investment tax credit is going to be for the distributed solar business? - So it's interesting, right? Because we have a lot of debate about this at our company all the time. Because on one side, we think that it'll be harmful, I think, for the developers, but on the other side, we are actually kind of enthusiastic about the ITC going away because like with most government incentives, it generally has the perverse impact of increasing prices. So I believe that fundamentally, based on the sunset, you will have the balance of system cost in total system cost of a solar facility decrease. You will not have any more of the apprenticeship rule requirements. You will go ahead and have kind of who is the actual most cost effective components as it relates to the system. And then in particular where we're building systems, the capital equipment components, sometimes are not the most expensive aspect of the system. Right, we just have sidewalk conditions, we have bouts of plant conditions, we have all of these other things that factor into it. And so I think what's happening, right? In the market places, it relates to electricity, is a total addressable market of electricity is expanding in the revenue side of the equation is drastically changing. And that will make up for over the arc of time, the loss of the investment tax credit. This probably is an unpopular opinion, but that's just kind of how we're looking at it right now. - How about on the tariffs? - You know, it's one of those things where it's like threading and needle. Obviously the gentleman in charge changes on a whim between what the tariff rate is and how long it's going to be in place. And if there's a sunset or if there's a pause and everything like that. So we've definitely felt the bite of tariffs within our projects. We've been successful in having a portion of those tariff increases. Go ahead and be dealt with via our master services agreements and put that onto the manufacturer. But now as it relates to the acquisition of equipment, like this is becoming one of the biggest things. Where is it coming from? What type of tariffs in place? Is there an anticipated tariff in place? And what can we do to go ahead and source either from more friendly trade relationships that exist between the United States and at an accounting party? - I took to go ahead and mitigate that risk. - How about storage? Do you think storage is on a much different path now than wind and solar given the different treatment? - I do. I think it's for a couple of reasons too. So one, of course the ITC is being able to extend all the way into the 2030s with energy storage is a big frost for that specific asset segment. But the number two, I think the difference with energy storage is that fundamentally it is a despatchable asset. And that's one of the things that have always been kind of the issue with both solar and wind and its intermittent nature of generation. I do believe that like Congress as a whole probably saw the value in habitat despatchable asset being able to go ahead and despatch energy or take in energy based on what is needed in the grid at the time and I think with the electricity market growing in the way that it's growing and what I anticipate being the increased volatility within the electricity market. Storage 100% serves a core function and probably can get deployed faster than many other types of assets that are also despatchable. That'd be like primarily natural gas generation, whether it's peakers or larger combined cycle power plants that takes a bunch of time. We can go ahead and interconnect dozens that are distributed generation batteries quickly and it need a digital asset allows for it fundamentally to respond instantaneously to price signals as well as electronic signals in the marketplace. So speaking of pricing signals and increasing demand, where do you think pricing is headed here over the next 24 months? I think it's given the reduction in subsidies and tariffs and the man is that just how we just headed towards much higher pricing. Unfortunately, I believe the answer is yes. I think that there is going to be much higher pricing on throughout the electricity market as a whole talking about the entire United States. I think there will be certain elements of the country or certain areas of the country that are going to go ahead and feel it more than others. Specifically, I think PJM is going to have a bunch of problems as it relates to capacity shortages and ever increasing capacity prices, because that seems to be where the majority or a huge portion of the center of growth is happening. And then fundamentally, other areas of the company, excuse me, countries such as ISO New England, that has gas constraints in particular, just does not have the ability, especially during the winter, to have natural gas be less expensive, because of pipeline constraints. And there's just going to be a continued back pressure or electricity pricing. And then fundamentally, if the one other aspect as it relates to the retail consumer is the electrification build out, whether it's all the new transmission, distribution lines, and all the infrastructure upgrades that are just naturally happening, not necessarily even because of data centers, but EV Charging, just electrification of transportation, heat pumps and all this other stuff, that all gets put into the rate payers, electricity rate. And so that obviously is an issue. And then back to your original point, if you remove one subsidy, such as the investment tax credit on generating class of assets that be solar and wind, if you want new generation build, the price signal of the top line revenue of those projects has to be higher to justify new projects, I mean, online. And so it's just that supply demand equilibrium. How much of a bottleneck are you seeing interconnection cues being to preventing the supply from kind of serving the demand and bringing prices down? Are the cues getting worse better? I know there's been a lot of reform. Has it helped it all yet? Yeah, so it's really interesting, right? Because I think during still out in terms of what the cues are going to look like, host the OBBA. Before the OBBA, I can tell you that the interconnection process and cues, it was the stone wall that essentially had everyone on equal footing just waiting to go ahead and get interconnected. I imagine that a bunch of projects are going to drop out of the cues nationally, as the sunset of the IT scene takes its bite. And maybe that will allow the best projects to make their way through. But fundamentally, the grid, both at the utilities, as well as the regional transmission operators or ISOs, move at their own pace. And it's just far easier for load growth to always outstripped new generation in terms of just how that supplied demand equation works. It'll still be the biggest issue. I think that there probably needs to be some form of greater reform even in the market. I know that there's many states that are just frustrated by the ISOs that operate in their state as well. And there's discussions about leaving ISOs and all sorts of things. Because at the end of the day, the voters are going to speak loud as to their governors and their state legislatures in terms of ever increasing electricity supply. And it is fundamentally true that the way you go ahead and deal with electricity pricing is by bringing on new generation. And I imagine that certain states, and you already see it now, will want to take some of that power in their own hands and try to deploy the distributed generation even faster than it is being deployed today. All right, last question for you. And that's in terms of your plans going forward. So we've got all the markets moved a lot probably in the last year. If we had this conversation a year ago, you wouldn't have the information you have now. Are you still focused on DG solar and a little battery? Or do you think you're going to move to focus on other technologies or maybe different parts of the renewable generation sector? We actually recently entered into hydroelectric power because we saw that hydro as a base load generating asset is quite frankly an untapped resource throughout the country and based on the investment tax credits staying in place for that all the way into the 2030s as well as just higher overall electricity price signals. We're going to see a bunch of new hydro come online. We've entered that market. We have our own hydro development team. We acquired two very late stage permanent assets that are on our dams. We're planning on 100% across the country in the right locations but primarily within the PJM market because of the data center price signals that are there. And then I also fundamentally think that as we continue to look at economic signals in the market and just like generally speaking the transition, we will probably look at some gas fire power plants as well on the smaller side. I think that it's an important stack of asset generation within kind of the overall straight work of electricity in the US. So that's another start to investigate. All right, well best of luck in the new hydro venture and helping serve this increasing demand we got here. We need all the help we can get. I really appreciate the time tood. It was great speaking with you. [MUSIC PLAYING] You can find us online at www.projectfinance.law or send us an email at [email protected]. Please rate, review, and subscribe on Apple podcasts, Spotify, or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the currents. [MUSIC PLAYING] [Music]