By Haresh Patel

The next two years will be a bonanza for US solar investors aiming to capitalize on the 30% Investment Tax Credit. If you haven’t made your business New Years resolution here’s a recommendation.

10X your investments and grab market-share with the remaining 30% tax credit while also preparing for the hangover in 2017.

To achieve this goal, hiring alone is insufficient. There isn’t enough time or qualified people to hire. The executives that invest in tools and business processes to boost organizational productivity will dominate project acquisitions and, more importantly, maintain a lean cost structure that will be a must in 2017.

Time is of the essence

2 years may seem like a long time, but examining key investment milestones illustrates that solar investors only have a brief window to expand deal-flow before the ITC deadline.

Looking back to the 2011 expiration of the 1603 Treasury Grant we see that the real cutoff for solar investors actually came when banks stopped looking at projects, which hit about six months before the incentive expired. Therefore, while Dec 31, 2016 marks the COD deadline for the ITC, in order to syndicate financing, investors need all the critical elements of projects lined up by June 30, 2016. Performing diligence on the bare minimum aspects a project before it can be brought to a bank – conditional use permits, the off-take and interconnection agreements etc. – can take a month alone. Investors that need to bring in construction lenders or tax equity investors need even more time. This pushes back the time investors have to fill their deal pipelines even further, by a minimum of 1-2 months (April-May 30, 2016).

Second, the 2011 Treasury Grant expiration demonstrated that there will be severe financing bottlenecks as June 30, 2016 approaches. Banks will be inundated with so many potential projects it will give them the opportunity to pick and choose with discretion. Projects submitted later will face stiffer competition.

Hiring alone won’t solve your problem:

Solar investors that want to scale deal-flow by 10x, in time, solely by hiring more bodies should have done so yesterday. According to a study on hiring processes conducted by University of Chicago economists, filling vacancies in today’s economy takes between 5-12 weeks on average, depending on the size of the company. In the solar industry the available resource pool of high quality talent is small and competition is high. The next best option is to hire from outside the industry and train new employees, which adds another 6 months before they make a real impact. Meaning that onboarding a new group that is capable of boosting deal flow of a significant magnitude is not going to impact business until sometime between July-October 2015, at the earliest.

Putting it all together, a new team essentially has 7-10 months to fill a deal pipeline with 10x more viable projects.

This brief window emphasizes the need to maximize productivity. Investors need to invest in tools and processes that allow them to enhance origination and close deals quickly. Scaling a team by only adding bodies does not ensure success, the key to increasing deal-flow is maximizing the returns on the resources available.

Looking beyond the ITC

Solar investors that have had the foresight to begin scaling without addressing productivity may have limited success with top line growth, but they jeopardize their bottom lines. This will have severe consequences in 2017, when there will be an abrupt slowdown of investment opportunities. Companies with high cost structures will have an extremely difficult time achieving profitability. To compensate for shrinking incentives, solar investors need to learn how to consistently close more MW’s per employee. Implementing business processes that increase productivity today will insure a competitive business beyond the ITC.

Ultimately, solar investment is an execution play and the industry is maturing, which leaves a lot of room for business model improvements. Historical examples of successful execution oriented businesses demonstrate that winners often have the lowest cost structure. Dell Computer sold directly to customers to bypass middlemen, Amazon leveraged technology to keep a lean inventory and generate float, and Walmart is famous for extremely frugal corporate spending and, consequently, aggressive pricing to gain market-share. In solar, access to low cost of capital and a low cost structure will determine the winners. The industry is waiting for the companies with the best business model to emerge and dominate.

Haresh Patel is the CEO and co-founder of Mercatus Inc., a provider of cloud-based software solutions that simplify renewable energy investment.

A Behind the Scenes look at SolarWakeup

By Yann Brandt, Managing Editor

The most common question I get about SolarWakeup is how I do it. How do the 9 articles and the morning thoughts get put together so that they hit your inbox at 7am eastern time, 6 days per week? After SPI in Las Vegas, I figured it was a good time to give you a behind the scenes look at how the wheels turn.

To see where it all started, you have to go back to August of 2012. I had just begun a startup and knew I would be somewhat absent in solar for sometime so I pondered ways to stay relevant to the solar industry. Emulating Florida’s Sayfie Review, I told my wife that someone should do this for solar, when she had the brilliant idea that I should be that someone.

So on August 24^th, 2012 I wrote 15 of my closest solar friends the first of 675 SolarWakeup newsletters (as of 11.17.2014). Today, the list stands at over 2,000 readers who get the 9 articles and 1 thought (100 words or less) each morning. On average almost 30% open the email every day and 11% click on the link within the email. Some of you go directly to the site and then read about 1.7 articles while there.

Your biggest complaint is that the links don’t open into a new tab and when I post an article by Fox News or Washington Times. My biggest complaint is when you don’t publish enough content which makes my part of the process more time consuming (I call this the Monday morning mashup). Your favorite part is telling me how wrong one of the authors is or to give me a scoop, which is my favorite part. I have enjoyed the few exclusives or breaking news that I was able to break ahead of actual reporters and I always love giving advice to companies and executives on how to improve their content.

One fact that is often misunderstood is that I have a daytime obligation, an amazing job with a great company and team (find me on LInkedin if you want to talk work). SolarWakeup is not my job and I do not monetize it, mostly because I want to be able to write what I think is most valuable and not be beholden to the bottom line. I actually spend quite a bit of money to keep the wheels turning but I feel compensated by your thoughts and feedback and the random notes of encouragement.

The biggest secret of SolarWakeup is that I do it at night. At some point between 8pm and midnight, I pull out the laptop and find the articles. Initially I woke up at 5:30am and found the articles then, but my friends know that 5:30am is not my friend and the additional content published overnight is not that relevant.

So I wherever I am, I get in front of the computer at night (eastern time) and find the articles. I find the articles in this order

• Use worthwhile content that was emailed or tweeted to me that day
• Insert any original stories that readers, contributors or I wrote
• Go through my list of ~30 Google news saved keywords like: solar, solar+Romney, solar + report, solar + letter, solar + nytimes, etc.
  • This step typically gets me to about 4-6 articles
• Start going through my list of solar related websites

The list of solar websites is somewhat of a ranking decided by your clicks. I see the articles you are most interested in and reorganize the list of websites according to the success of the clicks. I also adjust based on my judgment so if one site is being particularly promotional or burying specific company (advertiser) info in the article, I push them to the bottom of the list. Some sites also get ranked according to the author so it could be at the top if it is a particular contributor.

Then comes the part about writing the blurb/morning thought. There is little pattern to it but the ultimate goal is to create solar camaraderie or drive action from the readership. I feel like this is the opportunity for all readers to think about the same topic for 30 seconds per day.

Let’s talk logistics. I travel a lot for work, which means that I can be found doing the Wakeup at all sorts of hours, sometimes at noon if I am in Asia. Using SPI in Las Vegas as an example, I would visit with colleagues/clients at dinner, meet up for some drinks and attend a party hosted by supplier. Then when everyone is ready for sleep, I open up the laptop and find the stories. Sorry for the typos….

It has been a great road for the past 2 years plus and it will keep going. I often think it would be great to work with other media platforms or do more original stories. I truly enjoy doing the Wakeup and there are many people to be thankful for that have helped me get here. I hope this quick look behind the scenes was everything you ever hoped it would be. Of course if it leaves unanswered questions, just hit reply on your next SolarWakeup email and it comes straight to me!

See you at 7am!

All The Numbers Of The Vivint IPO You Need To Know

By Yann Brandt, Managing Editor

“According to the filing, ALL of the systems installed by Vivint Solar use Enphase inverters … That means, Vivint Solar bought over 215,000 Enphase products in 2014″

Residential solar has been growing at a pace beyond anybody’s expectation. With SolarCity’s IPO less than a year behind us, Vivint Solar hopes to go public in its latest round of fundraising. While there are comparable data points, Vivint Solar and SolarCity have distinctions as well. From markets, financing products to technology, we break down the Vivint Solar IPO filing, also known as the S-1 filing.

Vivint Solar is owned by Blackstone L.P., a global investment and advisory firm with about $279 billion dollars in assets, as part of the deal where Vivint was sold for  around $2 billion. Vivint is labeled in the IPO as a sister company, focused on providing residential home security systems and services to over 850,000 customers throughout the US. Vivint Solar is expected to trade under the ticker $VSLR and Blackstone will remain the majority owner of the company. Vivint (home security unit) will not be part of the IPO process.

The Market Information

Vivint Solar is currently operating in 7 States including: Arizona, California, Hawaii, Maryland, Massachussets, New Jersey and New York. In 2014, the company expects to open 20 new offices in new and existing markets. Our guess is that Vivint Solar will follow in SolarCity’s path and enter markets where they are not yet overlapping, such as: Nevada, Connecticut, Colorado, Washington D.C., Delaware, Oregon, Pennsylvania and Texas. Of course each State has a timing issue around incentives and costs of electricity which would determine the value of entering the new market.

Vivint Solar maintains a unique sales approach, employing mainly direct sales personnel (canvassing) signing customers up by knocking on doors. The company has 489 salespeople, many of which came from the sister company. After the IPO, the movement of personnel could be limited in a non-poaching relationship. However, the two companies will pay lead referrral fees to each other to help the synergies continue. Keep in mind that Vivint has 850,000 customers and Vivint Solar has only penetrated 2.5% of that amount with 21,921 customers, meaning there is a lot more room for growth from that channel.

Financial Products and Customers

Being a part of Vivint and Blackstone is not without advantages. Financially, Vivint Solar maintains access to a credit line of $70 million dollars from Vivint and the Blackstone relationship brings financial crediblity to the table. Viving Solar currently lists $443million in funds and 53MW of tax equity available to invest. To date, Vivint Solar has contracted with 21,921 customers, with 8,625 customers signing in 2014 almost doubling all of 2013. Keep in mind that SolarCity signed up almost 30,000 customers in Q2 of 2014, still a wide gap. On a total basis, $VSLR has 129MW of systems, bringing the average to 5.9kW though the 2014 average is 6.6kW.

From a financial product standpoint, Vivint stands out. As of June 30th, Vivint has not contracted any leases. Meaning that their projects were done through power purchase agreements (PPAs) with some cash sales likely. The leases will encumber the balance sheet with a production warranty similar to the other market participants. The PPAs are averaging a 2.9%-3.9% annual escalation. Customers are still leaning towards the higher end of the credit risk, with an average FICO score of 750.

Solar Installation Technology Specifications

From 2013 to 2014, the average system size increased from 5.9kW to 6.6kW. The assumption would trend that the increased volume made purchasing higher efficiency panels feasible. Vivint states that the top manufacturers as Yingli and Trina; solar trade tariffs are listed as a risk item but no explicit purchasing strategy is mentioned that would signal a departure from current module suppliers. From a technology risk point of view, Vivint specifically mentioned the Zep acquisition by SolarCity and what it meant losing access to their preferred racking vendor. It appears that being committed to a single supplier is a risk Vivint Solar is willing to continue taking by looking at their inverter purchasing.

Enphase is the preferred inverter choice for Vivint Solar. According to the filing, ALL of the systems use Enphase microinverters. With 30 thousand residential solar installations at this point, that is a lot of Enphase product, and one question we had was exactly how much of North American product went to Vivint Solar. By reviewing the quarterly filings released by $ENPH, we were able to estimate 867,850 inverters sold to the North American market in 2014. During that same timeframe, Vivint Solar installed 8,625 systems/56.9MW with an esimated 25 panels per system. That means, Vivint Solar bought over 215,000 Enphase inverters or 25% of the total North American sales by the company. A risk for both companies for technical and business purposes for sure. Will investors be concerned or ask for a strategy to mitigate the risk seeing that no system has been operational for longer than 3 years thus far.

Financial Position and Review

The balance sheet seems strong, so let’s review the key metrics we are becoming accustomed to seeing from solar asset owners. $VSLR is sitting on $25 million dollars in cash and has credit lines of $57 million with interest rates between 7.5% and 12%. Each individual contract represents a contracted cash flow, meaning that Vivint Solar currently has $647 million dollars in outstanding contracted revenue.

Retained value has become the metric that is not yet standardized across peers. At the last quarter, SolarCity called for a retained value of $1.76/watt while Vivint Solar calls theirs $2.39/watt. At this point, it probably means comparing apples and oranges but will continue to sort itself out.

The IPO

Vivint Solar is ready for its IPO, or so the executives and owners seem to think. The solar industry wants the IPO to succeed, mostly because another strong round of capital injection will support the retail investment thesis that solar represents. Having two comparable publicly traded solar companies is a good to have in the limelight, as more homeowners look to add solar to their home.

Getting the IPO out will be the key, there are challenges ahead which may not be related to solar but how the deal is structured. Remember, SolarCity barely made it out in a more difficult financial climate when it went public at $8 per share. Today, trading at almost 10x that number, we see the financial market ready to bring another company on. But the hope remains that the other peers in the downstream finance space follow and make the IPO leap.