Back when it was an expensive, unproven technology, solar energy was driven by hippies in sandals rigging up off-the-grid systems. About a decade ago, change-the-world Silicon Valley types hoping to make gazillions of dollars entered the fray, raising venture capital and promoting moonshot projects, like futuristic solar farms in the Southwestern desert.
Now come the financial service professionals. Because when it’s structured properly, the business of building solar panels and generating carbon-fee electricity can be a solid investment. Not a killer one that will mint billionaires overnight, and not a do-gooder plunge that will pay socially conscious investors below-market returns. But rather a mainstream vehicle that appeals to middle-aged guys in khakis who are more concerned with creating reliable streams of income and beating benchmarks than they are with saving the planet.
Solar, in other words, has become basic. And that’s good news for people worried about global warming and emissions.
I came to this realization in an office suite in Old Greenwich, Connecticut, the heart of financial services country. This is the headquarters of Altus Power America, a five-year-old builder and owner of solar systems started by two financial services veterans. On Oct. 13, Altus announced it had closed a deal to manage $125 million of cash from units of the Blackstone Group, one of the largest financial corporations in the world.
Altus’ founders are Lars Norell, a native of Sweden who started his professional life as a lawyer and later worked at Credit Suisse and Merrill Lynch, and Tom Athan, a veteran of Société Générale and AIG Financial Products. When the financial crisis hit, they thought about creating their own investment fund, as did so many other refugees from giant institutions. Unlike many of their peers, who were rounding up cash to invest in distressed assets, rental housing, or emerging market debt, Norell and Athan looked into solar. “’It works in Europe, would it work in the U.S.?’” Norell says, recalling their thought process.
At the time, solar was just starting to make sense as a business in the U.S. due to several factors: aggressive incentive programs in states like California and New Jersey, generous federal tax credits included in the 2009 stimulus bill, and the declining cost of solar panels thanks to China’s manufacturing boom. Norell points to a solar panel on the wall in the office. “That used to cost $1,200 and now it costs $150,” he says. The price of installation has fallen, too, as engineers figure out more efficient and effective ways to erect panels. In California, for example, the price of installed capacity per kilowatt hour fell by half between 2009 to 2013.
But perhaps the most important innovation came in the business models. Solar systems require large, upfront investments and take a long time to pay off, even after the price reductions. But new methods like leases (in which building and home owners lease the panels from third-party owners) and power purchase agreements, or PPAs, under which a third party builds and owns the system and then sells the power to the building owner at a discount to the utility rate for a long period of time, have made solar more appealing. With PPAs, consumers get cheaper power (at rates up to 20 percent lower than they’re paying for conventional power) without putting any cash down. And because PPAs often last for 20 years or more, they create a stream of income for investors and owners the way a bond would.
Joined by a construction expert, the founders of Altus used $4 million of their money to start bootstrapping a few tiny deals in 2009: a 47 kilowatt system on top of the headquarters of A Royal Flush, a porta-potty business in Bridgeport, Connecticut; a small one on the roof of a T.J. Maxx in Massachusetts; another on a synagogue in Bethesda, Maryland. “We proved we could use the money to build a solar system that would produce electricity and connect to the grid when you turned it on,” Norell says. Next, they raised a second, $6 million fund, mostly from friends and family, and built another 14 systems in 2010 and 2011. (Here’s a list of the company’s projects.) After Altus raised $10 million from a wealthy family in Greenwich, an insurance company offered the company $35 million to manage.
In other words, Altus quickly morphed from using its own money for demos to selling investments in its building projects to commercially minded investors. And the principals developed a sales pitch that eschews talk of rising sea levels in favor of terms like IRR (internal rate of return) and cash flow. “The question any investor asks is how much cash flow they’ll receive,” Norell says. “We have delivered annual returns of 8 to 10 percent to our investors.” (The offering documents he showed me bore that claim out.) And in a world of exceedingly low interest rates—a 10-year U.S. government bond pays interest of only about 2 percent per year—that’s quite appealing.
How does this work? Take a hypothetical example. If Altus builds a solar system for $1 million, it receives a 30 percent federal investment tax credit, which it can use either to offset taxes or sell to a bank or financial institution. Upon completion, then, the fund immediately receives about $300,000 in cash. Combine that with the payments for the power the system produces—about $70,000 a year—and Altus can offer pretty consistent quarterly returns to investors over a long period of time. And it can do more to goose returns—some states provide credits for energy production that can be sold, for example. And after several years, Altus can sell its portfolio of systems to another investor, providing further returns.
In fact, financial engineering has turned solar into a rather conservative, low-risk investment. Altus and many other solar investors aren’t trying to reinvent the wheel, or even improve it much. As the company notes in its literature, we “invest in power generation assets, not new technologies.” Like other asset managers, Altus takes a management fee and a percentage of the profits above a certain amount. And it generates returns that are both reliable—building owners tend to pay their electricity bills in good times and bad—and not necessarily correlated to the broader stock market. “Solar is ridiculously stable,” Norell says.
To use the jargon of the trade, the business is now scaling. Armed with the infusion of cash from Blackstone, Altus is looking to build bigger systems. In October, it sealed a deal to build a 4.3 megawatt solar plant in Hampden, Massachusetts, and essentially sell the output to the town of Longmeadow. That’s more than 100 times the size of the first system Altus build in Bridgeport five years ago.
More and more, the conversations around solar no longer involve carbon emissions or global warming or Solyndra. The pitch is almost purely financial—to investors and to customers. The group at Blackstone that invested in Altus doesn’t have a mandate to make socially useful carbon-free investments. It has a mandate to look for low-risk investments that can provide good returns. And when Norell and his team pitch building owners, it’s a simple one. “We’re a large company, we have good insurance, we know more about roofs, we have plenty of track record. All we’re offering is a way to cut your energy costs by $200,000.”
