All the Benefits of Solar without the Trouble Via PPAsBy Cas Biekmann | Tue, 09/15/2020 - 12:12
Q: How was Energía Real established and what are the main issues it aims to solve for its clients?
A: The company was founded with the idea of creating a portfolio of energy income-generating assets. From the start, we decided to focus on the long-term power purchasing agreement (PPA) business, so that we could have both an asset and a paper-based finance business. As a result, we could grow a portfolio and eventually sell to a fund. The strategy is to add value for our clients with a service rather than through their purchase of a product. In 2016, we saw the right opportunity because CFE rates were lower and profitability was not as clear. Nonetheless, we always saw the opportunity to sell this service in volume. What sets us apart was that we immediately focused on the C&I segment. At that time, our company was very niche because the market was focused on selling or doing short-term financing solar systems for residential use. This has very much changed since then.
Our service seeks to foster independence from CFE and control a company’s budget and energy expenses. Our solutions allow companies to adopt solar, while favoring liquidity because they do not need to purchase it directly themselves. Furthermore, companies are able to focus on their core business. If they invest in a solar system, they practically add a noncore business to their portfolio. We take this service out of their hands with our PPAs.
Q: What does the company’s client portfolio look like?
A: The company owns one of the largest portfolios of PPAs in the distributed generation (DG) segment, if not the largest: approximately 10MW installed. While this does not make us the biggest player in the DG landscape, it does make us a market leader in the niche of C&I PPAs. This is our main goal, after all. We have received over US$120 million in financing, which is considered mainly debt-based. This means that Mexico’s DG sector is very attractive to sophisticated investors and that there is an appetite for this niche.
Our current portfolio is diversified between infrastructure and retail. For infrastructure, we have a series of CKD companies that own and operate tolled highways, where we provide the energy to the toll booths. The rest is mainly in retail, a mixture of standalone stores and shopping centers. Starting this year, we have shifted our attention even more toward the industrial space. Our clients include real estate developers, which will share their industrial portfolio in order for us to implement our service.
Q: What would be the main benefits of signing a PPA with Energía Real for a company in the C&I segment?
A: The main benefit is that companies get to see energy as a service, rather than as a tangible asset. When companies realize that they are buying cheaper and greener Kw/h as a service, and all it takes is one simple phone call to install the service, they consider this a great option. It is pretty much like receiving satellite TV as a service instead of having to launch a satellite and install an antenna yourself.
Another added value is that we have been very creative with our PPAs in order to adapt to the market. Other companies have tried to make financing or PPA options rather rigid. Instead, we are flexible. For instance, if a company asks us for a PPA on a term considered too short for our initial needs, we take a closer look at it to find options. If we like their property, such as an industrial site for a warehouse operator, we can sign a shorter PPA with them. Their roof has a longer-term value, allowing us to be more flexible because a new player would be interested in using the same solar energy.
Q: What other developments is the company implementing to enhance its solar service?
A: Two of our current customers have commissioned us to include storage services. This serves as a hedge to policy changes and a viable option for future use. Other than this expansion, we have implemented pioneering monitoring systems. As a PPA company, our goal is to add value by understanding energy consumption trends through our service. We never provide 100 percent of the energy that a client needs when they hire us, due to the intermittent nature of solar. We try to drive their energy consumption down so that the energy we provide has more impact on their savings.
Q: What shifts in demand has the company experienced and how is it positioning itself to deal with these changes through financing?
A: The pandemic has driven up demand dramatically. Prior to the health crisis, many solar installation companies were competing heavily against our product. Potential clients were open to invest millions of pesos into their own systems. They knew about necessary maintenance, spending liquidity and the product’s weight on the balance sheet. Solar is a great financial opportunity after all. Now, with the pandemic and its macro-economic implications, people are 100 percent more focused on services that provide savings and allow them to keep cash on hand rather than purchase systems. We have, therefore, experienced an overwhelming drive in demand. Our challenge is to have enough capital to fund this growth.
Now that we are a better established in the market, we have seen interest from development banks. We are in the process of closing a new cheaper financing deal with one of these banks. This will be very favorable to our operations.
Q: What does the company expect will be the impact of the government’s new policy direction on the DG sector?
A: We can agree that DG will be affected the least by the recent changes. CFE understands the democratic aspect of rooftop solar and knows it does not sufficiently penetrate the market to really affect its grid on a technical level. This has been reflected in the regulatory changes, which focused on centralized utility-scale projects. If anything, the changes initiated will create hurdles but represent a form of institutionalization of DG. If you examine sophisticated markets with more regulation, what CFE proposed this year is merely a portion of what top-performing markets include. Therefore, I am not too concerned about the policy shift.
Regarding PPAs, many people in the industry have decided to rely on amparos against these policies. We are more fearful of the intention behind the regulation than the regulation itself. This grey area is where the real uncertainty stems from. For PPA companies, it is easier to rely on an amparo. For it to work, you need to prove to a judge that you are directly affected by the policy, which we are as a direct generator. If you are an installation company, it becomes harder to prove direct effects.
We have also seen a great deal of collaboration occur in the industry, rather than looking at each other as competitors. This is a positive note for the DG industry. The Top 30 companies have shifted their outlook somewhat, recognizing that the market is big enough to accommodate all of us. This comradery has been very positive for the sector.
Q: What is Energía Real aiming to achieve for 2020-21?
A: For 2020, I am happy to say we plan on growing our portfolio by over 50 percent. We are focusing on operating our current portfolio as well. This means implementing all the technological, ERP and customer service systems so that we can accommodate this growth. We are trying to automate the day-to-day operation of our PPAs as much as possible. This year has been marked by automation and standardization for the company. Thankfully, growth is part of this mix as well. In 2021, we expect Energía Real to grow two or three times.
Energía Real generates its own energy via distributed generation and sells it directly to end users in the C&I segment through power purchasing agreements, allowing users to slash energy costs without investing in their own system.