Finding Innovative Alternatives to Finance DGBy Cas Biekmann | Fri, 09/25/2020 - 12:47
Q: What is the history of Finsolar and what services does it provide to the Mexican market?
A: We founded Finsolar around two years ago and saw the opportunity to present a solution that would make it easier for large companies to implement solar power. Our model focuses not only on financing but on operating and maintaining the systems. Unlike other companies in our environment, we do not work in the residential sector. We install systems near their property. Our mission statement is to find innovative alternatives to financing DG in Mexico. Current financing options do not provide the most adequate solutions. During this pandemic, it has only become more difficult for companies to comply with financial requirements, even when they need it the most. Therefore, we are always looking to make PPAs and products more flexible and accessible for players in the country.
Q: What are the main characteristics of Finsolar’s innovative solution?
A: It is a structure based on tax equity, which is very popular in the US but not so much in Mexico. Both countries have the same regulatory foundation. We have two types of customers: large companies and medium-sized companies. To the latter, we sell energy through a PPA. The large companies function more like investors. Applying it in the US was rather straightforward, whereas in Mexico, we had to adapt it and add further value. First, we reconstructed the TAX-Equity model to match current and future economic and regulatory environments. Second, we developed a solar asset management platform that ensures system's long-term performance and provides real-time visibility to stakeholders. Finally, we embedded a social component aligned to our client's ESG strategy in which we give away energy to the communities where they have presence.
We are fully focused on distributed generation (DG), meaning we stay under the 0.5MW cap in Mexico.
Q: Do you see DG in Mexico’s ever-changing energy mix and how are you positioning the company to take advantage of this situation?
A: We are obviously quite bullish about this market segment. We have suffered the consequences of uncertainty in the energy sector, especially regarding B2B. Most of the investments that considered DG have been slowed down or have been put on hold. Nonetheless, we think that this will change next year. Mexico needs to get used to uncertainty. The current situation, marked by uncertainty and the pandemic, will not simply go away.
We see DG as one of the fastest-growing areas in renewables because it is considered to be somewhat outside of the 2014 Energy Reform, unlike utility-scale projects. DG existed before the reform and will continue to function even if a new reform reshapes the market. It is somewhat protected from most of the recent changes. There will always be an option to implement DG completely off-grid. We are already working to implement such models in our solution but will do so gradually. With our financing model, storage makes a great deal of economic sense as well. While we do not like all of the recent policy measures, some of the requests made by CFE are quite reasonable and can be found in more mature energy markets worldwide. Perhaps, the manner in which the requests are being made is not the way to go.
Q: Which business sectors is Finsolar targeting with its model?
A: For the moment, we are targeting companies that have been doing well during the pandemic. These sectors include pharmaceuticals, basic goods, raw materials, food and beverages. We are also looking for companies that have an advanced sustainable strategy. The ideal would be companies that already have a dedicated energy department and understand the market, as well as a sophisticated finance department. Selling a fully financed, operational solution with tax benefits is quite complicated, so it helps if potential clients are fully aware of the benefits.
Q: What sets apart the company’s approach regarding its PPAs and tax equity solutions?
A: One of our premises is that current PPAs and financing alternatives are not very attractive. While they are nice to have, they are rather complicated to implement because they require big commitments in a future that is increasingly uncertain. We try to approach this area differently. When we launch our PPA structure in January 2021, it will be much more competitive and flexible: costs will be around 20 to 30 percent below the market average. Our contracts will last five years, making them much more flexible than the current long-term PPAs.
For larger companies, our goal is to work through our tax equity approach rather than the PPA. Larger companies can implement the model without any capital as all the investment comes from the income tax. This means they can focus their CAPEX on their core and lower the risk of investing even more. This approach will make much more sense for some companies and we have identified which ones we will focus on. Companies that are not paying a lot of taxes would be much better off with a PPA, for instance.
Finsolar develops innovative financing schemes aimed at medium and large companies that want to get into the distributed generation solar segment but are unwilling to commit to large investments of time, effort and capital.