#5.3: Virtual Power Plant (VPP) Hackathon
Summary
In this final installment of the 3-part series, Ben [http://linkedin.com/in/benjaminhilborn], Jack [https://www.linkedin.com/in/jkerbymiller/], and Charles [https://www.linkedin.com/in/cjurczynski/] wrap up their exploration of virtual power plants (VPPs) with a deep dive into development strategies. They bring their coffee shop-focused VPP concept to life, tackling questions like: How do you stack revenue streams? How do policy incentives like the IRA shape the economics? And how do you overcome the challenges of site control, permitting, and community buy-in? Turns out, the answer sometimes lies within a bite of mincemeat.
Episode chapters:
* (1:07): Intro to guests
* (3:55): VPP hackathon catchup
* (5:12): Policy influences on project feasibility
* (16:38): De-risking projects
* (23:49): People are key
* (30:23): Project finance
* (41:25): Making money on projects
* (59:10): Resources to go deeper
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* James Gordey [https://twitter.com/james_gordey]
* Ben Hillborn [https://twitter.com/BenjaminHilborn]
* Wyatt Makedonski [https://twitter.com/wyatt_yy]
* Charles Jurczynski [https://www.linkedin.com/in/cjurczynski/overlay/about-this-profile/]
Music
Our incredible intro/outro music is the song Ticking, by artist TINYou can stream the whole song and the rest of their catalog here:
Episode transcript
Well welcome back everybody to this next episode of the intermediate podcast. today we're talking about project development and all the, all the ins and outs of it. we're going to do our best to frame this as a bit of a follow on to our, coffee shop that we, that we talked about in the, in the previous two episodes. but if we stream, of course, we'll still try to make it, fun and entertaining. And, today we have with us, my co-host, Charles Shensky and our guest, Jack Kirby Miller. Jack, I have to say, do you want to say a quick hello? Hi, everybody. yeah. Excited to be on. And, I get to spend a lot of time with Ben and excited to spend some time with Charles as well. Yeah, likewise. Thanks, for coordinating. It's been good to be here with you and and with Jack. And I'll just, like, super brief background. I think a lot of people know generate, as an investor, operator and owner, distributed generation assets, we do so much more than that. And, a big part of my day to day role is in what we refer to as delivery, encompassing development and construction of assets. so any portfolio that generate buys from a developer, where there's still leftover construction or development work to do comes through our team. So hopefully I have a little bit of experience in that space that I can I can speak to. Amazing. And, Jack, you've got, you've got a good amount of background in the space as well. Do you want to give a quick primer on yourself? Yeah. So I spent my early career working in the built environment, developing energy efficiency projects. decided that looking at first cost and the decisions that are made around it, we need a better financial tools and, spend some time in finance, all in, early stage clean technologies and, managed, spend some time, at Swell Energy, the distributed energy storage developer, which, you know, operating across the US, and their structured finance team. And that's really sort of informed my opinion on, what it takes to get lots of little assets out there, really quickly. And I think hopefully I can bring a bit of a different perspective if you're thinking about development from, you know, the the extremely distributed versus, you know, 1 to 5, ten, 20 megawatt scale. so, yeah, I work, Ben and I work together at Pearl Street, and, I wish I had been at your VP. VP coffee shop because, I work a lot with our, VP programs. so. Yeah, happy to happy to be here and excited to dig in. Amazing, amazing. Well, a quick recap. So in our, in our VP episodes, we, we kind of dove into, finding a niche in the, in building a BPP. And we came up with the idea of a, a virtual power plant, specifically designing a program for coffee shops. And the, the outcome of that was that we wanted to deploy solar and batteries to coffee shops, around, around certain metros in the US that aligned with, you know, a high solar generation potential, you know, high density of coffee shops and, and, you know, friendly, friendly environments for, for actually deploying VPCs. And so now that now that our motley crew has decided that this is our niche, this is where we're going to go now, we have to figure out how are we actually going to build this thing, where's where's the money going to come from? How do we structure projects? and how do we go from this idea of a virtual power plant to a physical operating virtual power plant? and we we do talk a lot about policy, here on intermediate. And that's possibly one of the, probably a good place to start. And I'm wondering if either of you guys want to, want to talk about a little bit about what you've seen around policy that influences the feasibility of, of putting together a project like a, like distributed assets in a BPP. I'd like to give people a framework first for when we talk about development and demystifying. I think sometimes this is even lost in project finance, community and people who are quite adjacent. Really, development is everything that comes before you start construction, and that's a lot. There's a lot, a lot of paperwork that you have to do, and you're really dealing with people and you're dealing with communities and neighborhoods. And so where we start is land. You want to get site control. You want to know where are you going to put your project. And we have the right to to rent that land out or own it. You want your permitting to make sure that you are allowed to put it there. According to the local zoning and bylaws and things, and there's a lot of work that goes into that. And then you want your interconnections. So you want to know that if you're building a power project or if you have a connection to the grid that you're able to to give electricity or take electricity back, assuming it's a power project. The fourth one, and this is where I just wanted to jump into this, into what Ben was talking about is your revenue. And this is going to be really key when you want to go get financing someone to give you millions and millions of dollars for your coffee, VP, coffee shop, PPV, revenue is going to be different for every project. It could be a PPA, which is perhaps the simplest approach. I'm. I'm looking at you. this could, but it could be multiple different layers. Right. And one of the big layers in this, particularly if you're using newer technologies that can sometimes be a bit more expensive, for example, batteries or EV chargers, if you're incorporating them into your VPP. There is so much incentive money to defray the upfront costs of the equipment, and that is a big part of what makes the economics of this project pencil. And it'll be different at different places. To bring this full circle back to Ben's point, is getting there, is that a lot of this is policy and regulatory driven? Well, policy driven, regulatory, not so much. it is the I.R.A., the Inflation Reduction Act of 2022. It is the IJA, the infrastructure, infrastructure investment and jobs Act of 2021. And together, these account for over $1.5 trillion into infrastructure in the US built environment. And probably more because a big chunk of these, these policies were to extend tax credits, which are a financing mechanism that form the basis of building these projects as well. And it's a real expansion that people say could go much further beyond the I think its budget is $369,000,000,000 billion. the industry expects it to generate a lot more than just 369 billion. And these are, our tax credits. So we can go into that later on. But there is a lot of policy that drives the revenue for, these projects. And I skipped over it a little bit, but on the local level, you've got municipal considerations. So there is policy at the state and local level that can drive where we might choose to site of VPI as well. I actually yeah, I would definitely put a lot of emphasis on that local level. development is almost always except for the of skills where I have worked. Right? Development is almost always a ground game. Right? for those like if you're building, VPI, you need to concentrate enough distributed assets in a concentrated geographic area to be able to provide meaningful load to utility that's working in a much higher level. And so paying attention to the friendliness of that local geography, the utility service area, that's really important. A lot of the work that we do right is identifying where you can, pull different. Right. You're obviously going to be using, you know. Yeah, there's there's some flavors to this as well. Right? A lot of VPNs, specifically are not owned assets. Right. So you have a contract with an asset that was already installed. So, to operate it and provide energy services to the grid. if you're looking at trying to bridge the gap to close the financing, where you can have a VPI that's owning its batteries is a, third party that provides services, you're going to need to be able to stack a number of those different revenue streams, right? Obviously, the, tax benefits, state level incentives and then hopefully incentives, or, revenue streams from the utility service service area you're inside of. so there's this idea of like, you know, multiple overlapping geographies that that are going to have an impact on what, what policy environment you're in. And I just want to tie this back as well to the, the coffee shop VP is that you'll think of maybe the coffee shop or the coffee shop owner. The person who owns the building is being your host, who you're renting land from. Effectively, you're putting all your equipment onto their site. but then they're also you're kind of like your base customer. You're trying to do something that gives them value. You're trying to lower the cost of, running air conditioning or covering their Wi-Fi electricity bill or whatever. You're trying to bring down their energy bills to make it cheaper. And a big part of serving that customer with cheaper energy bills, because at the end of the day, they're going to make this decision based on that. Well, hey, is it cool? But also, hey, does it send me money? And so in order to drive that down while, you know, imposing a very big cost upfront to get all of this various different equipment and to, to retrofit and get electricians in there kind of twiddling with wires in order to reduce that cost. You're defraying that with these incentives, with these, these cash flows that have been created by the regulatory structures. So that makes it at the end of the cheapest for your core customer. Would that that person. I'd actually so in this specific instance and I think it's representative. So throw a hand up if I'm diving in too deep into these details. But in, in many like one of the biggest values of distributed resources is resilience. so coffee shop is actually a good example, but I've seen this with, universities with, you know, any, any, any, any business that that relies on refrigeration, business interruption is a massive cost. and it's a huge risk. And so if I were looking at developing this coffee shop, coffee shops, you know, they're distributed throughout a community, when our power goes out and we no longer have wireless internet throughout it. You know, for folks that work from home, like coffee shops, become a center where people go to gather, and so, like, you know, that actually could be some really high revenue days that you're missing out on because, you know, your your, your power is down with the rat, with the remainders. That's actually a pretty good way to look at, sort of a baseline justification of, of getting some assets and some services provided. so it isn't policy dependent. It's interesting where there's a similar concept on both sides of the equation here, where on the customer side we're stacking reasons for, but we're stacking values for why you want this. there's, there's resiliency, there's lower energy, there's the cool factor, so on and so forth. And on the product development side, we're also stacking revenue streams to, to make the, make the project make sense. you know, stacking in an incentive with your PPA, with, you know, other, other pieces. and it's kind of interesting that there is there's commonality between both sides of, that both the seller and. The customer here. So we've said we've set the policy drives revenue. And, Charles, one of the things. That partly and customer demand drives revenue, right? So you're more on hand, you've got all this kind of you got incentives, you got tax equity, you've got, local, you've got utility programs all kind of policy driven on the, the wholesale or the like the, the energy market level. But at the end of the day, if we're talking about distributed like that, coffee shop has to have a reason to make that decision. Somebody has to make a business decision to say that I want to retrofit my coffee shop with all this equipment in a way that is going to lower my costs, be kind of cool, because I can show all the energy. Maybe it's going to be green and sustainable and renewable, and I'm also going to be resilient and the like. It'll be a decision from the business owner to say, I want to do that. And that that underpins whether or not the vfi goes ahead, and then it is up to a developer to make the business case or to make the numbers stack up in order to deliver that service to that customer. Right. And a big part of the numbers stacking up is the policy back end is the can we find enough money elsewhere to justify this massive upfront cost? So I just want to be clear, like customer comes first, but policy is a key driver of the total revenue. That's good framing. yeah. I think when you think about the, when you when you think about the development game, it's pipeline, pipeline, pipeline, right? Companies are valued at approximately, you know, yeah, the public companies are valued based on their pipeline in that space. and, you know, there may be some exceptions to that, but that's the general rule. and so it really does come to, you know, how do you a bring a bunch of like, how do you go out and sell to a bunch of distributed, business owners or residences or, real estate portfolios? And then how do you bring those, those that wealth of, you know, many different sites through the pipeline, to the point where they are, you've kind of. And I think maybe it'd be worth talking about what de-risking is, but where you do the rest of the project and that's ready, to either, you know, take onto your balance sheet and, perform construction or sell off and have someone else, perform that construction. So, yeah, I think. I think, yeah, I was gonna say there's, there's a couple of buzzwords here that I think, I don't know if we want to get into a, a developer's glossary, but de-risking is just one of those words that I think people really throw around when you're in project finance and project development. so I'd love to hear a definition from you. thinking about development generally, it's filling the pipeline and then everything else mostly is de-risk, de-risking the project. the kind of stodgy textbook definition is, transferring risk away from the project to the parties that are most capable of assessing and mitigating that risk through contracts. so, for example, big thing that, folks talk about for, like mid and larger size projects is yeah. And maybe it would be better to, to, to talk through that sequentially. Right. But you know, getting there's a bunch of data you need to understand about your, your, your site. So, what is interconnection going to look like from the outset? Are there any environmental concerns that need to be remediated that might result in costs? what is the cost of building on that site going to look like? and basically you can do a high level assessment of those and then move through towards land control, which means you have the rights to, develop that property. and then as you move through the later stages, you're kind of trying to, you know, set up and, set up, insurance, around, like long term performance insurance against hail, other hazards, and ultimately get to a place where you're able to get a, what you call like a turnkey construction contract, where as the project developer or eventually the project owner. you are not on the hook for delays in construction or cost overruns and construction. and you've passed that off to typically a third party firm that is going to be, procuring all the equipment and bringing it onto the site and installing it. And then, basically, applying to make sure that that can all go through and, and that you can, commission those projects and keep them running. To wildly oversimplify. yeah. I don't I don't want my lawyers building a solar project, but equally, I don't want my contractors trying to negotiate the, negotiate the finer points of a of a tax equity structure. So, I mean, obviously, I'm overexaggerating, but at every stage of the project, there are so many different skills, just like and I that example really illustrates the breadth. And you've got accountants and you've got bankers and you've got lawyers and you've got contractors and you've got, environmental consultants and insurance consultants, insurance advisors. And it's just what a developer does is coordination. It is making sure that all these work streams need to get done and allocating the roles and responsibilities to the person who needs to get it done right. And I really like to think about, responsible and accountable. I am trying to hold I use financial contracts to hold the responsible parties for delivering these workstreams accountable. And that means how much I'm going to pay you to do that job. But what happens if you don't do that job right? Like you're also on the hook. And so ultimately, I'm sitting here in front of my financial model, prima, I said at 2:00 in the morning trying to figure out how are we going to spend the money responsibly, but also what happens if somebody fails to perform their job and thinking through all the different, downside cases, as we call it? Like if there's something goes wrong, what, what what then has to happen. And so I'm trying to put myself in the shoes of different people. I can't do any of this stuff. You know, that's just that's the crazy truth is that I'm not I'm not an engineer. I'm not out there turning wrenches in the field. I'm not a lawyer. I'm not sitting in, like Manhattan high Manhattan office, like turning pages on a contract. Although I'm pretending to be every single one of those things at any given time. I am sitting across the table and say, that sounds about right. Right. And like, I'm learning this and I'm learning what I need to, what I need to know. And I am moonlighting as any one of these. But ultimately, I'm also working with a lot of people who are acting on my behalf. And you're kind of like the general, I guess you're trying to marshal all the different troops and make sure that they can go out there and fight a battle where you ultimately win a project, right? Like you get it done. For us, victory is well, the victory is a couple for victory is what we call NP or notice proceed. That is when you've agreed with the local town that you've got all the permits and you've agreed with your contractor, but we sometimes refer to it as EPC, which is engineering, procurement and construction. so the contractor who you've signed a contract, they're ready to go out, build, they've got all the permits they need. And then you say, okay, you go, you have I will give you a notice to proceed with construction, and they'll go out into the field. And so that's victory number one. I think in some ways that is the key victory for a developer. But victory number two is when you go to the utility and say, I have built a project and now I will start exporting electricity. And they take a look at all the electrical. It's like a teacher marking your homework. They're going to go and look and make sure you've done it the way that they want to see it done. And there's a whole bunch of rules and regulations around connecting your project to the grid. And then the utility comes back and says, yeah, you can start exporting electricity or importing, or you can start operating your project in conjunction with our grid. And at that point, that's when you can start making money right away. So if you're working from a spreadsheet, you're trying to figure out how to make this into something that makes financial sense, right? Like, I would love to say we are greening the grid. We are making this coffee so cool. And but but at the end of the day, there is this financial consideration and it costs an awful lot to build this thing. And you want to be pretty certain that you're going to get that cash back. And so once this is operational and running, you've reached that point, you're going to start to see some of the cash flow back because you're like, you're really in the hole here, right? You've given somebody given a lot of people a lot of cash. And you're like, I'm kind of flat broke right now. I got to start making money from this. We should probably touch on where did all that cash come from. And let's talk about project finance showing. Let's talk a little bit. Oh can we I. Love to talk about project finance. I just want to touch on one thing that Charles said that's like kind of important around the skill set of a developer. And I think to some extent you're the general, to some extent you're a project manager. You hopefully have a pretty robust financial model that you're stressing about in the background. but in my experience, like the number one critical skill of a project developer is like relationship and people management. you have a ton of these circumstances where, yes, you have a contract or you're working on getting a contract, but you are working with people from across the political aisle. You're working from with people who have explicitly different, motives and incentives around the project. And like, the most valuable thing you can be doing with your time most of the time is helping make sure those relationships run smoothly. so I just, I think it's easy to get buried in the contracts and easy to get buried in whether this project to get a pencil or not. But, you know, if you go to, if you go to some, if you don't know until you go up for approval that, you know, there have been entrenched entities that were like against the project and weren't, weren't listened to. you've put a lot of effort into this, without, pulling it back. I want to get the pants question. Yeah, yeah, but to that point, one of the words of wisdom I, I live by here is a contract is only as good as the lawyer who's paid to unpick it. Like at the end of the day, it's a paper document that governs the relationship. But the underlying relationship is what matters. It's there to protect you. If you get into a dispute or if you fight somebody. But you can't just say and you can just say it's in the contract. But at the end of the day, that contract is it's a commercial negotiation that you said that says, I'm going to give you something, a VP and microgrid, whatever, and you're going to give me something, the permission to build it, for example, or, you know, the the construction labor. but it is the relationship that underpins that contract. First, the contract is only meant to describe how the relationship is supposed to work. In an ideal circumstance. That's a really good clarification. and figuring out like, it's like a pie with a bunch of different flavored slices and you want to give the pumpkin to, you know, The person who really likes pumpkin pie. Yeah. My brother. Yeah. And I want this slice of apple. and there's going to be like, the mincemeat slice at the end that nobody wants. and hopefully it's pretty small. But you're going to pay someone a lot of money to eat the mincemeat pie. Yeah. You're going to pay an insurance company, probably. Or or, you know, the equity is going to take on that risk. And, they get the second pie. So this is, I've got, this actually is a funny segue into a real life development story. It's not buy it. But it's a good friend of mine was, developing, I want to say it was it was either solar or wind, but developing it for a big utility scale project in Wisconsin. And the locals were not having it. They're like, no, you're a big city coming into our little town, and you're going to force wind down our throat. We don't want it. And and she's like, no, no, no. I'm like, you know, I just I work for I think it's, I think it's next year. It's like I work for a big company. Sure. But, like, I'm just a Chicago girl. I drove up here like, you know, I came by and I wanted to say hi and and literally to the to Jack's point about relationships. She went to a town hall where nobody wanted this project and said, nobody's consulted us and just talk to people. It was like, yeah, this is the plan. You know, these are all the community benefits. Usually there's like, there's tax revenue for the local community. You pay taxes that school taxes like this is helpful for your community. And this is not a takeover. There's no sort of deep state worries behind here. And everyone started to warm up to her and thinking, okay, like this isn't so bad. And they said, well, you know, we're going to go post-meeting. We're going to go to the, you know, community hall, and we're going to have a little get together. And, and she walks in there and they've, they've laid on a spread and it is white hamburger buns, uncooked onions and uncooked mincemeat. And they're just throwing these things on together into a hamburger, like an uncooked hamburger. It's a bun. It's raw onions and raw minced meat, and everyone's just eating and they're like, well, aren't you going to join us? And she's like, oh, I guess I'm the one eating the minced meat slice. I like. And you're just like, yeah, you do, because this is what everyone else is doing. You're part of the community now. You're representing your company, but you're also trying to show them that you are your relationship building. And that relationship building can come in so many different ways. And that's just one example. Yeah. You eat a raw, you eat a raw hamburger, because sometimes that's what you've got to do in order to get this project done. Yeah. And I wouldn't under emphasize like being there and listening to concerns is like especially at community scale and larger like that's so important because your project will have a big impact on the community. And like you need to become, have at least to some extent become part of it. So, and yeah, we've seen this in the distributed side as well. especially when, working with low income communities, it is absolutely paramount that you work with folks who have existing relationships there. Like there's, there's been a lot of mistrust built up over the years with, for like really good reason around things like upside down solar, people's, where, like, the pricing is set up to escalate, yeah. And, you know, there's not really a substitute for working with with folks who know that community and have trust there. yeah. Anyways. Very good point. Very good point. okay. So the point that we, just bounced off of and we should probably come back to is where does the money come from to, to deploy these, you know, these pairs of, batteries and solar panels to coffee shops across, across the western seaboard? Oh, it all comes from generate capital. Oh, perfect. Easy answer. That's good. Jack is Chuckling. Yeah yeah I mean sure. Also you know I think thinking about as basically. Fundamentally capital has different expectations for risk in return. And the more risk it's taking on the higher it expects the return to be. and so as a project moves through the pipeline, different types of capital will become available to it. So, you know, high level early stages, you're looking at something that looks like development equity typically, you know, there's a few folks out there. This is perhaps one of the most underserved, areas of the capital market. I know. seg sustainable infrastructure, is doing a lot of really great work in that space. not to namedrop too many non generate names. and then as you move towards, completion, you're, might have the long term project owner start to take a stake as early as, you know, it might be pre NTPC or it might, it's depending on the asset class. It's often starts at NP and then you'll often get varying types of debt coming in with that. typically the earliest step will come in is during construction. And that'll be like a short term construction loan. and then you'll have long term debt once the project is quite, you know, verbal air quotes, de-risked, and operating, and then sometimes you'll get really low cost capital from, sort of the biggest investors think your, sovereign wealth and, pension funds, after a couple of years of operating history, especially with new, asset classes or new new portfolios, which is $0.02, yeah. Charles, I think you have. Yeah. I just wanted to jump in here with a quick explainer, which is when we think about a project, it's just it's moving things from left to right along a timeline, and we find ways of segmenting that. So I think there's probably is actually a relatively recent concept that I'm still playing with. But maybe for segments we want to talk about we talk about development. And that's like that's just paperwork. That's that's moving paper. It's getting all your planning and permits and your leases and a lot of the sort of call it the white collar work of building the project. and that ends at entropy. To give you a bright line, just a little bit fuzzy area around that. But development leads, leads up to notice, to proceed. And then you notice to proceed. And that's when the blue collar work starts. That's when you get your contractors on on site turning wrenches and building the infrastructure. and that will go from NP to code completion development. We also have a couple of other things in power. We refer to permission to operate. We call it placed in service. there's completion of code, completion of development, a couple of different, names there. But let's you code, you go forward and then after code, you really kind of have you have operations. But I said for I'd split operations into this kind of wrap operations where typically for the first two years you have some teething issues, things break down. they take a little bit of time. Each of these projects can be their own special beast. and you sort of figure out, where things are breaking and you fix them. And that's the sort of wrap period. And then after about roughly two years, give or take, depending on the complexity of the project and how well it was built in the first place, you'll get to a sort of steady state operations, and that will kind of go for on a go forward basis. And that's, that's sort of where the pension funds are interested, particularly at the bigger pork belly of utility scale projects. But we're talking distributed here. So let's put them to one side for now. Each of these call it we'll call it three for now. development construction operation stages is going to match quite well with a different pool of capital. And we talk about risk. It's this really nebulous concept which is basically, almost like, percentage likelihood of the project to die for one reason or other, maybe your grid constraint. And the utility says, look, you built it, but I can't take the electricity anymore. I can't, like you just can't connect it. And I'm. Putting the electricity that I'm putting into the ground because I can't like there like the utility can export it from my site and I'm not getting paid for it. Maybe it's the townspeople saying, we don't want this here. Thank you. But no, like this isn't good. Or maybe it's, you put some, equipment into a coffee shop that went bankrupt, and the guy is like, look, it doesn't make sense for me anymore. I'm walking away or I'm retiring. And then, you know, you've got electrical equipment on a coffee shop, and nobody's paying for it, right? So there's like, that's those are examples of risk where things could happen and you want to understand whether or not they will or won't happen. It's a lot harder when you sort of rocked up and you said, I'm going to build a solar project here. and then somebody turns around, says, over, my dead body is going to be, you know, that's that's quite high risk, right? But once you've once you've got all your paperwork and said that you're allowed to do this, you know, there's definitely construction risk. And I also want to say that development doesn't cost a huge amount of money. We're not talking crazy big sums, but it is very high risk. So this you'll have, investors who play in this space. You mentioned Segway. We can just go it, let's be fair about this nexus as a development capital solution. You've got lacuna. You've got, ley line that's doing this green backer. I think those are probably the 4 or 5 when you're talking about, like, distributed energy. but then also a lot of developers who've recently got private equity money are doing this with their own balance sheet. So there's a whole universe of different funding providers at development stage. And then you get into construction, and that's when you have to start, like buying equipment and equipment's expensive, so there's less risk, but there's a much bigger need for a lot more money. So all of a sudden that's a whole new, group of investors who feel like, hey, this I'm I'm ready to dip my toe in the water here, and I'm willing to take less. Less, risk on than than the, development funders. But I'm also willing to deploy a lot more capital. And so they come in, they help you buy your solar panels or EV charging equipment or your, your thermostats and meters and things to help you manage load or maybe your refrigeration units, and then they'll take it through to operations, and then you've got a whole new universe of investors who are going to think of this more like, an investment product. They the way that solar really got to scale was that they discovered that a lot of pension funds who had a lot of underfunded liabilities, could see solar in a similar way to, say, Treasury bills. So when interest rates on treasuries plunged, they were like, well, a solar project, kind of, if you squint a little bit, looks a little bit like a a Treasury bond, but with a higher rate of return. So we're just going to put our money in that and it matches the pension funds liabilities. And, and they don't really need a huge return on their capital. So that's a whole new universe of people who could potentially invest in your project at that point. But each of these investors is going to have a whole list of concerns that they want met. And that's when we talk about de-risking it. You want to make sure that those concerns that you're getting out of those concerns as a developer, and you're able to answer them before you even go out to talk to those people, because they will come back and they'll say, but what about this? But what about that? But what about the other? And you say, don't worry about it. We've thought about it. We've taken care of it. That's not a problem anymore. And then they give you their money. It's just that simple. This is something that said, oh yeah, this is this isn't like that. that Jack is all too familiar with. I, I can hear a chuckling away in the background. It's like the time and the time to make sure you. Can answer all the investor's questions is before you talk to the investors. That is 100%. So like when you're when you're at the negotiating table, when you're going out to find someone to fund your project, it's really not the time to be improving the quality of your project. You should have you want to do that ahead of time. other just like notes on, risks that are helpful is a lot of your risks. They're they're greater and they're often binary. Meaning, is this project going to go forward or is this project not going to go forward until you reach NP once notice to proceed, right when you've got, when you can actually start construction? once construction starts, it's actually quite rare for the project to stop. and so your, your, you know, your return might change, you might have some cost overruns, but. Yeah, I see, like, that grimace. Yeah. The, that there are such thing as stop work orders. so sometimes going back to the policy question, sometimes policies change, sometimes communities issue moratoriums and they're like, we don't want any solar in our town anymore. that has been known to happen. Or you become non-compliant with the permit that has been previously issued. So it can, but it is much less likely at the construction stage that that is binary. And to Jack's point, it'll be cost overruns, which could be a problem. Right? Like you don't want to be spending more on your project than you'd initially budgeted for, because now you've got to make more money somehow, and people don't want to pay more, because once you start building it, they're like, so you're going to do it for the price you said you're going to do it for. And so it's very hard to make more money. So you want to make sure that you're not spending more money. So worth worth noting here. If you find yourself on the don't build side of the develop don't develop divide, slowing a project down, for a significant period of time is like actually a reasonable way to make sure that that project doesn't happen. Amazing. So we have, we structural projects. We have a solid pipeline of projects of, of all of these coffee shops. We have, we've done some de-risking on these projects. We have signed agreements with, with EPCs. We have signed agreements with capital providers. We have, signed agreements with, with our off takers. So like the coffee shops that, that want these, that want to participate in this virtual power plant and, but let's talk very quickly about, about how do we actually make money off of this. And this comes back to, one of Pam's questions from the from the very beginning, what is a PPA or more broadly, how do you monetize these assets and make sure that everybody that has taken a gamble on you and developing this pipeline of projects is able to get payback yourself included? Who wants to take that? I want to start with that, but but let's start. Could you you. Rephrase the question for me? what is, yeah. What is what is what is contracted revenues. Sure. yeah. And I don't let's start with contracted. But there are two ways you can get paid contracted revenues and contracted revenues. Yeah. And, investors, project finance investors love contracted revenues and VCs. BP's live on contract is. Oh. Well, is. That why is VP. Is broadly. Right like. BP's would love. Contracted. Revenues. If they were typically enough to cover the cost of the capital and they were in the business model of owning the assets. if you're building a VP with other folks assets, then it makes a ton of sense. You can have a more aggressive risk profile. So, yeah, talking about, contracted and, contracted revenues. You know, one of the biggest. and honestly, one of the early stage things you will do when you're developing a project is securing what's called an offtake contract. And, it, it can look a few different ways. The kind of, the, the, the standard, in kind of the solar space is, PPA or power purchase agreement. And it's basically, an agreement between the asset owner and someone who needs power. So that could be a utility or a commercial entity or even a homeowner to pay a certain price per unit of energy produced and delivered to that, so, well, unit of electricity specifically, these tend to be long term documents or long term contracts. So, they should cover a good chunk of the useful life of the equipment. Typically they will cover at least the, period of time over which you are financing the equipment. lenders in particular. Right. Lower risk capital really like to see a solid revenue contract set up. but you could also have an agreement that is, structured differently. So you could have, contracted revenues through a lease where, you are giving the use of equipment regardless of the specific, kilowatt hour production to a particular off taker. yeah. And there's other things as well, like tolling agreements, and things like that for energy storage. more capacity payments would be another, although those tend to be relatively short term contracts, at least in the, the, areas where I've worked. but yeah, so that's, that's on the contracted revenue side. part of the logic of the, of those contracted revenues is, the, the off taker right to the customer, so to speak. is getting a what is projected to be a better deal on the energy that they're purchasing, by locking it in for a long period of time. And that allows you to finance the, the equipment, with. Well, specifically with that on the other side, you have, uncontacted revenues. So this could be, you know, basically based off of retail electricity rates, or, and like, you know, something that is, that is unfixed or floating, and that can give you much higher upside. but it's harder to get, debt to support that. So that's something that's, as, Charles was just saying that's, that's really helpful for, or is really interesting to folks that have a greater risk tolerance, in the equity and venture space. And also know where at time. We are. Meeting apart this. But I am loving it's, it's, looking forward to part two. I think we're pretty close. I don't know if there's a whole lot more we need to cover here. I think one. Thing I would love to highlight is just thinking about, like, we've talked a lot of it'd be good to clarify the difference between, like, one off project development and project development, where you have a portfolio of assets and pre rent financing. because like specifically for Dars, like. It's usually portfolio. Yeah. Well it yeah, it should be for portfolio leases. That's my position. Which I can take two more minutes if you want to, if you want to dive into that. Let's I think that would be good. yeah. And it shouldn't take ten minutes. So, So what's the Segway from where we were to here? So we're talking about people's contracted, contracted revenue and different kinds of contracted. I think. So things are on the spectrum. These revenue contracts can go all the way from, I think when you think about a very to kind of clean basic PPA would be, the sort of agreement you might have signed if you'd, put solar on your rooftop, right on a residential solar PPA. So pretty, pretty standard. but then the bigger the system is that the bigger the counterparty, the more they might want to negotiate it. So. So you can get into quite negotiated elements here for contracted revenue, though there aren't too many different types of contracting structures, PPA leases are the typical pathway to structuring a power uptake. To be clear, leases you can actually probably use in different cases, even for batteries and for, EV charging. I've done a lot of distributed battery leases. for example, which is something that generate was very happy to finance and is very happy to finance. and I think we can do you can do leases for, for busses. So we have a portfolio of electric busses where we get paid X number of dollars, flat rate every single month by our counterparty to use those busses. And then, you know, they get the benefit of the busses. There's no utilization risk. There's no like, pay by the mile or anything like that. But that's a good example of where, like UN contracted revenues are, right, where we could in fact, some of our early battery projects, we split the we did a shared savings model where whatever dollar we saved you, we would get, you know, 80% of that and you get 20% of that. Now we'd get 80% because we cleared. We were clearing the, the costs that we paid. So we need to finance those batteries. But you're getting that 20% savings free and clear. And so that's reducing your overhead bill. But, you know, I don't know how much I'm going to save you in any given month. I can make an educated guess. I can use some really fancy venture capital backed software to determine what that number might be, but I can't hang my hat that I'm going to get that every single month. And then what happens if you, you have an outage or you close your shop and go on holiday for a month and you're like, I'm not. You know, I'm turning everything off for a month, then I'm the one who has to ride with that. I don't get anything from that because I know you're not using power. so generally, project finance doesn't like that because there's a lot of uncertainty. Right? The whole goal from the project financiers perspective or the lender that the bank lender's perspective is, I want as much certainty as possible. If I'm going to give you a home mortgage, I want to know that you're going to pay that mortgage, which is why I do credit checks. And, a lender would do credit checks on you and, and want to understand your, your financial position and your income. It's a pretty similar process obviously with a lot of differences, but it's a pretty similar process for investing in a, in a renewable project. You know, it's a big outlay of cash upfront. I'm giving you a lot of money. I want to make sure that you're going to be responsible with the money that I give you, and I'm going to give you a score and determine how likely it is that you are to repay that. So if you're going to go and say, well, I'm going to take that money and I'm going to go to the casino and start spinning, spinning balls and like, don't worry, it's very likely that I'm going to get red every single time. Like the balls are pretty weighted to in that favor. You're like, I don't know how you know you're going to hit red every single time, but maybe you found a way to beat the house, right? Like maybe you have an angle on this. Maybe you have a a technology that is just more sophisticated and, and actually you've seen something in the market that says, if I go and invest in, AVP, there's going to be ways that I can operate it to really capture something, some pricing that that isn't otherwise there that I or I can. I think about those as bilateral contracts, for example, where. Like it could be it could be market access. So like getting or taking a portfolio of smaller assets and then bidding them into transmission, double ancillary services, contracts. Right. That wasn't like maybe that's just a more lucrative, lucrative market to, to, offer my energy services to right at the core, I am offering handheld. we'll get to bilateral contacts in a second. But at its core, I am providing, a unit of power or a savings on that power on the on the power you would have otherwise use. and then also, I'm kind of moving it around, so you might pay one, one price at one time of the day. You might pay a different price at a different time of the day, or I'm reducing your total demand, or I'm providing electricity to, to reduce your demand or to reduce the amount that you're taking from the grid. And, and it's some triangulation of these. But in each I may I'm probably over complicating things now. But basically whatever I use the hardware to do, I'm looking for a way to be compensated. I can either get compensated through a contract or I can get compensated by bidding into a market, or bidding it into a certain time of day, or splitting the revenues with you. And there may be there may be savings. There may not be. So it's a really a question of certainty. And the savings could be huge, right? yeah. And especially the newer the technology, the newer the market, the less track record you have around that. the higher the bar for like getting financing on the back of a variable, variable outputs. Right? Yeah. For sure. Kind of across the, across the spectrum from like market risk to, you know, performance risk. and yeah. Okay. So quickly bilateral contract is two people getting together and saying, coming up with paperwork in an agreement to say I give you this in return for that and really in energy, it will I will give you a kilowatt in return for a price. A pay is a bilateral contract. It's not negotiated through a market. It's not wholesale. it's not kind of a public document. It is you and me getting into a room and negotiating paperwork that says you can. I will give you this service for that price. Yeah. And I think of these a lot in terms of, providing like capacity or other services to like relatively tight geographic areas or tight markets, where, you know, for like to put a bit of a point on it where a utility has a problem, they've got transmission lines that are no longer, that are no longer serving load well enough, like, non-EU, whereas alternatives contracts are kind of my favorite there. But it's basically a contract between those two parties where one is the service provider and the other is the utility. And in the cases that then I spent time thinking about at least. yeah, absolutely. And so just to zoom back out, like where we're really in that revenue spot, like if you're going to go back to the four things that are valid for really cares about revenue side control, permitting and interconnection revenue, revenue, revenue, we are sort of touched on, incentives. And so tax equity is global. A lot of, subsidies or rebates or incentive payments will be quite local, often at the state level, and will vary by technology, of course. and then you've got your customer revenue. And so when you talk about the customer revenue component of that, you're stacking all these different revenue types. You've got the customer revenue. And that could be where it's either contracted or about, it'll be a bilateral contract or a wholesale contract. So you're kind of stacking all these different revenue streams on top of one another. And here we are talking about one subset. So I just wanted to situate ourselves in the context of this, this monster of a project that where all these different work streams that you've got going on. Amazing. Jack, did you get to to cover what you were hoping to. No, no, but. There's always more. yeah, I think the the highlight is just that, the, the framework for project development is, is mostly focused on moving one asset through a pipeline. and it looks a little bit different if you're at asset costs like $30,000, then ten, $10 million. specifically like, the financiers tend to have, minimum thresholds where they're interested in giving you time. And so, like, you know, five seconds on, well, give me 15 seconds on the process. So, like, in order to set up, like, you know, a bunch of, residential batteries, for example, you're going to prove that you can access the homeowners and make those sales, you're going to set up contracts, you're going to work with financiers to basically set up a fund like entity that has sort of, prearranged thresholds for financing. So you might have, you know, $10 million that's going to get deployed into a bunch of, residential, assets. And then, basically, you will start placing those, bringing those assets through. Each subset will go through these known set of, milestones in order to get, a certain amount of allocation of funding. And then it goes in and then you get to play with what are the good assets, what are the bad assets? How do we well, what are the less good assets and how do we mix those up so that, the overall requirements of the financing we secured previously, are met and it's just, for each asset, the process tends to be much simpler. But the overall financial operations and development operations around that are often much more complex. because the level of effort does not scale with the dollar or megawatt value, it turns out. To wrap this up, I think that we've, today we've learned that, this is a big multi-variable problem, to solve. And while there are some overarching commonalities, you're going to find, a huge amount of differences depending on where developing these projects, what kind of size of projects are developing, what kind of financing your, you're using for this or what kind of customers you have? and so, you know, part of the reason that we pulled this episode together, with Charles and, and Jack is because both of you guys actually work on, on this complex problem in, in a couple different ways. And so just as we close on this episode, I think one of the, one of the best things we can do for, for people is help them understand who is out there in the industry that knows this stuff. And is actually there to help. In case somebody who's listen to this episode is honestly seriously thinking about going and developing projects like this, Charles and Jack, why don't you guys each give kind of a quick breakdown around, just for, I guess, a recap of what you do and how you help developers. Oh, good Lord, that's a big question. so, look, there's a universe of developers out there, and they come in sizes great and small and left and right that some just do pure development and do a little development. Epic like this is a skill set that for all the developers we have out there, we need more. We need better, always more. I think the development is the bottleneck. People who can get projects across the line are worth their weight in gold in this industry, and that is very what keeps the ball moving forward. So now my plea is anybody who's listening to this who's considering a career in development, absolutely do it. And come talk to me. I want to give people resources. I want to empower them. I want to encourage them. so me first. But, if there are, you know, if there's any subset, if you're interested in project finance, I'm happy to put you in the right direction. There is an absolute universe galaxy of different investors who are willing to take different slices of the pie, as it were. and they like their different flavors. So again, if you want to dive in, if there are certain areas that you think you have a good skill set in and you're kind of like, ooh, that development sounds really cool, or you know what? I just I'm just going to sit back until, you know, generate traditionally. And typically we'll look at Npx do the construction where the big capital that comes in and then and then hold for the lifetime or, or one of the first people to really see these is evergreen projects where we could hold for the life, and we're structured as a balance sheet entity. So we don't have a, a fund that we have to sell out. And, and like send money back to the investors. At some point. We can hold on to these to a long term. so that was a bit of a novel concept when we started. So, you know, that's a different flavor on the same thing. So I know that's a roundabout way of saying it really depends. So align your interests. Come talk to me. I will point you in a subset of the people who I was talking to. And maybe we can put something in the show notes. Oh quick shout out to KVK to kind of take VC folks. They are doing a really good job in trying to corral all the different, you know, what they call the climate capital stack. So the venture capitalists, the developers or the development finance entities are really thinking about it from a finance perspective. But if you want to know who an investor is, who takes on different types of risk, then, they're doing a lot of good work. And maybe we can put that the show notes. Amazing. Yeah, we'll do that and check. Yeah. I mean, I've been in I work at Pearl Street. and if we were talking about always needing more and better developers, we help developers focus on adding value to their projects. Right. So, Pearl Street is a financial operations platform. we help manage all of the chaos, financial models across, you know, tens, hundreds of projects as they move through the development pipeline, help keep an eye on cash flows and help make a developer's job a lot easier with regards to finance and financial operations. So they can, you know, as we said earlier, focus on the things that really matter. You know, coordinating those contracts, helping, make sure that people feel heard and that, you know, that their projects are moving forward. Amazing. Well, I think, I think with that, we've kind of come to the, comes the end of our developing a, virtual power plant series of episodes. Thanks again to Jack and Charles. If you have any questions or comments, please make sure to check us out at www.indermediate.com
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