Interview with Lisa VanPatten
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and finance executive, Lisa VanPatten, CFO of Sunergy America.
Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
The Economics of Solar Energy
Zezas: Hi, this is Andrew Zezas, your host at CFO Studio. I have the pleasure of being joined today by Ms. Lisa VanPatten, CFO of Sunergy America Inc. Sunergy America provides engineering, design, material, installation, and maintenance in the commercial solar space. Ms. Van Patten has been in finance and accounting for over 25 years, having held positions in manufacturing, medical instrumentation, and telecommunication with companies so well know such as Vonage and RCN Communications. Ms. VanPatten is here to talk to us today about the Economics of Solar Energy. Lisa, it’s so nice to have you here on CFO Studio.
VanPatten: It’s a pleasure to be here.
Zezas: So, the solar industry is one that’s been in the news a lot. It’s been the topic of a lot of discussions. There are many that believe that the industry is in turmoil. Companies are closing. Companies are going out business. Companies are going in and out of the business, yet someone with your background has just recently in the past couple of years joined a solar energy company. What’s going on?
VanPatten: Well, it’s a good question. In my view, this is actually a great time to go into solar. One of the reasons that I think you’ve read some problems with solar in the past is because that there were solar companies that prices of the panels were dropping tremendously and manufacturers were unable to keep up. So, some of the news media talked about solar panel manufacturers going under. Now there’s a few, but those solar manufacturers figured it out and they basically have stabilized prices. You’ve also seen solar panels production actually increase over time. A year ago, I was purchasing 190 Watt panels and today, I’m purchasing 245 Watt panels.
Zezas: Okay. So, cost has gone down, fewer manufacturers, but a stabilized manufacturing industry, and higher capacity panels.
VanPatten: Right. A year ago, we also saw incredible incentives in the solar industry. We saw the SREC market in New Jersey at the highest its ever been and we had really great federal incentives. So, when you take that all together, there were certain businesses out there that kind of played on the SREC market and on these incentives, and really didn’t design a sustainable business model. So, a lot of these people now have sort of been weeded out. Our company at Sunergy America, we really have a sound business model and have really analyzed it from a financial viewpoint. For me, when I got into solar, I said, ‘Wow, this makes economic sense.’ This is a really great place to be and I am so happy that I am in it.
Zezas: You’re not the first to tell me that despite the collapse in the SREC market in New Jersey that the industry is still sound. It still makes solid financial sense. So, the collapse of the SREC market, a lot of folks have heard the term SRECs, but don’t know what it is. It’s SREC. Share with us what an SREC is all about and why that’s important or why was it important?
VanPatten: So, the state incentive in New Jersey is an SREC. There are states that have other incentives. SREC stands for Solar Renewable Energy Certificate. What that means is that, let’s say you were to install a solar system and you were producing 2000 kwh per month.
Zezas: Now that’s a commercial installation, something of that nature?
VanPatten: It could be a residential, too. Either one. What that means is, let’s say you use half that energy, so half that energy you would be paying for and the other half you’re actually selling back to the utility whose giving you credit back for the energy you generated. So, that’s one scenario. Second scenario is, taking all that energy you just produced, 2000 kwh, in the State of New Jersey, you receive a certificate for every 1000 kwh you produce. So, in this scenario you would receive 2 certificates.
Zezas: That’s looked at as an SREC.
VanPatten: Which is an SREC. Then, a year ago, SRECs were trading at $600 a piece, so that means that the utility would have paid you $1200 for those two SRECs. Today, the SRECs are trading at a $134, which is really low and this is where it all fell apart for a lot of businesses that were really counting on those SRECs. You will receive SRECs over the course of 15 years. So, a lot of people mistakenly thought that they were going to have $600 all 15 years. That’s just not the case. The reason is because it is publicly traded and there is a supply and demand. So, the market is going to dictate the price of the SREC.
Zezas: So, for those companies that build their business model, the installation and manufacturing companies, anyone that was providing this type of service to either consumers or to commercial buyers, when they built their model on the base of a $600 SREC and the bottom fell out, the bottom fell out of their business.
VanPatten: Exactly, and that’s why you see a lot of companies going under because you cannot sustain at that price.
Zezas: And, you say they’re publicly traded. There’s a public exchange for SRECs as well.
VanPatten: There is a public exchange. You can go to it. It’s called the Flett Exchange. It’s on the website. It actually publishes what the spot rate is for various states and New Jersey is one of it.
Zezas: So, for companies like Sunergy America that have built their business model, not on the strength of SRECs, this is still a viable industry and a profitable one.
VanPatten: Yes, absolutely.
Zezas: Interesting. So, the SRECs are New Jersey based. Are there federal incentives as well?
VanPatten: There are federal incentives. So, in 2009, I am sure you remember this, President Obama signed the Recover Act and in it there was a program called the 1603 grant. Aside from the 1603 grant, there was also an investment tax credit. What that means is anyone who was installing a renewable system was to receive a cash payment from the Department of Treasury. Every different renewable type of energy was given different types of incentives. Solar energy was given 30%. So, if you were to install a $1 million system, at the end when you place the system in service, you would apply to the Department of Treasury, and they would send you a check for $300,000. That program was in place until the end of 2011. Until the end of 2016, you can still take advantage of the 30%, but instead of a cash payment that the Department of Treasury was giving you, it comes as a tax credit. If you don’t know, tax credit is dollar for dollar. So, it’s almost the same, but it’s not the same as…
Zezas: It’s not cash.
VanPatten: It’s not cash. Cash is king!
Zezas: So, we talked about the financial benefits of solar energy. Let’s talk about the operational benefits, the functional benefits of solar energy. Does it still work?
VanPatten: Yes, it does. One of the things that’s nice about solar is it’s clean. It’s definitely friendly for the environment. Nothing is emitted in the air. In fact, solar panels themselves, once their done with their use for life, are recyclable.
Zezas: All panels that are manufactured.
VanPatten: All PV panels. It’s also extremely reliable. Once they’re set in the roof or on the ground, that’s it. You basically don’t have to do anything to them.
Zezas: No moving parts, low maintenance.
VanPatten: Right, very low maintenance. So, once or twice a year you have to take care of them. The other added benefit with solar is that companies with solar can also certify themselves as a green building or promote themselves as a green company. There are a lot of consumers today that is very important to them. So, the fact that you can enhance your brand and appeal to those type of consumers is a benefit to your business.
Zezas: That’s true not only of the individual consumer, but also commercial consumers. Sometimes, they actively seek out the opportunity to do business with other companies that are green.
VanPatten: Yes, absolutely. We see that all the time. Aside from that, I read a statistic that said that employees who work for companies that really care about the environment and have green initiatives are very satisfied because they feel good about working for a company who is doing things like that.
Zezas: So, there is no negatives to being in the solar space.
VanPatten: No, I don’t there are any negatives.
Zezas: So, does it make economic sense also? We talked about the SRECs and the government incentives, but distill this down for me. You’re a finance executive, from a financial perspective, tell me how this works.
VanPatten: This is a great question because this is the question that everyone wants to know. ‘Bottom line Lisa, this has to make economic sense. Why am I going to do it’ It’s nice to be green, but it better make economic sense. So, what we do at Sunergy America, we will sit down with the client, we’ll look at their space, we’ll look at the size of their roof, the status of their roof, we’ll look at their land if there is any that we can utilize, and even their parking lot, if we can put a car port system in. I had a real customer recently that had adequate roof space and was paying something like 18 cents a kilowatt hour, which is fairly high. They had great credit. They definitely had the tax appetite to take advantage of the investment tax credit. So, we designed a system for them. Just to put in perspective, it was a 1.3 megawatt system, but the amount of electricity that they paid per yer was $200,000.
Zezas: Prior to installing the system.
VanPatten: Prior to installing the system, that’s what they were paying.
Zezas: So, these guys were paying $200,000 in electrical costs.
VanPatten: $200,000, that’s a lot of money. It was a manufacturing and they were just running one shift, but they had huge energy needs. So, we designed the system. I was happy to see that our engineers were able to provide 100% of their usage.
Zezas: That’s unusual.
VanPatten: It depends. Some people may not have the land. The land helps. Some people may not want the car port and are only subject to the roof, but you can get 50, 60, 70, and in this case 100%.
Zezas: So, you installed the system and wiped out a $200,000 annual electrical cost.
VanPatten: So, we were able to wipe that out. In terms of financial, what that means financially, I’ll sit down with the CFO and walk him through my model. This is what your savings is. The other thing I’ll promote is money is cheap right now, there are great rates and a lot of people are refinancing their mortgage, and for businesses right now, especially businesses that are creditworthy, this is the time to take advantage of what is out there. So, in a lot of my models, I’ll model that, the company will put in 50% and that the bank will loan them 50%. At the end of the day, once I run those figures and we take advantage of all those incentives, I don’t usually include the state incentives since their not predictable, the CFO is surprised to hear that the payback will be less than three years and the IRR over the 25 year period of their system will be 22.6%.
Zezas: That’s not too shabby.
VanPatten: No, you tell me where you can go invest that kind of money and get 22.6%.
Zezas: So, what type of companies can go and get 22.6%? What type of companies does this work for?
VanPatten: Well, it is someone that definitely has high energy needs, a manufacturer’s good, a hotel is good.
Zezas: A big roof.
VanPatten: We’ve done a nursing home. Yes, a big roof. People who are paying a high rate. 18 cents is actually really high, but if you’re paying 6 or 7 cents, then it’s probably not right for you. And, creditworthiness. Right now, I don’t know if you have enough to borrow for the whole system, but at least have enough to borrow some.
Zezas: So, you either have the cash to pay for it or the creditworthiness to finance it.
VanPatten: To finance it yes.
Zezas: So, we’re almost out of time. We’ve got time for one more question, but I know you’ve got some interesting answers for this one. What happens when federal subsidies go away. Does solar remain as an industry? Is this a fad?
VanPatten: Great question because that actually happened at one point where solar was very hot and then it got very cold. Today, all you have to do is really look at the news media and say, ‘where are the smart people putting the money, where are the prominent companies investing in.’ Just two months ago, there was a news story in the media that Warren Buffet, who is a very prominent investor, put $2 billion out to buy a solar farm.
Zezas: Billion with a B.
VanPatten: $2 Billion. So, all the people following Warren Buffet were up in arms and said, ‘Oh my God, should we take a look at solar, should we be investing in solar?’ So, there were a lot of questions at why he was investing in solar. I thought his answer was very interesting. Warren Buffet said, “I’m not investing in solar to get rich, I’m investing in solar to stay rich.” Great answer.
Zezas: That’s a Warren Buffet statement, sure.
VanPatten: That speaks to all the benefits of solar, that it is stable, it’s a long view, and it’s here to stay. The other news stories that were also very interesting is that are very prominent companies investing in solar. For instance, GE recently announced, actually it was back in April, that they were going to build the largest solar module manufacturer in the United States. They announced it in 2011 and said that the product won’t be delivered until 2013. So, here you have General Electric, a very prominent company …
Zezas: One of the best run companies in the world.
VanPatten: … yes, betting on solar panels here in the United States. Not in China, not in EU, but here in the West.
Zezas: I know that we talked before the interview about Apple joining into the solar phrase as well.
VanPatten: Yup, good memory. Apple, everyone loves Apple. They are building the largest data center in North Carolina and they recently made an announcement that they were clearing a 171 acres to build a huge solar farm. It’s going to be used to power their data center. Now, Apple doesn’t put in a data center temporarily. This is for the long run. They could have waited. They could have said, ‘Well, let’s see if there’s some other technology coming along.’ They decided no. This is the time to take advantage of the incentives that are there. We believe the technology is a stable technology and we’re putting it in.
Zezas: So, Warren Buffet, General Electric, and Apple.
VanPatten: And Sunergy America.
Zezas: I’m sold. Lisa, this has been fantastic. I truly appreciate the time you spent with us and sharing your views on solar energy and I wish you and Sunergy America tremendous success.
VanPatten: Thank you so much.
Zezas: It’s wonderful having you here.
VanPatten: It was nice being here.
Zezas: This is Andrew Zezas with Lisa VanPatten of Sunergy America, saying thank you very much for watching us here on CFO Studio.
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