A short time again, I used to be at an industry comfortable hour (hey, bear in mind these?) the place I ran right into a pal and well-known industry analyst, Wooden Mackenzie’s Michelle Davis. We had caught up earlier within the week in regards to the business and industrial (‘C&I’) photo voltaic sector, by which my agency specializes and which she researches commonly. And on that road nook in Salt Lake Metropolis, we every made just a few passing feedback in regards to the convention, the expansion in C&I photo voltaic, the flood of capital into the sector, the growing curiosity degree and the way difficult it’s to scale. These challenges exist for lots of causes, however as we mentioned the sector a bit extra, we drifted into the native and regional nature of C&I. As we have been leaving, Davis stated to me, “sure, the tail could be very, very lengthy.”
What struck me was not that she was proper — as an industry-leading analyst, in fact she was. It was extra her concise method of describing the market and, frankly, our enterprise mannequin, which is to chase that lengthy tail of C&I photo voltaic. And as we have now seen lately, it isn’t simply our agency’s enterprise mannequin; it’s changing into an more and more sought-after asset class by not simply conventional strategic buyers, personal fairness funds and infrastructure funds, however buyers of every kind who’re searching for a mixture of lengthy and steady returns with a deal with environmental and social governance (ESG).
What is the lengthy tail?
As I believed extra in regards to the lengthy tail of C&I photo voltaic, I started studying about different industries and got here throughout the e book that helped coin the phrase: ‘The Lengthy Tail.’ The writer is Chris Anderson, former author for the Economist and editor in chief at Wired. The that means of its title is encapsulated in its subtitle: “why the way forward for enterprise is promoting much less of extra.” Anderson discusses three themes which might be resulting in an extended tail in enterprise — democratization of manufacturing, democratization of distribution and higher connecting of provide and demand.
The democratization of manufacturing is maybe most evident in media and leisure. The power to document a music, film or write a weblog put up that may be shared internationally in a matter of minutes has spawned companies like YouTube and TikTok. Spotify and Netflix are examples of capturing the lengthy tail by democratizing distribution — songs, motion pictures, and documentaries beforehand unavailable or exhausting to search out on-line or at a bodily retailer at the moment are simply a part of a client’s month-to-month subscription. Amazon is the archetypal instance of a enterprise that higher connects provide and demand.
The e book introduces us to the producers like YouTube stars or Etsy artists, new markets like these for documentaries on Netflix or the most recent esoteric craft beer, and the brand new tastemakers spawned by Amazon evaluations and Instagram influencers.
How does the ‘lengthy tail’ relate to C&I photo voltaic?
The C&I photo voltaic market has its personal model of those gamers. The brand new producers are builders whose authentic enterprise could have been power effectivity, mechanical engineering, roofing installations or business actual property. The brand new markets usually are not simply state markets with insurance policies pleasant to renewable power, but in addition submarkets like rooftop industrial prospects in Maryland that host group photo voltaic.
However the brand new tastemakers are maybe a very powerful gamers. They embrace institutional buyers demanding investments with optimistic ESG standards, NGOs pushing massive power customers to cut back their carbon footprints, and revolutionary power patrons like Google and Amazon with revolutionary procurement methods and contracts that enable long-tail prospects like a village in Ohio to simply procure photo voltaic power and lower your expenses on the similar time.
These new producers, markets and tastemakers are rising from a C&I photo voltaic sector that’s changing into some of the sought-after asset courses. Past the ESG motivations and the will for steady, long-term money flows, the sector is changing into well-liked relative to different seemingly comparable subsectors of ESG and renewables. Inside photo voltaic and renewable power, C&I photo voltaic has the good thing about offsetting retail power charges, that are in fact increased than wholesale power charges offset by utility scale wind and photo voltaic initiatives. C&I photo voltaic can be naturally distributed in nature, which offers buyers with portfolio range throughout utility zones, state markets and buyer credit score profiles.
The whole addressable market (or TAM), is huge, as made clear from this chart from an insightful report from Wooden Mackenzie and Station A, an AI-powered clear power market.
Capturing the lengthy tail of C&I photo voltaic
However whereas the C&I sector is simply over 10 % of its TAM, it could possibly really feel extremely crowded and saturated at instances — due to the lengthy tail. There isn’t a doubt that investing in C&I photo voltaic is smart. The TAM is there, the coverage assist is simply growing, the financial case is compelling, and the patron and company demand is rising exponentially. Nonetheless, many of those new entrants and buyers fail to grasp simply how lengthy the tail is, and extra importantly, how exhausting it’s to entry the tail.
Processes run by funding banks and RFPs run by consultants solely get you to date and are usually a race to the underside. Bilateral transactions on the lengthy a part of the tail require industry experience, long-term relationships constructed on belief, and execution certainty that comes from having the complete capital stack at hand and technical know-how to construct and handle a photo voltaic venture. On the capital aspect, it’s straightforward to have a dedication from a fund in a press launch, however you additionally want a lender that understands the complexities of C&I, and most significantly, a tax fairness investor that’s keen to eat away at their tax invoice just a few million dollars at time.
It’s undoubtedly extra thrilling to plan for the proper scenario, elevate capital on an concept and a pipeline and over-engineer a white-board technique on the entrance finish that sounds good to buyers. It takes extra persistence and experience to grasp and get to know the native companions and markets that comprise the lengthy tail. Usually it’s best to undergo a stay transaction after which replicate it upon getting confirmed that the offers do exist and there’s a workable course of in place. The primary deal is all the time the toughest — and if there are too many mushy prices and guardrails concerned, there probably is not going to be a second deal.
Success in C&I photo voltaic additionally requires flexibility. An investor should present native companions with a versatile platform that funds C&I photo voltaic at present, however would possibly fund battery storage tomorrow, and EV charging infrastructure subsequent 12 months. If the platform is designed with the native companions in thoughts first, then the replication and deal circulate will maintain itself.
There’s an previous saying that every one politics are native. The identical may be stated for C&I photo voltaic. There isn’t a shortcut in capturing the lengthy tail. It’s discovered over time with certainty, velocity, and belief. We hear it day by day in our enterprise. At some point, it’s a baseball coach that wants an modification to a web site lease and says that he’ll ask the constructing proprietor tonight at their son’s baseball apply. The following day, it might be a developer leaving a convention a day early on a red-eye flight to make their native utility fee assembly.
The extra native the C&I market turns into, the longer the tail shall be. So, because it seems, my pal was proper. The tail of C&I photo voltaic could be very, very lengthy. To completely notice the huge potential of the industry, we have to higher join provide and demand by higher connecting high-quality native initiatives to institutional capital. Let’s hope the industry comfortable hours come again once more quickly so we are able to seize the lengthy tail collectively!
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Richard Walsh is a managing associate at Madison Vitality Investments, a platform that develops, owns and operates distributed era initiatives inside the business and industrial and small utility-scale sectors.