Eco Investor Guide

Given the environmental impact of the recent oil spill in the Gulf of Mexico and the recent deaths in coal mines across the world, one can see that the true costs of oil and coal are more than their mere monetary costs. There is a need for capitalism with a conscious that takes into consideration nature, human life, environmental impact, in addition to the financial cost. Natural capitalism is a way of utilizing nature, with no waste and no toxicity, while productively using capital to generate a return to shareholders. With the right technology, we can learn to do more and better with less and longer. The benefits of sustainable energy will have numerous benefits such as national security, reduction in green house gases, as well as jobs, profits and competitive advantage.

There seems to be a closing divide between large corporations and environmentalists. GreenVesting is one such company that gives hope to environmentalists that want a good return on their investment. To give a little background on GreenVesting, they plan, build and operate PhotoVoltaic (PV) systems from roof mounted and ground based systems. Roof-Top PV systems are mounted on privately owned roofs such as warehouses or on municipal buildings such as schools or town halls. Ground Based PV systems are sited on plots of land which are rented on a long term basis. The electricity produced is fed into the electricity grid and purchased by the electric utility companies, in accordance with the Renewable Energy Sources Act (EEG). The cash flow generated by the sale of the electricity produced net of any debt servicing is credited back to the investors.

GreenVesting works with investors who wish to invest directly in their own PV System or purchase an ownership interest in a diversified portfolio of PV systems operated by GreenVesting KG. The management team consists of scientists, engineers and finance professionals. The Finance Director in charge of investor relations is Peter Walburg, while the Sales and Marketing Director for client relatons is Gerard O’Connor. The Technology Director responsible for vendor relations is Klaus Bauer, and the Director of Operations responsible for roof brokers and contracting is Dirk Volker.

I spoke recently with the management team about the future direction of GreenVesting, solar technology, photovoltaic project management and green capitalism. Here are their responses.

How do you balance “being green” and being a capitalist? Many in the “green world” do not think this is possible.

For the Green Movement to have real results and alter the negative direction that the planet is moving as a result of human industrial activity very large amounts of capital need to be employed on truly global projects. This capital is needed not only develop new technologies but to deploy them. The owners of this capital require real rates of return on their investments hence the very real need to marry ecology with economic activity a founding principal of GreenVesting. In addition there was always room for a mélange of thinking and acting green with the craving for yield. Our society is not an altruistic society, forgetful, when it comes to uncomfortable memories such as nuclear catastrophe’s such as Three Mile Island and Chernobyl, and not to mention the ones, which have not being published in such a great detail and very much yield oriented. Or in other words a society which is based on the “division of labor concept” will not do anything for free. However, the last couple of years have set and started a trend, which was already being phrased by the “Club of Rome” in the seventies and brought to the attention to millions of people by former Vice President Gore. This made a difference and boosted the realistic front green movement.

Which countries have the best model for solar power worst and why?

In general we are big believers in the FIT model where stable long term investment products can be developed for investors most European countries have implemented this approach in some form or another. We are less comfortable with the US model which gives a large payment upfront to subsidize the cost of equipment without a country wide framework governing grid connection and the price of power. The worst are those countries without any legislation promoting solar of which there are many. PV Investments are infrastructure –like therefore they need a comfortable planning horizon. The European laws generate this comfortable planning horizon, for both parties: The governments and the investors.

How long should governments subsidies solar and how?

Until point we reach the point of Grid Parity. But in addition they should provide the ground rules and have the utilities take the produced electricity.

Is your company profitable without subsidies? Will it ever be?

I would answer this question by saying that our company relies indirectly on Feed In Tariffs (FITs) to generate profitable investments for our investors. These FITs pay a premium for electricity sold to the power grid by our Photo Voltaic Power Plants. Over time technology is producing rapid improvements in Panel Efficiencies so requiring the FITs to be lower. In many ways these declining FITs have been the drivers of innovation to the point that in a few short years we will reach the nirvana of Grid Parity where little or no FIT will be required. Furthermore, the subsidy is no subsidy but rather a fixed allocation, whereby a consumer pays a fixed amount of 1-1.5 cts for each kwh to finance the additional costs. However, utilities also sell “pure green” electricity to interested consumers at a premium. Hence, no fiscal budget is being touched and most probably Utilities should make a profit on selling green power while getting financed through the fixed allocation scheme.

How do you evaluate projects?

There are many elements that are incorporated in our analysis of a particular project.

The location of a project is critical. Location depends upon the situation and irradiation to be expected, site elevation, type of land or building etc. Equally important is the equipment to be used in the project, who manufactures it and the long term performance. Another issue is who will construct the site and their experience level.

Legal Work: Typically we do not acquire the buildings or land, but instead lease the sites through long term leases. Thus, it’s important that the projects are adequately secured in the event that the owner of the site has any legal difficulties, such as bankruptcy. This is not an insignificant point when one considers these projects are 25 years plus in duration and very important where projects are situated in emerging markets, (of which we have none).

Is it easy to find land/buildings for projects?

It has become progressively harder this year to secure sites in Germany as returns when compared to other years are better and the political dialogue in Germany around FIT cuts has produced a rush to secure sites in advance of these proposed cuts. Elsewhere the other European markets such as France, Italy and the UK are opening up having adopted attractive FIT legislation.

How do you use weather as part of your analyses for projects?

Not necessarily, weather but as mentioned irradiation, or the amount of sunlight a particular site will receive in a given year. This is simply not just dependent on latitude but elevation and the surround topography of the site. Having said this, the long term irradiation in Germany is fairly stable, therefore a stable but not insignificant factor for choosing the respective modules. For example: A location in a very attractive irradiation zone will typically cost more rent, therefore space is scarce => we would use the best and most expensive modules. A site in a less attractive irradiation zone we pay less for space and therefore can use cheaper modules. Contrary to some of the companies we have seen, we always look at the investor’s yield first and then choose the equipment

When contracting for a project we typically leave nothing to chance and we only work with fixed price contracts. Occasionally something minor may occur that demands extra expenditure but these events are rare given the experience of the people here at GreenVesting.

How do you finance your projects? What funding do you get from banks? How has this changed since the financial crisis?

We have a number of financing counterparties typically local German Savings Banks who understand the business very well. Internationally, we use the larger banks which have local banking networks in country. We normally employ an 80/20 Debt to equity in our projects.

It became very difficult to get attractive financing during the height of the crisis; we have however seen an increase in the number of banks willing to finance projects with more favorable terms during 2010.

What kind of rate of return do you expect?

The answer depends on a number of factors, location of the projects, time horizon, the amount of leverage deployed in each project. I would generalize by saying that the current returns available to investors in German Solar projects are low to mid teen IRRs in a leveraged scenario over a 25 year time period. And that is after our fees, insurance, and converter “insurance” for 20 years.

What is your sensitivity to interest rates on your projects? Do you hedge?

Our projects are not that sensitive to interest rates, financing is typically over 17 years with the first 10 years being at a fixed rate and thereafter it floats. By that time (10 years) however the majority of the financing has been repaid so the tail risk to interest rates is relatively minor. However if interest rates would increase a significant amount over a short period of time, especially during the building phase of a large project while the interest rate of the financing has not been secured yet, we would suffer.

How much do you out source production? How difficult is this?

GreenVesting is not in the business of project construction rather our core business is project management and development. Any activity which is outside of these core roles we out-source. We use third parties to construct our sites and we employ a nation wide network of firms to perform maintenance work on our facilities.

Working with third parties means that GreenVesting can remain a small flexible organization and rapidly respond to changes in the market place, having a large organization would mean that this would be impossible.

What are risks to your company and industry?

There are a number of risks for example the current change in the political climate towards solar makes planning and running a business difficult. Almost every month we have a different proposal from government regarding modifications to the German FITs. Given the long lead time for our projects this at times proves extremely challenging to manage. The demand for solar equipment is at an all time high currently and if it continues to grow production may not keep up and prices may climb again. On a macro economic front a rapid rise in interest rates would make new projects difficult to finance at attractive rates for investors and potentially limit the growth of GreenVesting.

What is the most difficult part of your job?

Dealing with site- landlords, local authorities and legal departments from banks.

What mistakes has your company made and how did you fix it?

The PV-Industry in Germany has not only attracted former bankers and investor who “outed” themselves as being green, but also fast movers who want to make the fast buck. This used car salesmen mentality has created some bad noise in the industry. With our first project we dealt with one of those guys, who we now have a legal case against. The project was very small and in no means important for us and our P&L but it is annoying and time consuming, but even more it is a shame that within an industry which generally aims for the good, to have to deal with people taking advantage of a good system. We have now stable partners with whom we align, share profits in the long term and also share the same corporate philosophy of honesty and transparency.

What is it like being a small company in a big market?

While there are larger companies than GreenVesting we possess a very deep bench with respect to Solar PV expertise and financial management all gained at much larger institutions. In the best spirit of entrepreneurship, we offer better products and service to our clients than is currently available from much larger institutions. Hence we believe our size is a competitive advantage for us and our clients. Within the first year of existence we have not only used our private money and the funds of our investors to create a track record, we have also used the time to create process. Both, the track record and the process have helped us to be taken more seriously by banks and suppliers.

How has China’s manufacturing ability changed the solar industry?

It has been an enormous contributor to the reduction of the price of equipment. China is also not only bringing large manufacturing capacity on board but is rapidly building its own R&D expertise which should also drive innovation. But the expansion could not be so enormous without huge governmental subsidies. China is the largest producer, user and governmental supporter by subsidies of the worldwide PV Production.

How has technology changed? What do you think about the product that can be painted on roofs for solar…will we have a mass market for this?

There is of course a potential large market for all of these promising new technologies but they will all need a lead time for mass market adoption. What we need is time not only to roll out these technologies but also to see how they behave as the systems age. GreenVesting uses silicone technology in most of its equipment, this is technology has been around since the USA and the USSR launched satellites to spy on one another and as such we have years of data on these systems. This reliability is why GreenVesting finds financial sponsors for its systems. However, the thin film technology will enhance the industry massively, create significant price reductions. The production process of thin film technology is just a lot easier and uses less manual labor. This is the reason why China put major emphasis on crystalline modules rather than thin-film, where the US Company First Solar (FSLR) is a market leader.

What “green technology” offers the best prospects over the next 10 yrs?

In order of significance, solar PV and solar thermal, smart grid technology and energy storage, wind and wave.

Where do you see opportunities to expand?

GreenVesting is now actively expanding its operations outside Germany to countries such as France, Italy and lately the United Kingdom where we hope to implement out specialist knowledge in Photovoltaic’s for investors. France, Italy and Great Britain all have attractive FITs right now. There are other jurisdictions on our horizon such as Canada and Asia but these are in the future.

For more information about GreenVesting: www.greenvesting.de

Clearly, the work of GreenVesting will inspire similar investments elsewhere in the world which will help solar stocks in general such as First Solar (FSLR) and JA Solar (JASO). Another easy way to get quick exposure to solar stocks is to invest in the Claymore/MAC Global Solar Energy Index ETF (TAN) which is a solar exchange traded fund. Other solar stocks to consider include Suntech (STP), Canadian Solar (CSIQ), Yingli Green Energy (YGE), Solarfun (SOLF), and ReneSola (SOL).