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Ep328: Optimizing Distributed Generation Assets
00:23:45
Barrett Bilotta, CEO of Agilitas Energy, discusses the company's integrated approach to renewable energy development and recent trends in distributed generation and energy storage.
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- [00:00]
A
Foreign.
- [00:04]
B
Welcome to Currents, the Norton Rose Fulbright podcast. Today we're recording with Barrett Balata, CEO and co founder of Agilitas Energy. He joins us today to discuss his vertically integrated energy business for developing renewable energy projects in the US and give us an update and why he picked the business model he did and anything else that happens across his mind today. So thanks for recording with us.
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A
Pleasure Todd, thanks for having me.
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B
Okay, so one, there's so many developers out there and there's a lot of different strategies for developing. What is your strategy and why'd you settle on it?
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A
No, it's a definitely thoughtful question, especially given the current market circumstances. So we are a mid market energy company. So we look at the world as an energy company does, specifically within the distributed generation sector, which means that we have always built, owned and operated our assets. Many people within what I would call the DG mid market have specifically focused on one aspect of the project lifecycle, whether that's developing a project and selling the paper or building the project as an EPC or end up being the end asset owner. There's not really many integrated companies and in the marketplace and so we are fully integrated. We do our own development, both M and A of projects operating and notice proceed as well as greenfield origination. We have our own in house engineering and procurement and construction management capabilities which allows us to go ahead and optimize the project that we're going to eventually own and operate. And then fundamentally we have a strong power markets background where we have a team of people with decades of experience coming originally from the thermal generation side of the business and being able to take that ISO regulatory kind of framework and knowledge and being able to put them on our operating fleet. And so with that we're able to go ahead and I believe have the best outcomes as it relates to project performance as well as just overall I.
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B
Can'T say this for certain because I don't know that every company has confirmed this to me, but I think I always thought, at least looking at these companies, I agree with you that there were a lot of companies that were out there that kind of got the project ready to be built and then they flipped it. There were other guys that would buy from them and then take them to construction and then there are other guys who just really wanted to clip coupons and they'd buy operating assets. And to me it made sense to do it that way because the cost of capital and the risk you're taking is very, very different than any of those stages of the life cycle. And what you're throwing out there is somebody who's got the skill set to see the project through all life cycles. So how did you manage to raise the type of capital that worked at all those different risk points and keep everybody happy?
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A
Yeah, so it's really interesting. It's definitely, as with all business, chasing the lowest cost of capital and fundamentally a lot of what we do is by having it all in house and all within the platform itself, we're able to de risk across all of our projects and assets from the beginning to the end in terms of what ones go ahead and achieve success versus what ones end up failing. And so what I mean by that is a lot of the counterparts in the market that are going ahead and doing development and selling the paper will go ahead and throw spaghetti against the wall, for lack of a better term, and try a shotgun approach to finding assets to then go ahead and sell. With us, it's more of a disciplined approach. We're only targeting markets, pro programs and specific types of incentive structures that we want to own because we're not ever doing a development to sell to another counterparty. We're doing a development and then eventual build for something that we're going to own on our balance sheet. And so it's surprising that when you're able to be in every type of value creation point within a project and have a disciplined approach in terms of what you're looking to develop for yourself versus just trying to maximize the flow of paper in the market, you're able to go ahead and have a very attractive outcome. Right. And then cost of capital becomes less important because you've in essence made money every step of the way and able to just have a overall higher success rate of projects to actual commercial operation.
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B
So where do you see in today's market kind of the best opportunities? I think there are, from what I know, it seems like there's several developers out there who need to unload projects. So maybe there's some, some good opportunities there for you or somebody like you who can kind of, I guess, mitigate some of the risks that maybe they couldn't do and maybe has enough capital, staying power to hold onto the asset and, and turn around somebody's pipeline. But you tell me, like what? For somebody who has the skill set and the capital that you do, where do you see the best opportunities?
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A
Yeah, that's been a shifting environment, I should say, over the last several months. Right. Especially with the OBBA and just even before that interest rate adjustments that the entire market kind of felt so What I would say is that over the course of our history we've primarily ended up acquiring, acquiring projects at call it pre, NTP or ntp. But over the last year or so we've seen a huge opportunity with operating portfolios and projects that have already been in existence for some time. I think that, you know, generally speaking, within the distributed generation sector of renewable energy, the market has always been focused on new asset generation. But the way that we see it is that fundamentally, maybe the dirty little secret is a bunch of the distributed generation assets that are already operating and built in the marketplace aren't working to what they were originally supposed to do. And they also have just been either mismanaged or neglected. Or the business model of I'm going to go ahead and buy a bunch of operating projects, hold them for the tax equity period and then sell them outside of recapture to the guy with the next lowest cost of capital doesn't exist anymore because there isn't a lower cost of capital because most of this origination happened in the zero interest rate phenomenon period. And so what we've been focused on as of late is actually buying operating projects and portfolios and then optimizing them. And that's primarily because, you know, there's risk involved and there's time involved. Bringing an NTP project to, to life. But fundamentally from a risk adjusted returns basis, being able to buy and optimize repower, reprogram existing operating steel is just a better, in a quicker flash to burn. So over the last 12 months, and I would say probably for the next 24 to 36 months, we see a massive dislocation within the DG market, in particular specifically in operating portfolios. And that's where we're going to focus a lot of our attention on.
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B
Have you seen the value that people are willing to pay for operating portfolios changed over time? Or is it really just that you guys think you can, through your own kind of proprietary knowledge, eke out more value from what than other of your competitors? Or do you think the pricing just generally in the market's gone softer?
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A
I think it's a combination of both. I would say that yes, the pricing in the market has gotten softer. And I just think that is because fundamentally the underwrite scenarios that new buyers are doing, they're changing availability assumptions, they're changing say community solar delinquency and credit rates, they're changing operating expense. It's just the rose colored glasses of what the spreadsheet business looks like has changed. And so people just need a higher return Because I think that originally what we saw was people really searching for yield when there were very, very low interest rates. And people thought that in particular solar was going to act like a bond in terms of just a steady stream of cash flows. But in reality, solar is a machine. It requires a lot of care and feeding, especially if you want it to operate properly. And that takes a lot of effort. And fundamentally it takes, you know, individual companies that know what they're doing to make them actually perform. So one, yes, hurdle rates have increased. And then two, yeah, we wouldn't just go ahead and buy a project or look at a particular portfolio unless we thought there was substantial alpha that we could uncover. And that can be a variety of different things that can be either repowering the system, I'm using that as a broad term, you know, by making changes to inverters, or if it has coupled energy storage, making changes so they work properly and making sure that uptime and availability increases. It could be about changing programs that the system participates in. It could be buying out existing PPAs, replacing them with new PPAs that we already have, kind of off the shelf, but doing a combination of things that we believe can add, you know, substantial value to get to a higher return.
- [09:58]
B
I'm switching not from the M and A of operating assets and more either to M and A of pre NTP or just developing stuff on your own. You mentioned the shifting landscape. I mean, clearly that's happened. Kind of taking them one by one. How, how much additional friction do you think the FIAC rules are going to add to development?
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A
We definitely are, you know, having to go and drill to the center of the earth to, to make sure that we're going to be fiat compliant on our, our assets. I think that in some ways it's one of the reasons why it's a thin market on buying NTP or pre NTP projects at the moment is because there's just still some ambiguity around fiac, around what these long term services agreements and how that's going to get captured into the FIAC rules outside of just the capital equipment components. And the start of construction is going to play in that. So, you know, as we're looking at it right now, we have a bunch of batteries, you know, energy storage systems that we are green fielding. We are under development. By the time that those become ntp, we understand and we have the comfort that we will have the ability to have fiat compliant systems. We definitely are with some of the larger companies such as LG and Tesla. Those have been our primary main vendors as it relates to energy storage technology. But if you're bringing a system online within I would call it the next 12 months or right, right before kind of the, the July 4, 2026 date, it's definitely one of the things that people got to look, look at harder and fundamentally when we're buying projects that we didn't originate and have maybe different energy storage platforms or products that aren't going to be fiat, we then have to take a step back and usually redesign that system with a quick equipment that we believe is going to be best suited to meet that federal, you know, regulatory requirement. And so that's a delay to interconnection and that's a delay to start a construction, which has never been easy to begin with. But this is just another wrinkle. So that does affect what I would say bottom line is it affects pricing in the market and it affects who's going to be the buyer of projects in the market and have to deal with that.
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B
And how big of a chilling effect do you think the, the loss of the investment tax credit is going to be for the distributed solar business?
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A
So it's interesting, right, because we have a lot of debate about this at our company all the time because on one side we think that it'll be harmful, I think for the developers, but on the other side we are actually kind of enthusiastic about the, the ITC going away because like with most government incentives, it generally has the perverse impact of increasing prices. So I believe that fundamentally based on the sunset, you will have the balance of system cost in total system cost of a solar facility decrease. You will not have any more of the apprenticeship rule rule requirements. You will go ahead and have kind of who is the actual most cost effective components as it relates to the system. And then in particular where we're building systems, the capital equipment components sometimes are not the most expensive aspect of the system. Right. We just have site work conditions, we have balance of plant conditions, we have all of these other things that factor into it. And so I think what's, what's, what's happening right in the marketplace as it relates to electricity is the total addressable market of electricity is expanding in the revenue side of the equation is drastically changing and that will make up for over the arc of time the loss of the investment tax credit. This probably is an unpopular opinion, but that's just kind of how we're, we're looking at it right now.
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How about on the tariffs?
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You know, it's one of those things where it's like threading a needle. Obviously the gentleman in charge changes on a whim between what, what the tariff rate is and how, how long it's going to be in place and if there's a sunset or if there's a pause and everything like that. So we've definitely felt the bite of tariffs within our projects. We've been successful in having a portion of those tariff increases go ahead and be dealt with via our master services agreements and put back onto the manufacturer. But now as it relates to the acquisition of equipment like this, this is becoming one of the biggest thing is where is it coming from? What type of tariffs are in place? Is there an anticipated tariff in place? And what can we do to go ahead and source either from more friendly trade relationships that exist between the United States and a counterparty to go ahead and mitigate that risk?
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B
How about storage? Do you think storage is on a much different path now than wind and solar, given the different treatment?
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A
I do. I think it's for a couple of reasons too. So one, of course the ITC is being able to extend all the way into the2030s with energy storage is a big thrust for that specific asset segment. But then number two, I think the difference with energy storage is that fundamentally it is a dispatchable asset. And that's one of the things that have always been kind of the issue with both solar and wind in its intermittent nature of generation. I do believe that like Congress as a whole probably saw the value in having a dispatchable asset being able to go ahead and dispatch energy or, you know, take in energy based on what is needed in the grid at the time. And I think with the electricity market growing in the way that it's growing, and what I anticipate being the increased volatility within the electricity market storage, 100% serves a core function and probably can get deployed faster than many other types of assets that are also dispatchable, that be like primarily natural gas generation, whether it's peakers or larger combined cycle power plants. That takes a bunch of time. We can go ahead and interconnect dozens of distributed generation batteries quickly. And it being a digital asset allows for it fundamentally to respond instantaneously to, to price signals as well as, you know, electronic signals in the marketplace.
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B
So speaking of pricing signals and increasing demand, where do you think pricing is headed here over the next 24 months, given the reduction in subsidies and tariffs and demand? Is that just. Are we just headed towards much higher pricing?
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A
Unfortunately, I believe the answer is yes. I think that there is going to be Much higher pricing throughout the electricity market as a whole. Talking about the entire United States, I think there will be certain elements of the country or certain areas of the country that are going to go ahead and feel it more than others. Specifically, I think PJM is going to have a bunch of problems as it relates to capacity shortages and ever increasing capacity prices because that seems to be where the majority or a huge portion of data center growth is happening. And then fundamentally other areas of the company, excuse me, countries such as ISO New England that has gas constraints in in particular just does not have the ability, especially during the winter to have natural gas be, you know, less expensive. Right. Because of pipeline constraints. And there's just going to be a continued back pressure on electricity pricing. And then fundamentally if the one other aspect as it relates to the retail consumer is the electrification build out, whether it's all the new transmission, distribution lines and all the infrastructure upgrades that are just naturally happening, not necessarily even because of data centers, but EV charging, just electrification of transportation, heat pumps and all this other stuff that all gets put into the rate payers electricity rate. And so that obviously is an issue. And then back to your original point, if you remove one subsidy such as the investment tax credit on generating class of assets, that being solar and wind, if you want new generation built, the price signal of the top line revenue of those projects has to be higher to justify new projects coming online. And so it's just that, you know, supply, demand, equilibrium.
- [19:06]
B
How much of a bottleneck are you seeing interconnection queues being to preventing the supply from kind of serving the demand and bringing prices down? Is it, Are the cues getting worse, better? I know there's been a lot of reform. Has it helped at all yet?
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A
Yeah, so it's really interesting, right, because I think jury's still out in terms of what the cues are going to look like. Post the OBBA before the obba, I can tell you that the interconnection process in cues, it was the stone wall that essentially had everyone on equal footing and just waiting to go ahead and get interconnected. I imagine that a bunch of projects are going to drop out of the queues nationally. As you know, the, the sunset of the ITC takes its bite and maybe that will allow the best projects to make their way through. But fundamentally the grid both at the utilities as well as the regional transmission operators or ISOs move at their own pace. And it's just far easier for load growth to always outstripped new generation in terms of just how that supply demand equation works, it'll still be the biggest issue. I think that there probably needs to be some form of, of greater reform even in the market. I know that there's many states that are just frustrated by the ISOs that operate in their state as well. And there's discussions about leaving isos and all sorts of things because at the end of the day, the voters are going to speak loudest to their governors and their state legislatures in terms of ever increasing electricity supply. And it is fundamentally true that the way you go ahead and deal with electricity pricing is, is by bringing on new generation. And I imagine that certain states, and you already see it now, will want to take some of that power in their own hands and try to deploy distributed generation even faster than it is being deployed today.
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B
All right, last question for you and that's in terms of your plans going forward. So we've got all, you know, the markets moved a lot probably in the last year. If you had this conversation a year ago, you wouldn't have the information you have now. Are you still focused on dg, solar and a little battery or do you think you're going to move to focus on other technologies or maybe different parts of the renewable generation sector?
- [21:46]
A
We actually recently entered into hydroelectric power because we saw that hydro as a baseload generating asset is quite frankly an untapped resource throughout the country. And based on the investment tax credits staying in place for that all the way into the 2030s, as well as just higher overall electricity price signals, we're going to see a bunch of new hydro come online. We've entered that market. We have our own hydro development team. We acquired two very late stage permanent assets that are on non powered dams. We're planning on 100% across the country in the right locations, but primarily within the PJM market because of the data center price signals that are there. And then I also fundamentally think that as we continue to look at economic signals in the market and just generally speaking the transition, we will probably look at some gas fired power plants as well. On the smaller side, I think that it's an important stack of asset generation within kind of the overall string work of electricity in the US So that's another area we'll start to investigate.
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B
All right, well, best of luck in the new hydro venture and helping serve this increasing demand we got here. We need all the help we can get.
- [23:08]
A
I really appreciate the time, Todd. It was great speaking with you.
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B
You can find us online at www.pro project finance law or send us an email at currentsordonrosefulbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers. Stay ahead of the Currents.