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[Episode #19] – Distributed renewables in Latin America and beyond


Finance geeks, this episode is for you! Latin America has had one of the fastest-growing renewable energy markets on the planet for the past several years, but nobody ever talks about it. We aim to correct that in this wide-ranging interview with Adam James, Deputy Director of Global Strategy and Policy with SolarCity.  Who’s got the hottest auction design? Who’s growing at eye-popping rates?  Who screwed up their incentive program so badly that nobody wants to invest there anymore? And what are some outside-the-box ideas about how to get capital flowing into distributed energy systems in the developing world? Plus: oblique Prince references! (RIP)

Guest: Adam James, Deputy Director of Global Strategy and Policy at SolarCity, former global demand analyst for Greentech Media, and the founder and CEO of the Clean Energy Leadership Institute (CELI), an organization devoted to providing young people with the tools they need to impact clean energy policy.

On Twitter:  @Adam_S_James

On the Web: Articles by Adam James at Greentech Media

Recording date: May 6, 2016

Air date: June 15, 2016

Geek rating: 8

Chris Nelder: Welcome Adam to the Energy Transition Show.

Adam James: Chris great to be here.

Chris Nelder: Before you made the leap to Solar City last fall you were my favorite analyst on renewable energy in Latin America by far. I always found your articles on that for green tech media to be a must read and I'll link to your archive at green tech media there in the show notes but I'm sure you've still got your finger on the pulse of Latin America. So let's start there like first of all what kind of prices are we seeing for wind and solar systems down in Latin America?

Adam James: Yeah. Well thanks for your kind words as well. Got to say it's a pretty small pool of analysts who are looking at Latin America Solar so.

Chris Nelder: That's true and you're one of the few who writes in English so hey

Adam James: I'll try to be flattered. I mean as far as pricing is concerned. What we've seen is that pricing has come down very very fast in terms of PPA pricing in most of the key markets in Latin America which I would kind of put three at the top which are Mexico Brazil and then Chile. Kind of being the biggest and the ones where you've gotten the most evidence to kind of see what direction prices are heading. There have been a few other auctions and other markets and especially in Central America. So we had an auction in Panama. We've had some indirect procurement happen in Honduras and in all those areas. You know Jamaica we've seen that the PPA prices have gotten lower and lower over the last three years. The challenge really has been in my opinion that any time you get record low prices you've got to remember that there's another side to the equation which is what kind of a return are the investors in those projects getting, and the lower the PPA, all things being equal the lower the returns are so so low low prices are not always good news when it comes to investment. And so in some cases and Panama for example you know we saw these rock bottom prices but then none of those projects really materialized. There's a lot of other kind of nuances here especially around you know in Brazil the currency risk. So a lot of projects got cleared at maybe $100 a megawatt hour but then the currency just nosedived. And a lot of those projects are worth about $60 a megawatt hour now. So what used to work you know a year ago or a year and a half ago with currency at those levels no longer works today.

Chris Nelder: Gotcha. So what kind of prices though are we actually seeing especially for solar?

Adam James: Well in dollar terms I mean we've seen that the prices in the most recent Mexico auction were very very low from you know between four and six cents for solar and wind, in the Chilean auctions that have happened over the last two years. They've come down from around eight to nine cents down to between six and seven cents. And in the Brazilian auctions we've seen prices consistently kind of in that $80 to $100 per megawatt hour range. So you're seeing a trend heading down. Definitely. But as I said the counterweight here is what kinds of returns are investors expecting. And I think given the risk in a lot of these markets both Country Risk and currency risk there's definitely a floor for those PPA prices and where they can be without significant cost reductions and I think where we're getting closer and closer to hitting that floor given the cost of capital.

Chris Nelder: Right. Obviously it can't be free and obviously there are financing costs and you know any time you're getting down close to four cents a kilowatt hour or 40 dollars a megawatt hour you're pretty close to the bottom there. I mean we've recently heard about this project in Dubai that's come in at just barely under 3 cents per kilowatt hour, thirty dollars a megawatt hour which is amazing. And that's unsubsidized but of course that's when the Middle East you know it's the most sunshine abundant place on the planet.

Adam James: It only gets you so far. The cost of the project you can get that down pretty low. And then the cost of capital is really where you get to pull a lever in a place like the Middle East. So if you're willing to get very very low returns you can certainly make a three cent EPA work. But but but that's not going to be the case everywhere. And I think again that that's the important thing to remember here is that record setting PPA prices are only partially indicative of success in the industry. The question you have to ask is why and how are you able to get those prices that low. And the answers to this question may lead you to the conclusion that you have some success if it's because costs are coming down. That's great. That's because your cost of capital in public markets is lower. You know that kind of thing it's great. But if it's because you're accepting unrealistic returns that's probably not so good. You know if it's because you're relying really heavily on a subsidy that may disappear the following year that's not so good. So I think the why are you able to get such low prices is more important than just taking the prices themselves as a signal of where the market is.

Chris Nelder: Yeah that's a great point. I mean especially if it means that you're taking a bid that's so low that the developer isn't actually going to deliver on the product.

Adam James: That's exactly right.

Chris Nelder: Yeah, so just to be clear the numbers that you were just talking about were unsubsidized numbers.

Adam James: Yeah that's right. That's right. So they're still really impressive and I think the place that they're the most realistic and that they are good news is in the Chilean market. You know Mexico I think that a lot of those are loss leading projects. So I don't think very many of those projects are going to be making money in Brazil. Certainly very few of those projects are going to be making any money. The Chilean projects are actually pretty robust and I think the developers and the investors will be making money off of those projects. They've got a kind of a best in class auction structure in the Chilean market that I've really admired how they put it together. They've started bidding by what time of day the project kind of has output rather than just a flat of megawatt requirement. So in other words they say who can bid whatever the lowest price you can for the hours of 2 to 5 p.m. and then you can bid in to that block and that means that solar which can consistently deliver at those times can bid really competitive against gas or other things whereas in some other markets where you have to provide a firm power commitment that's harder, and so I think that kind of auction structure is really great. And I think we'll see at other places too like Brazil where they've recognized that it's not just about the price of energy it's about the value of that energy because you know who cares if you can get hydro power at $20 a megawatt hour if you hit a drought and you have no water. Right? Like in those moments. It's worth paying $80 a megawatt hour to have solar built because it can show up when the drought hits whereas hydro can't. And so there's a value component to this that I think the Chilean auction has done a really good job of structuring itself to reflect.

Chris Nelder: So the Chilean auction that's a reverse auction, yeah?

Adam James: Yeah yeah that's right.

Chris Nelder: OK. So I guess you're kind of edging into the next question I wanted to ask which is how do these PPA prices for these wind and solar projects I guess we're really mainly talking solar here. How do they compare with the conventional fossil fuel alternatives in those countries?

Adam James: Pretty well. You know I think what we're seeing is that in some cases these countries are setting up auctions that are renewable specific. So you don't have renewables going head to head necessarily with gas or even sometimes like hydro you know they'll have non hydro renewables carve outs within the auction so that solar and wind are competing against each other rather than against those other resources. But really they're coming pretty close to being competitive with the cheapest things in the market which tend to be hydro and gas and you know as I mentioned I think that one thing is that these auctions don't do a very good job of recognising in general is the value that resources provide and the risk that you take on as a consumer with bets that you make. So gas might be really cheap to build for example today but if gas prices triple you're in a situation where you're going to be paying a lot more for the energy that's being produced if it's being bought on the spot market then that's a risk that gets shifted to consumers. As I mentioned with hydro it might be really cheap to build but if you get hit with a drought you know like what happened in Brazil then you have rolling blackouts.

Chris Nelder: That's right.

Adam James: So I think that the direction that we're heading in Latin America is starting to look kind of lead the world and this is looking at what does a well balanced diverse portfolio of energy assets look like? And how do we get there? Rather than just having this simplistic 'What's the cheapest thing' approach. And you know the system planning approach includes risk it includes volatility and it includes the unique contributions that certain assets can bring and it's more of a value question than a cost question.

Chris Nelder: Yeah and as you point out it's it's not really straight forward to make an apples to apples comparison against the fossil fuel alternatives. I mean not only is the character of the power different you've got variability versus firm power and so on and so forth but you're cutting a 20 or 25 year PPA for a solar project and you're not going to get a 20 year PPA out of anybody for a natural gas fired power plant.

Adam James: Right. They'd have to buy an awful lot of gas upfront or get a firm contract upfront which again that kind of thing isn't impossible to do. But you know I would just point out that you know we've had a lot of these booms and busts throughout history you know throughout the last 100 years but they tend to be 15 year cycles. You know so every time we get burned by making a series of really bad investments that look good at the time by the time the people who have made those bad investments and have gotten burned they cycle out of the industry. And then there's a whole new flock of people who rush in ready to get burned again. And that's happened in the US with natural gas once before. And you know it looks like it's likely to happen again in the U.S. And I think that fortunately what I'm seeing in Latin America and in some cases here is that that shift to the value question is one that breaks that cycle of easy money and easy contracts on day 1 and focuses a little bit more on the big picture. And of course you know that's putting aside climate which is a silly thing to put aside because of how large and impactful it is and how much it kind of exacerbates these problems like if you're worried about investing in hydropower because you're afraid of normal levels of drought. That's not something that's going to get better over the next 10 20 30 years in a world of increasingly worsening climate change and I think that utilities are beginning to recognize that because they're getting hit with really really heavy consequences even today for the decisions that they've made over the last 30 years.

Chris Nelder: That's right and the uncertainty is high too. I mean nobody can actually give you a good risk adjusted outlook on the probability of drought hurting hydropower for the next 30 years straight like nobody knows.

Adam James: Yeah. Yeah that's exactly right. And I mean in Latin America they're just particularly exposed to that kind of risk. You know Brazil certainly but a lot of Central America is as well and that's why Central America has really up its game a lot over the last three years and started investing a ton in solar and in wind. It's funny sometimes the academic conversations we have or the pundit conversations we have about things like variability sometimes just go in circles while ironically you know utilities in Central America have charged ahead and just started developing those assets and they have relatively small grids and they're going to find a way to make it work because they know that it's important. And I think a lot of good decisions kind of get made that way sometimes by testing things out and by making commitments to move in a different direction and and being committed to solving the problems as they arise. Now you know in places like Central America I think that there are likely going to be some issues because they've invested in lots of large assets rather than many small ones which are much easier to manage. But I don't think they're anywhere close to hitting a point where that's going to really derail them in terms of the way that their energy infrastructure is set up.

Chris Nelder: You know speaking of Brazil and the drought problem I remember about a year ago watching the news pretty closely about the problems that we're having in Sao Paulo keeping just domestic water availability going. Do you have any idea what's what's been the outcome there or how they've managed over the last year.

Adam James: No. I mean part of it that I have tracked is just kind of the drought levels as they relate to their reservoir and their reservoir reserves because there's a clear correlation between what happens with the reservoir levels and what assets they have to fire up that they typically have standing around. And so so what I saw over last summer you know was prices skyrocketing at 300 400 dollars a megawatt hour and the fact that that that happened and utilities still had had that plus rolling blackouts and that even with prices there they couldn't provide power. And now they've had to go back and ask for an emergency rate increase that's been passed along to consumers. And it's not a good time. I mean in Brazil right now just macro economically not a great time to be going to the people and raising their electricity bills. So it's just it's really odd to me in Brazil at least that you know I think there is a country that their auction process could really use some work because they've really they've put a ceiling on the price but no floor and they've said that that's to protect consumers harshly. Which I understand. But I think th at they're missing the point a little bit here that bidding the price down from $100 and megawatt hour when you're paying four hundred dollars a megawatt hour over the summer is crazy like you would do very well to lock in solar at 100 dollars a megawatt hour. And it would be much more likely to get built than when you bid it down into oblivion.

Chris Nelder: Yeah locking in 10 cents a kilowatt hour is not a terrible thing. Come on.

Adam James: Right. And again I think especially if you think about it in terms of what is the value that you get from that contracts and if it's simply just a hedge against risk that's worth something like you can say is that risk worth two cents to you? And if it is then that's effectively an eight cent PPA. And I think that you know if you just look at millions of dollars spent over the summer because of volatility you want to put a price tag on on risk a price tag on volatility. There it is and you just have to ask yourself how often are we going to be paying that. And and as I said earlier I am afraid that they are going to be paying that price more and more often because drought has been [trails off].

Chris Nelder: That's right and nobody is ever going to have to go apply for an emergency rate increase for a solar project. I mean that's just never going to happen.

Adam James: Right.

Chris Nelder: And then that's the kind of risk that again never enters into these sort of comparisons to the alternative.

Adam James: You could have an extended eclipse I suppose for maybe a half a year or nine months or something some kind of serious risk like that that poses. But if you want to you want to bet on something. I would much rather bet on the sun coming up than rain falling at levels that it has in the past.

Chris Nelder: Or Mr. Burns could raise a giant shield and block out the sun and then all the rooftop solar would start working.

Adam James: Yeah it's one of the silliest things today and the policy discussions is that idea of variability and I think sometimes totally misses the fact that variability is proven to decrease with geographic disbursement. So it's one of those problems that gets solved by ramping up not by ramping down and in places like Brazil actually they've done a very good job, you know I don't want to be too down on them, they've done a very very good job on the distributed generation side for promoting distributed solar generation for all the reasons that we've just talked about that they recognize that having those assets spread across their grid will do a lot to strengthen it and that they provide a real value including shaving peak and just reducing overall reducing demand on the grid. So they've done basically everything that they can do to set a positive regulatory environment for a distributed generation. A lot of the credit for that goes to their local trade association. And I'm really optimistic about the outlook for distributed generation actually in Brazil over the next few years.

Chris Nelder: Now does that have something to do with their approach to net metering?

Adam James: Yes so they've increased the system size caps that have increased the size of systems that are eligible for net metering which is good and made multi kind of family condos and things like that eligible to net meter so you can do community solar stock projects which is kind of innovative I'm trying to think of where else has regulations that are as good for that as Brazil does right now.

Chris Nelder: I mean we're only beginning to get to that point here in the U.S..

Adam James: Yeah. So those things are really good. They also kind of cleared up what had been an issue in the past. Brazil has got a lot of wonderful things about it but the taxes are not one of them. So they very very heavily tax everything. And one of the problems that distributed generation had been having is that the gross electricity gets taxed. But then you get compensated for your net electricity consumption. So in other words you know they would, if you consumed 100 kilowatt hours that day they would charge you for 100 kilowatt hours and tax you for a hundred kilowatt hours. They only compensate you for 50 kilowatt hours back if that's what you export to the grid and that would not include tax. So that's maybe insignficant in a country where taxes are low, but when they're as high as they are in Brazil that actually made the paybacks for those systems a lot longer. You know. So just just simply by eliminating the tax that they had on gross electricity consumption. They've helped the market kind of leapfrog ahead significantly from where it was this time last year. And that was a state issue where the states really stepped up and did a lot of leadership and we've seen a lot of that in Brazil. States stepped up and put on the first auction for utility scale solar. States are stepping up to pass the tax breaks and kind of tackle these local issues. So yes it's been really encouraging.

Chris Nelder: What about utilities scale and Brazil. How are they doing with utility scale solar and are they also doing that with a reverse auction?

Adam James: Yeah yeah they are. So there was a state auction that kind of kicked things off in Pernabuco and that cleared at about $100 a megawatt hour. But then almost none of those contracts have actually gotten built out because between now and you know I think that was in December 2013 and between then and now the currency has depreciated so much that contracts that were being paid in reais but you know you had to kind of like finance them in U.S. dollars to finance the building of the power plants and U.S. dollars. That that's become almost impossible like the math there has become almost impossible to make it pencil and you're kind of boxed into this strange situation right now with their auctions where you can get lower cost capital from the National Development Bank in Brazil. But to do so you have to use local content and the local content that does exist is pretty expensive and there's not enough of it to meet demand from the auctions and because it's more expensive it's actually a little bit of a toss up as to whether it makes more sense to build a utility scale project using local content with that cheaper financing or just to pay a premium to finance in dollars and hedge your currency risk but get to use cheaper equipment. It's you know it's really tough to make them work.

Chris Nelder: Yeah, yeah.

Adam James: So They've procured a lot of solar utility scale solar and wind and wind has been successful in Brazil for a long time so less worries there but they've procured a lot of solar over the last two or three years and now it's just a question of you know can these developers make it work given high interest rates given the lack of local supply given the currency risk and it's not a job that I would want to try to make all that stuff work.

Chris Nelder: Well yeah I mean the currency risk aspect in particular has just so changed the game across the energy sector over the past three years. I mean it's been a huge part of the oil price decline. It's been a huge part of the changing value or price of solar projects and wind projects. The pain being felt by especially emerging market currencies has a lot to do I think with general decline and commodity demand. It has been a real issue and I wonder how that has changed the outlook since 2013 in ways that really I think most people don't really appreciate because I mean who watches currency markets unless they are a trader or an investor or somebody who really needs to do that.

Adam James: I totally agree. Yeah. I totally agree and I mean two things I would add. One is that it's a really difficult problem to tackle. India has actually proposed some kind of interesting ways of solving this problem that we can talk about but there's really not a good way to tackle that issue because somebody just has to assume the risk. And there's markets for that where that gets priced but it adds a big premium onto your borrowing that can certainly be a big problem. The other kind of observation that I would make on the currency side of things is that what it encourages is I think it encourages local development and encourages you to find local debt and encourage you to find a local equity and that kind of puts a little bit of a ceiling on growth in a lot of cases because bringing international markets, real money markets in, just tends to get you access to more efficiently priced capital especially when you're trying to get to scale. So you might be able to do some one off projects in a country where there's a lot of currency risk by tapping into local debt and more equity but it's just always going to have a ceiling on it at least on the local equity side. And so I think for the overall renewables market to really really grow we've got to put some serious thinking into this currency risk issue and figure out how to how to mitigate it.

Chris Nelder: What if they lifted the requirement for local content, I mean how much would that help?

Adam James: Ah depends on the country. I mean in Brazil it would help a lot to get access to local debt at competitive prices. But but then you still have the problem of your contracts and reais and so if your equity is in dollars then you're still in trouble, right? But then there's these big and this is why and now has been so competitive in Latin America because now is large enough that they actually have internal currency hedging because they have such a active presence in these markets that they've got local money. You know they've got local capital and local equity that they can put into those projects and kind of keep it all in the country. So those big conglomerates like Enel And NG that own all of the utilities and all of these businesses throughout Latin America have been really really competitive in the auctions for that reason and because they have larger balance sheets so they can access much cheaper debt overall when they're doing their development. They're hardly plucky upstarts but they are compared to those guys of like SunPower and First Solar and you know the artist formerly known as Sun Edison to actually get those projects up and running without having access to things like OPEC and EXIM financing. That's where they have a little bit of an edge in those auctions. But yeah it's tough. It's really tough and I'm not sure if there is a good answer. India has had proposed but it hasn't enacted a program to charge all the developers a small fee and that fee goes into a big pot of money that is in turn used to provide a currency hedge for everyone's contracts which in principle I really like that idea. I'm not an expert at financial markets enough to understand if that will be successful but I like that kind of innovation in this space.

Chris Nelder: Well you know since you mentioned SunEdison I wonder if maybe they should just change their ticker symbol to an unpronounceable symbol. What do you think?

Adam James: Yeah. For so long there's a lot of people who are trying to buy projects who would already consider their name a little unpronounceable because they just did not want you know I mean it was hard right? I know a lot of people who have been in to keep the lens off Latin America who have been in Latin America trying to buy projects for a long time and have felt like it was just impossible to really get any deals done because you had SunEdison swooping in and offering super low prices on the development side PPA side because they could roll it up into their yield cow and sell it. So I actually think there's probably some quiet rejoicing going on at the moment.

Chris Nelder: Yeah I'm really curious about that. I mean just for those who don't know before went it bankrupt SunEdison was the largest international player and distributed solar. That's correct yeah?

Adam James: Yeah I would say that they probably were the largest if not one of the largest internationally for distributed solar.

Chris Nelder: And I wonder if it's bankruptcy now will slow down the development of distributed generation in the developing world. Or if it's leadership in the sector will now just pass to another company. And if so who's in position to take over that role and for that matter who's going to step in and capture the projects that SunEdison had under contract and can't execute anymore. I mean do you have any thoughts on who's going to be the SunEdison?

Adam James: Yeah I think when it came to global distributed generation even SunEdison wasn't the next SunEdison they were criticized a lot for it kind of doing too much too fast and I don't really have any thoughts or opinions on that other than to say that that they did do utility scale development really really well but in a way, like their core business was never launching residential or commercial projects overseas. It always kind of looked like more of an afterthought because they were already in a market. So I think that there has been and there continues to be space for someone to step in and do residential and commercial systems at a global scale. There's just a lot of challenges to getting that done and it was you know there are challenges that SunEdison ran into and their challenges that I think any company who wants to go global when it comes to distributed solar is going to hit and it's fundamentally because distributed solar or developing distributors or assets in the global sense is just a totally different animal than doing utility scale development. And there's a few reasons for that. You know one is that it's it's going to be far more contextual. So the customer and what customers want in different markets varies a lot which is not necessarily true in utility scale you know you just were there it's all about going in and locking in your PPA with your off taker and there's a tried and true formula for doing that internationally with residential customers. Some people want PPAs but don't want long contracts. Some people want loans some people want to do cash. There's lot of different ways that customers would like to purchase the product. And there's a lot of education that has to happen and customers might stay in their homes for different lengths of time so maybe they move every five years so they don't want to sign a 25 year contract and so you have to ask yourself if you can make it work at a shorter tenure you know maybe they want to do loans but the local banks aren't really comfortable yet with providing loans to that kind of asset class and maybe they want to do cash sale. But you're in a market where people don't have very much expendable income. So that's one kind of bucket of challenges and then there's the financing side and learning to meet the kind of requirements that investors have for developing even portfolios of distributed assets in new markets. And then you hit some of the challenges we've already talked about, currency risk is certainly a big one. What kind of advance rate you can get when you're borrowing money is a really big issue. You know in these markets investors want to feel comfortable that they can recuperate their investment if need be. But a lot of times local markets especially developing countries are not very favorable when it comes to their legal recourse for a company. So if a company needs to go in and get their solar system back they just can't do it. You know it's just there's too much bureaucracy. It takes forever to get your system back so you can't make the argument that if people don't pay you just shut off the power.

Chris Nelder: Right.

Adam James: So anyway there's a lot of there's a lot of challenges to make in that global business model work.

Chris Nelder: Maybe they need to start building in some kill switches into the inverters or something.

Adam James: Yeah yeah I think that would certainly certainly help. I mean that that kind of thing really is something that provides a lot more confidence. But overall it can be really challenging to get people across the line from a financing standpoint and in developing markets. The other set of issues of course is kind of regulatory risk and the nice thing is that a lot of developing markets are very different from the U.S. and that all the regulators all the utilities everybody's on board with the idea of change and everybody is on board with the idea of new technologies and everybody is on board with meeting rising demand however they can. Which is a very different attitude than we see in the U.S. which can be a lot more calcified around around those kinds of questions so it's nice that everybody's kind of much more amenable to exploring new options. And we've got that going for us and looking at ramping up in developing markets. But the problems that they have sometimes are just deeper than can be solved politically. You know what are the depth of credit markets. You know do you have access to the equivalent of a FICO score in these markets? That's not a problem that you can solve overnight or even with political will. Right. So those structural issues can be various.

Chris Nelder: We've talked a lot on this program about the problems of standardizing finance or really standardizing projects so that they look like normal things to finance especially to the fixed income market. You know we've talked about the problems of doing that with efficiency of the problems of doing that with you know a commercial or small utility scale solar projects and one of these days I'm going to do a podcast episode and talk about climate bonds and how they're doing that. AKA green bonds to try to make these projects very standardized and follow all the same normal criteria so that the cost of due diligence is low and you can just sort of package it up and make it look like any old regular bond. But that's so much harder in Latin America where you don't have quite the same certainty around capital markets around regulation. You know just to trust that you can give to to financing arrangements and to public markets.

Adam James: Yeah. Yeah. And I think maybe one of the places where I've really changed my mind which is it happens a lot more than I would like it to where I just wake up one day and realized I was just dead wrong about something is about access to capital. You know I think for a long time I just thought that the reason renewables aren't taking off are distributed generation isn't taking off is because of access to capital just doesn't have enough access to capital. And I actually don't think that's right anymore. I think there's plenty of money out there. Money like just comes with strings attached. You have to meet certain requirements in order to in order to get the money. And that's not unreasonable. Right. Like somebody is not going to lend you money if they don't think they're going to get paid back. And that's an OK requirement for them to have in place. So you have to convince them that they're going to get paid back. And you have to and you have to give them a level of return that they see is being adjusted to the level of risk that they're taking. You know nowadays you know I don't think that a lot of investors are worried about the technology we're over that hurdle they're not worried about investing in solar assets and that they're going to blow up or disappear or stop making sense. I mean the technology is proven and they trust and they believe that they will get the returns that you're promising them. The problem is is that you just have that tension between wanting to provide the customer with the lowest price electricity you possibly can and you're always going to be balancing that against the kinds of returns that you give to investors and you also just need to be providing electricity to customers who you can be confident are going to pay their bills on time and in the U.S. that's been so easy because we have FICO scores and you can just check and see what their credit history is like for most developing countries do not have the equivalent of that score. Sometimes they show when people have bad credit but they don't really show if people have moderate to good credit. Or sometimes the local banks have all that information but it's not public or sometimes there is a credit score market but it's such a small sample size that it's really not representative at all of what those people's credit is actually like because it's not drawing on a long enough history. So even just simple things like that that's going to be a process of getting people across the line. And I think there's creative ways to do it. You can get people to pledge collateral. You can get them to get a prepayment or like a down payment or something like that you can take advantage of other funding sources within the government or get people to provide grants or investment tax credits so that you can have some monetization upfront to kind of leverage you know the rest of the equipment. There's a lot of ways to get around that. But the point is that you just like the money is there. You have access to it. You just have to prove that you're going to be able to provide risk adjusted returns and the risks in a lot of these markets are just really high.

Chris Nelder: That's right. I mean after all the Latin root of our word credit is cred which means belief. It's all about trust it's all about belief it's all about are you going to get paid. So moving on from this sort of financial wonkiness a little bit. I'm curious to get your outlook on what the real growth potential is in some of these Latin American countries. And then we can talk a bit about sort of a global perspective. So first of all again sort of rewinding to 2013. I remember reading back then about some forecasts from the International Energy Agency Navigant consulting and others who were just forecasting just this explosive growth for wind and solar in Latin America especially for Chile. For example IEA was expecting Chile's solar capacity to explode from 3.5 megawatts in 2013 to 1100 megawatts in 2018. Are these ultra bullish forecasts proofing out?

Adam James: Well first of all for once IEA being bullish on renewables right. I mean I wouldn't I...I Think that they may have finally learned their lesson. Maybe. But they were actually too conservative yet again because in its landmark we've already passed that benchmark and it's only 2016.

Chris Nelder: Really theyre already over a thousand megawatts?

Adam James: Yeah I think they cleared a thousand megawatts at the end of last year. So now they've passed it. You know Mexico and Brazil have been much much slower and there's a lot of reasons for that. In Mexico I think there was a lot of people myself included expected that distributed generation would take off in Mexico at a much faster clip than it has. And you've had a lot of political reasons why that has not happened. They have continued to lower electricity tariffs even though they're losing tons and tons of money to do that because they have promised that electricity tariffs will be lower. And that was the rationale.

Chris Nelder: So another another disastrous subsidy regime basically?

Adam James: Sort of. Yeah. I mean it was more like they said they said we're going to reform the energy market. But the only way that they could sell that idea was by promising lower electricity prices. So that's where they left it and their way of delivering on that was just to lower electricity prices whatever the cost. So the utility is you know racking up year after year with millions and millions and millions of dollars in losses. And I think that a lot of people myself included did not expect that that was going to go on for as long as it has. So that's one thing and then just in general the energy reform led to a lot of uncertainty around the regulations. So you had kind of lower tariffs than we expected and you had more uncertainty. And both of those things combined have led to just a slower development of DG (???) in Mexico. But you know the eternal optimist I think we are about to turn the corner on that. And in Brazil, Brazil just has had all sorts of problems that are not just restricted to the energy space but they have made any kind of foreign direct investment really challenging. So solar hasn't taken off as fast as it was expected to there than other places the Caribbean and Central America have taken off much faster I think than any of those groups expected them to. And so that's been a real positive I think as well. Even Argentina is really teed up for for a lot of growth despite overcoming some pretty serious challenges in the international financing arena. But they're putting together some tenders and I think we'll see a ton of renewable development there over the next year or two. Just financed with Argentinean pesos I think.

Chris Nelder: Earlier You mentioned Panama. What's going on there?

Adam James: Yeah. So Panama held an auction and did not really do a whole lot of vetting for who was bidding into the auction. So there's a few companies who did make it through the process who are really solid candidates solid developers. And then there was a lot of just speculative bids that were speculatively low right bids that were kind of unlikely to ever materialize. And no surprise have not materialized. So that was a little bit of an issue there. There's also a lot of administrative issues just with coordinating the tender process which is being done by one agency and coordinating interconnection to the grid which is being done by another agency and they were just kind of talking past each other. So folks who you know won tenders wound up having a lot of problems with getting interconnection for their projects. So they were in this strange limbo of having a PPA but then not really being able to kind of move ahead and because the pricing was so low the PPA pricing was so low I think a lot of people have just decided that there was no kind of bond requirements. They just are I think some of them are just probably going to wind up walking away from their projects.

Chris Nelder: Gotcha.

Adam James: But Panama continues to be an interesting an interesting market because it's it's kind of like hydro and oil you know it's either really cheap or really expensive and even though oil prices are rock bottom levels now electricity from oil fired generation is still very expensive compared to solar. So I think we will see solar development in the country especially rooftops solar developed in that country over the next year or two. They do have a good DG program in place as well.

Chris Nelder: What about Spain? That's been one of the biggest solar adopters in Europe for years and some years ago sort of became a poster child for a badly designed feed in tariffs and that put a big old hole in the national budget and caused the country a lot of fiscal distress but it seems like maybe things have stabilized a bit now.

Adam James: Yeah. Well they taught us a valuable lesson about not having the feed in tarrif be written into the national budget and therefore kind of exposed to whatever politicians are feeling that day. That's not a good way to structure solar policy ee've learned. you Know feed in tarrifs that are linked to electricity tariffs can be a little a little tougher to swallow because consumers see the impact so clearly and so directly whereas kind of taxing them and then putting it in the budget seems like it's going to save you some trouble in terms of consumer perception about what's happening. But it's just much more sustainable to have the feed in tariff be financed through electricity rates.

Chris Nelder: Which is exactly what Germany did with its feed in tarrif.

Adam James: Right. Germany, Japan. You know we've seen a lot of almost every other country I believe has adopted that model. But to answer your question I mean they've kind of clawed themselves back from the abyss but now is not an attractive place to develop still. All they've done is gone from screwing people over to paying them back for screwing them over but they haven't got a place that people really want to invest again. You know if Argentina has been any lesson and that's probably going to take some time to do to really rebuild the investor trust. And you know especially when there's so many other global opportunities I mean just why would you invest there now when you have other markets that are are doing a much better job of inviting foreign investment.

Chris Nelder: OK. So speaking of those other markets let's move beyond Latin America here a little bit and talk about kind of the broader trends of distributed generation globally. What are you seeing in the rest of the world and do you think there are important implications for energy transition in general to the rest of the world's appetite for distributed generation.

Adam James: Yeah I think there's a huge appetite for distributed generation globally and what we're seeing so far has been that most of the growth in distributed generation has come from local companies that are operating in individual countries who are doing kind of cash sale of systems. And as a result they're focused really in on these high end consumers who have the disposable income to just buy a solar system and put it on their roof. Flat out. Obviously that's a limited market and it also is not one that really addresses the root of the growth which is that in most of these non OECD markets you know which I think you know are going to be something like 80 to 90 percent of new electricity demand is coming from there with OECD markets staying mostly flat out to 2040. I mean there's just a huge amount of growth and most of that growth is coming because you have rising GDP per capita which means more and more middle class people right. More and more middle class people who are getting access to electricity and have a little bit more disposable income. And for those kinds of people I think the idea of getting a PPA or a lease or or a loan for putting solar on the roof is going to be really really attractive especially because in so many of these markets they're going to go through a rocky period of growth where they're adding a lot of new capacity and there's blackouts and challenges on the grid and things like that and I think people just will feel much more comfortable making that investment themselves. And you know if you look at places like Southeast Asia today most of those businesses and homes that can possibly afford one have a diesel generator already. And I think if you can make solar as accessible as a diesel generator you will see the same amount of uptick in demand for it and the utility and the energy regulators and the politicians are all onboard with that because what they have seen is that you know if you have to add two gigawatts 20 gigawatts 50 gigawatts of new capacity in order to meet rising demand in your country they'll take whatever you can get and companies like Solar City a kind of proven that you can develop hundreds of megawatts a quarter of distributed generation if you get the model down right. And that means you're developing at much faster than you could possibly develop utility scale.

Chris Nelder: Mmhm. Exactly.

Adam James: So I think that's something that we're going to see much more excitement about globally speaking over the next few years and we just have to crack a few of these challenges that we've been talking about on the podcast in order to get there.

Chris Nelder: Financing financing financing it just keeps coming back to that doesn't it. I mean the sad fact is it's just cheaper to go buy a little diesel generator and feed a couple gallons into it when the grid goes down than it is to supply yourself with reliable solar power for 20 years. It's just cheaper.

Adam James: Yeah. Well I don't know if that's true anymore. I mean I think thats-

Chris Nelder: Well in an upfront capital cost basis is cheaper right. Like on a total cost of ownership basis over 20 years it's more expensive but it's having to provide that capital upfront that's the killer. And I remember being in Bali last summer and seeing just the most bizarre stuff. I mean they've got I don't even know what to call it. Ganglia of power lines just sort of going everywhere like being threaded through trees and just run along the top of a wall or whatever any place they can put a cable. And that power is coming from some coal fired power plant that's causing environmental damage somewhere else in Indonesia and and the power is still unreliable it goes down you know and that's just sort of on and off and on and off. And this is a place where you could almost put up a solar panel anywhere because it's just go so much sunshine year round and you only need a little bit because they've got high efficiency little refrigerators and little LED televisions and whatever. I mean you know a kilowatt of power is a lot of power for residents in Bali. And so it really again just comes down to a financing problem.

Adam James: And the important thing to remember. You know go to Bali go to India go to any of these markets and you see what you just described and then remember that right now we are just coasting in neutral on a slight decline like that's the speed of the electricity development there. And then the next five years next 10 years it is going to be like shipping in first and then second and then third and fourth. I mean getting up to 75 80 miles an hour like that pace of expansion in five years compared to what it is today. When it comes to expanding access to electricity and developing new new energy assets is unbelievable. And you know my greatest fear at this point is just that we have not totally reckoned with the fact that these countries that are growing are going to build power one way or the other they are going to build power. And they are going to build whenever they can get. And so it's everyone's job in this industry to make sure that when they are faced with those decisions about what they are going to build that they builds things that are renewable and that they build things that are going to provide a long term sustainable future. And we don't have a lot of time to figure this out. You know we're on a pretty short timeframe here because these investment decisions are being made today and they last 30 years already. And this whole concept of lock in is not a hypothetical. You either lock yourself in to build a gas plant you lock yourself into either using it or writing off that asset. And the people who pay for that are consumers. So you're pitting yourself against a lot of inertia from the day that plant gets built. If you think one day we'll just be able to write this thing off. So I think it's our job in this community to look at these opportunities the markets that are growing no matter what and put ourselves in their shoes and say you know what do they need in order to make this work. And from the industry perspective I think what we've learned is that we can absolutely build renewable assets and we can build them faster than fossil fuel and they will be better for the customer and they will be better for the environment and in general we don't actually need that many things in order to make it work. We don't always need subsidies. We don't always need handouts in order to make it work like there is a very strong business, an economic case for developing renewable assets. We just need the policymakers in these countries to kind of sit down with us and ask us what we need because it's oftentimes things that they could absolutely do or change. And then the other side of it is that we have to acknowledge where there are things that we can't change and where you have these deeper structural issues that we need to bring to their attention but that we recognize they can't solve overnight. And then ask what can we do to to start business here. Anyways as an example if there is some kind of problem in that country you know the currency say is is all over the place. Would the government be willing to offer PPAs in U.S. dollars and then just use their currency reserves to offset some of that risk.

Chris Nelder: Oh that's a creative idea, yeah.

Adam James: Like that like create a loan loss fund. Right. So like.

Chris Nelder: Sure.

Adam James: They acknolwedge some people are going to lose money.

Chris Nelder: Just back stop it yeah.

Adam James: Right. But they back stop that investment because otherwise you just have to ask the banks or the financing partners to make what basically is a bad investment. You have to ask them to be willing to lose money you know to price the money to you in a way that is not reflective of the risk in that country.

Chris Nelder: And you can probably make the case you know at a national level that it makes sense for the national government to take that kind of risk because of all the other benefits that come from having the certainty of being able to build out a nice stable renewable energy capacity.

Adam James: That's right. And it's certainly you know will be a lot cheaper than than building transmission lines.

Chris Nelder: Or just being exposed to fuel purchase volatility or what have you.

Adam James: Sure yeah. I mean there's really there's a thousand reasons to and even just something as simple as creating a government entity that will buy these assets at a low price like create a government entity that will accept a 5 percent return.

Chris Nelder: There you go now you're talking.

Adam James: Put a billion dollars into it and tell it to go out into the market and buy the best assets that it can get and be willing to accept a 5 percent return and then you have some pull in the market and you're not asking them to lose any money in fact they'll be making money. They won't be making much money but they'll be making some money right. And I'm just I'm not I'm not saying that these are silver bullets. I'm just saying that like that we can look at these problems and say what do we need to do to like wrap ourselves around this issue. And then there are ways to think about it and start setting up some real solutions that are actionable but we just have to have a much better dialogue I think between especially between the government entities the financing institutions and the private sector actors and specific to the countries that we're looking to get involved in where we sit down and really hash out what it is that we need and start putting some concrete ideas on the table because the climate agreement was great. But one it was not enough. And two all that money that's getting poured in development banks is still is not going to be good enough if you don't have anybody to buy the projects on the other end. You know or that money doesn't get pointed into and directed in the most efficient way. And personally like I think that developing a multi gigawatt single power plant in India is a much more complicated venture than developing that exact same amount of distributed generation.

Chris Nelder: Couldn't agree more. Couldn't agree more. And you know your proposal to have the government basically function as a sort of a long term asset holder makes a lot of sense to me what is a solar yield co after all but a vehicle to sit there and be a passive recipient of long term annuity income from a bunch of little solar projects at you know five to six percent per year that's what they are.

Adam James: I would certainly save a lot of time going around and asking for pension funds to just to well invest the money that way right.

Chris Nelder: Exactly. And the pension funds and the infrastructure funds and the other natural sort of fixed income players in that space won't touch this stuff because the cost of due dilly is too high for them. If the project is like something under 100 million dollars it's not worth their time. So that's exactly the place where a government could step in or a sovereign wealth fund could step in with some sort of standardized offer and just say you know what we'll take your rooftop solar all day long and we'll take our 5 percent and just go, right?

Adam James: Yeah. And I think they don't. I mean one counterpoint to that whole proposal is I think that they don't want to undercut local markets right. They don't want to undercut local players who are looking for 12 percent returns and they don't want to come in at 5 and kind of crowd out the market. But I think that the point is that you don't need to do that forever like you don't need an entity that has 20 trillion dollars and is going to be around for the next 50 years. I think you just need someone there to you need to just run their numbers on whatever it takes to get to the kinds of returns that investors are looking for in that market and then figure out if the only way to get there is through lower built costs. Ask people in the industry how long is it going to take you to get there and set up a fund that last that long. I think that we're in a spot now where it's not about subsidization it's about building a bridge and that bridge is not subsidies you know are often taking a loss today because you're expecting a return. It's much greater in the future or a societal return or something that's a little more intangible.

Chris Nelder: Right.

Adam James: This isn't subsidy. This is the government leading in a space to kind of help move the market to the market in the direction that we know that it's already going, it's about accelerating that. Point being that I think is a lot of ways to do that setting up some kind of currency reserve fund loan loss fund offering to buy the assets you know doing regional specific auctions where you set a floor on the auction instead of a ceiling and you make people bid up on quality instead of down on price. There's a lot of things that we still haven't tried yet.

Chris Nelder: Is anybody even thinking about that or doing that? I mean that's the first time I've ever heard anybody say that.

Adam James: Sort of I mean Saudi Arabia in their in their KA care program from two years ago or so.

Chris Nelder: Which is now dead right?

Adam James: Yeah. They had they had a scoring system where you got a certain score based on your price that you were bidding but then you got kind of bonus points for using local content and bonus points for using things that met certain performance standards. And I'm just you know personally I think that we need to get to a place where we're really thinking about that more like you know you get what you pay for. So bidding down is not always good even just from a great operator point of view. I think that if you bid down to like let's say you know the investors need a return and that dropping below $90 a megawatt hour means that they won't get the return that they need. So you set the floor at 90 and you let people bid down to 90 and then you have a scoring system for module performance for invertor performance for adding storage and providing power firm power during certain hours of the day.

Chris Nelder: Right.

Adam James: For being willing to accept longer contracts. You know I think there's a lot of things that you could put in there that you care about as a grid operator like where you put the project maybe you give people bonus points for being in particular locations where you know that you don't want to build as much transmission's so you'd rather have distributed assets there and you recognize that putting them there will save you five hundred million dollars on a new transmission line. So it's worth spending 400 million on a PPA with that generator or whatever it may be.

Chris Nelder: Basic locational marginal pricing.

Adam James: Yeah but from a system planning point of view instead of from a market for you.

Chris Nelder: Right.

Adam James: I mean there's a lot of things like this from an auction standpoint I think countries can do as well that would really help to move the market in a in a more sustainable direction.

Chris Nelder: Really interesting ideas that's the kind of spit balling we need. We need a little out of the box thinking here. Especially if as you say we're we're basically just rolling down a slight incline in neutral. We need to be stepping on the gas here. We've we haven't really mentioned it here but I think anyone listening to this podcast would certainly feel the pressure of climate change hanging over us but we're not doing this just because it's fun. We're doing it because we have a very urgent problem we're trying to solve here and we need to accelerate it. You know and I don't frankly I don't know if I quite share your confidence that we're going to be going straight into first second and third gear on this. I kind of wonder where you get that.

Adam James: I mean the pace of acceleration for power development is going to speed up not necessarily that it's going to be a renewable. I'm saying it's going to speed up either way. We can either figure out a way to get on board or we are going to be left behind. So demand for electricity in these markets is going up. Hockey stick style out to 2040. And there's nothing that we can do about that. So it's just a question of what are they going to build.