Interview with Vishal Shah
by Leoncio Montemayor
In light of our upcoming ‘Solar Market Parity Europe’ conference, we interviewed Vishal Shah, the senior solar analyst with steady footing in Wall Street and clear eyes on the global solar industry.
Vishal Shah is a leading expert in the field of Clean energy and former Managing Director of Deutsche Bank. He has over 20 years of experience working with companies in the broader technology and Global Clean Energy sectors. Vishal has received several nationally recognized awards for excellence in the field of solar and clean energy sector. He has worked closely with global and state governments in advising Clean Energy policies, particularly in markets such as China, India, Japan and the U.S. He was one of the working group leaders involved in the U.S Department of Energy (DOE) Solar Vision task force established in 2009 to put together a policy framework for solar energy development through 2030. His coverage included large industrial, technology and resources companies for almost 20 years, and prior to Deutsche, he ran the Global Clean Energy Groups at both Barclays Capital and Lehman Brothers.
Pleasure to have you here Vishal. Before getting to the core of our interview, would you like to give a quick introduction about yourself and how you got into the solar industry?
Thank you Leoncio. My involvement in the solar industry goes back more than 10 years, when Cypress spun off SunPower and a number of Chinese companies, along with First Solar, went public. I have been very actively covering solar sector since then as the global head of renewables at Lehman Brothers, Barclays and most recently at Deutsche Bank. Back then our prediction (which at the time was the most bullish on the street) was that the solar market would reach 10GW by 2012. As it turned out, the solar market reached 27GW in 2012. In 2015. We had another bullish report out, suggesting that the solar market would reach 65GW by 2017, and the solar market actually crossed the 100GW mark last year.
“We expect up to another 50% cost reduction at the module level.”
It's widely documented that overall solar costs have dropped dramatically over the last 10-15 years. The numbers speak for themselves. What would you say, in your opinion, has been the main driver for this cost reduction? And what do you expect for the coming 5-10 years?
Back in 2007, solar module prices were as high as $4.50/W and today, prices are in the mid 30$c/W. This significant cost reduction has been possible due to a combination of the industry scale and technological progress. We expect up to another 50% cost reduction at the module level (perhaps prices stabilize around mid 20$c/W in the next 3-5 years) but believe there is also huge potential for cost reduction at the overall system level as efficiencies and power rating of modules improve. This cost reduction would also come from lower financing costs, balance of system and customer acquisition costs. We expect utility scale solar to offer the lowest cost option for new power generation in most parts of the world and distributed solar power costs would be almost 50% lower compared to the price of current grid electricity.
“I like to think of grid parity as a moving target.”
It is clear that in certain countries market parity has been achieved as the wholesale power prices are higher than overall solar costs. In my mind, if power prices > solar costs, then market parity is achieved. However, evidence shows that wholesale power prices have been dropping (albeit slower) as more renewables are added to the grid. With more solar coming online, will we eventually see a point where power prices are too low to meter? And what will happen then with existing assets?
This is a very interesting question. First, I would argue that the wholesale power price declines have also been a function of cheaper availability of natural gas in markets such as the U.S. There is no doubt that a lot of renewable capacity has been added and, as a result, wholesale power prices have come under pressure in a number of European markets. I like to think of grid parity as a moving target - as the solar/wind penetration increases, wholesale power prices would continue to decrease and solar/wind would have to be cheaper in order to maintain grid parity. For the next 3-5 years, we are going to see solar costs to be as competitive or lower than wholesale power prices. This will put a lot of pressure on existing power assets. We have already seen this play out in 2017 in the U.S where the President has announced plans to bail out the coal and nuclear industries. Needless to say that more than 90% of the new power generation in the U.S was from renewables. Of course, there are tax credits in place in the U.S, but what’s really driving the growth in my view is the fact that several stakeholders in the industry - large and small utilities, financial institutions and small developers are all on the same page. They all see that solar and wind are at grid parity and future growth will be from renewables and not coal/nuclear.
“What’s really driving the growth in my view is the fact that several stakeholders in the industry - large and small utilities, financial institutions and small developers are all on the same page.”
After the end of feed-in-tariffs, developers are aiming to sign PPAs for long-term revenue certainty. The other option is to sell the power directly on the spot market but without the price certainty. Do you see both as viable options for solar or do you think the industry will naturally move towards one?
It will really be a function of how much capital will be flowing into the sector and what kind of interest rate environment we see in the future. Currently, there is a lot of capital flowing into the sector and interest rates are low. As such, projects without a long term PPA can also get financing. However, when capital is scarce, solar project investors would need the assurance in the form of long term PPAs. In markets such as Italy, that have been used to fixed payment streams over 20 years, I see a natural transition to PPA markets especially as more participants enter the market. At the end of the day, it’s all about the cost of capital/financing. For projects with feed-in-tariffs, cost of capital has come down significantly. Unlike a feed-in-tariff however, PPAs do expose the developers to some counterparty risks. As such, projects with PPAs have a higher cost of capital and merchant projects tend to have the highest cost currently. If financial products become available to address this gap in cost of capital, then we could see the industry move more rapidly towards PPA/merchant projects.
“The natural transition would be from short/medium term PPAs to spot market contracts.”
As an off-taker (say a corporation), would you be willing to source your energy from 10 or 15 years in terms of a PPA or source it from the spot market, knowing that prices will (probably) decrease over time? What trends do you see on this in the USA for example?
The natural transition would be from short/medium term PPAs to spot market contracts. In the near term however, more and more structured products or medium/long term contracts (up to 10 years) would be required to transition the market from feed-in-tariffs to PPAs. Such contracts allow developers to share with counterparties part of the price risk (resulting from fluctuations in the wholesale market) and also volume risk. As the level of understanding of forward price curves improves, we see more and more counter parties offering these fixed price solutions. In USA, big corporations are starting to increasingly invest in renewables to meet their corporate sustainability goals. Most large corporations are entering into long term PPAs and there is also an increasing trend towards owning these renewable projects on balance sheet.
“The general conditions for grid parity solar development in Italy also remain strong - Italy's electric grid is considered to be very stable, there is sufficient availability of good land and favorable attitude of local authorities.”
What has changed in terms of financing solar projects now that revenues are less certain for the next 20 years? It's very uncommon to see PPAs of less than 10 years. How do banks perceive this increased risk? How will banks see the financing of merchant power plants selling their energy on the spot market?
While the revenues are less certain without feed-in-tariffs, the project economics are still quite attractive and there is a lot of capital chasing good projects. The general conditions for grid parity solar development in Italy also remain strong - Italy's electric grid is considered to be very stable among a leading number of European countries, there is sufficient availability of good land and favorable attitude of local authorities. The development of financing solutions to the Italian market would largely depend on what kind of project returns these investors can make in other international markets - in the near term, markets such as U.S are likely to attract a significant amount of investments. However, considering the declining subsidies in most continental Europe and relatively attractive solar LCOE, Italy will likely get a large share of investments as well. While larger banks are still likely to adopt a wait and see approach, smaller banks - especially the ones that have been traditionally active in the sector would be the first to act. We also expect new long term PPA products becoming available by international trading companies that would enable investments by several of these financing companies.
“Blockchain companies can provide for peer-to-peer transactions and enable rapid growth of microgrids in a post grid parity era.“
What are the next financial innovations that will help close the gap for post-parity solar projects?
If you look at 2 areas of financial innovation, they revolve around: a) providing financing or access to smaller developers and b) solutions for the intermittency and dependence on the utility/grid operator for post grid parity growth. There are new startups providing innovative solutions to both of these problems. Platforms connecting solar developers seeking financing, for example, for a small grid project in Italy to an international institutional investor based in the U.S could solve the access problem. Blockchain is rapidly emerging as a solution to the second problem where net metering and feed-in-tariffs are not available. Blockchain companies can provide for peer-to-peer transactions and enable rapid growth of microgrids in a post grid parity era.
“For bankability reasons, silicon-based PV technology will continue to remain the dominant technology in the market.”
In terms of technology, do you see any change from the silicon-based PV industry? Or are we in a technological lock-in with silicon?
I expect silicon-based PV to remain the prominent technology. Cadmium telluride is another promising technology solution from First Solar and I think their latest product offers a compelling value proposition for utility scale markets as it removes the balance of systems cost disadvantage. However's First Solar's market share would be dependent on how quickly it can scale its new capacity. Meanwhile, for bankability reasons, silicon-based PV technology will continue to remain the dominant technology in the market.
“The utilities we see today won't exist in the next 5-10 years.”
Do you have any bold predictions for solar for the next 5, 10 and 25 years?
Yes - while solar is starting to gain a lot of traction in most global markets today, it is still not ubiquitous. Solar-plus-storage offers the potential for customers (either individual or community) to go completely off-grid. In other words, the utilities we see today won't exist in the next 5-10 years. They will have to adapt or will face the fate that the retailers are facing with the rapid growth of Amazon. Decentralized power generation, especially in an era of autonomous, connected, electric and shared (ACES) transportation era would spell the death spiral for the traditional utilities. Solar, storage and other renewables would be the greatest beneficiaries.
Vishal Shah will be the keynote speaker at Solar Market Parity Europe, the platform aimed at connecting the right players on the verge of a solar (r)evolution. This new conference will bring together developers, financiers, traders and utilities, to discuss the future of large-scale solar development in Europe, beyond incentive-driven horizons.
|VISHAL SHAH /// MANAGING PARTNER - VERACIOUS CAPITAL|
|Vishal Shah is a Managing Partner at Veracious Capital, a sustainable and clean energy investment advisory firm. He is leading expert in the field of Clean energy and former Managing Director of Deutsche Bank. He has over 20 years of experience working with companies in the broader technology and Global Clean Energy sectors. Vishal has received several nationally recognized awards for excellence in the field of solar and clean energy sector. He has been quoted in numerous articles published by major media, including CNN, MSNBC, Bloomberg, the Wall Street Journal and the New York Times. Vishal has worked closely with global and state governments in advising Clean Energy policies, particularly in markets such as China, India, Japan and the U.S. He was one of the working group leaders involved in the U.S Department of Energy (DOE) Solar Vision task force established in 2009 to put together a policy framework for solar energy development through 2030. He has also been a frequent visitor to DOE stakeholder's meetings to expand U.S-China and U.S-India efforts in the field of renewables and energy efficiency. Prior to founding Veracious Capital, Vishal was the Head of Global Clean tech and Sustainable Investing sector at Deutsche Bank. His coverage included large industrial, technology and resources companies for almost 20 years, and prior to Deutsche, he ran the Global Clean Energy Groups at both Barclays Capital and Lehman Brothers. His career on Wall Street began in 2002 at Morgan Stanley’s London office. Vishal has a B.Tech in Chemical Engineering from Indian Institute of Technology, Bombay and an MBA from INSEAD, France. He has been a top ranked Clean tech equity analyst by Institutional Investor since 2009.|
MANAGING PARTNER /// VERACIOUS CAPITAL