A Summer of Solar and Storage
by Matthew Daly, MBA ’15 and Environmental Finance and Impact Investing Fellow (8/19/14)Matthew Daly (MBA ‘15) employs lessons from Johnson and the SGE Immersion program working on Yingli Green Energy America’s new Corporate Development team to evaluate investment opportunities.
As the second day of my internship at Yingli Green Energy Americas (YGEA) came to a close, the US Department of Commerce announced a preliminary decision in one of two ongoing trade disputes over the import of Chinese solar panels. Yingli, which manufactures its panels in China, fared relatively well, receiving a tariff rate of 26.89%. Some companies were hit with duties as high as 35.21%. The office in New York buzzed with activity that afternoon, and for the next several weeks, as my new colleagues adapted to meet this challenge.
Solar panel manufacturers in the US, led by SolarWorld Industries America (a subsidiary of a German company), contend that Chinese companies have used subsidies to flood the US market with cheap panels, driving down prices and jeopardizing American jobs. They hope that imposing stiff tariffs will help American solar manufacturers be more cost competitive, protecting their workers. There is much debate about the merits of tariffs in general, and that is certainly true in this case.
In the Sustainable Global Enterprise (SGE) Immersion we were taught to utilize systems thinking to help examine and understand the different possible impacts that a proposed intervention can have. This tariff is an interesting case study in unintended consequences. While it is true that competition from China has caused some US manufacturers to close their doors, it is not the whole story. The new duties will increase prices for solar panels across the US. This will slow the adoption of solar energy and the boom in installations that cheaper panels have catalyzed to the benefit of many installers and other players further down the value chain in the US market. Will the benefits to a relatively small manufacturing sector outweigh the reduction in demand for clean solar energy and the consequent loss of other solar jobs? It does not seem likely.
Even without international trade disputes and regulatory hurdles, manufacturing solar panels can be a challenging and volatile field of business. As demand has continued to grow and new manufacturers have been drawn to the market, the pressure on pricing has intensified. Margins have thinned, even for Yingli, which is the largest photovoltaic (PV) module supplier in the world. This has begun to improve, fortunately, with the gross margin for sales of PV modules climbing in the first quarter (Q1) of 2014. In the seasonal solar panel market, Q1 is usually not the best of times, so this is especially good news.
In order to fare better in a cyclical market, YGEA has recently created a new Corporate Development department. Led by Mathew Sachs (MBA ’07), the goal of Corporate Development is to invest in new business areas that are related to Yingli’s core competencies, but also offer some hedge against the challenges in PV manufacturing. I was hired to join this team for the summer, and I have been working on three main projects in this area.
Shortly before I arrived for the summer, YGEA identified energy storage as an attractive candidate for investment based on the potential synergies between solar panels and storage systems, and the anticipated growth in that market. I picked up this work stream by developing a broad list of the players in energy storage, focusing on particular technologies and areas of the value chain. Starting with this relatively wide net, I then passed the candidates through successive filters based on size, market focus, technology, location, and other parameters to identify the most promising candidates to contact. This is similar to a strategy that my team used for our SGE project, in which we conducted research and developed different criteria based on our client’s needs in order to present a small group of promising local suppliers for them to consider.
Developing and implementing the different filters has required extensive research into energy storage technologies and business models, which has given me the opportunity to really dive into an emerging sector with the potential to disrupt energy and utility markets. I will ultimately identify a handful of the best candidates for investment, and provide a deck explaining the merits of each option for further consideration by YGEA.
In order to better understand the market for energy storage, I have also been developing a financial model to analyze how potential energy savings balance with the initial capital expenditure on the storage system. Does energy storage make business sense for any sector or market segment under certain models? If not, it can never be a good investment.
One of the best potential cases for energy storage is demand charge management for commercial and industrial (C&I) utility customers. Demand charges are based on maximum energy usage during a short period, usually fifteen to thirty minutes, during a billing period. Utilities must maintain the capacity to meet peak demand from all customers at all times, even though it is only used during the hottest times of year for a few hours. This is inefficient and very expensive, and the extra cost is passed on to C&I customers via demand charges.
Energy storage systems can charge their batteries during periods of low usage and discharge energy during periods of high consumption to smooth a customer’s usage peaks and significantly lower their demand charges. Charging batteries during off-peak times to power operations during peak energy hours can also reduce the charges for electricity under time-of-use billing.
Finally, this is also beneficial to the environment. Reducing peak loads allows utilities to avoid using generation methods of last resort, which are usually the dirtiest and most costly. Building on models collected from several companies and using data from early projects, the financial model determines the payback period, initial rate of return (IRR), and net present value (NPV) for investments in storage systems of different capacities for different end users. This final model will be a valuable tool to analyze the business models of companies that YGEA is considering investing in, and the potential market for their products.
The selection of storage as a strong candidate does not preclude other sectors. Promising opportunities in other areas will also be considered as they arise. In order to facilitate this ongoing review, I have also developed a filter through which these can be easily tracked, evaluated, and prioritized by the Corporate Development team. The evaluation metrics are a combination of YGEA’s specific strategies and goals, paired with more standard measures of the potential performance of the company under consideration for investment. This tool will allow for a quick analysis of opportunities, weeding out those that do not fit key criteria at first review, and allowing YGEA to focus more deeply on those that are promising matches.
The experience at YGEA has included a great deal of fun in addition to work. Yingli was a sponsor of the World Cup in Brazil this summer, so there were several enthusiastic soccer parties in the conference room to watch matches, including the disappointing but exciting game between the US and Belgium. In addition to working directly for a Johnson alumnus, I also had the opportunity to get to know Nupur Pande (MBA’11), who is the Director of Commercial Operations and Strategy at YGEA and an alumna of the SGE Immersion.
Going into the summer, I was relatively open-minded about my internship. I knew that I would like to be in New York. I preferred to do something related to sustainability. Ideally my work would include some financial analysis that would contribute to my experience as an Environmental Finance and Impact Investing Fellow. Most importantly, I wanted to apply my new skills and knowledge from Cornell in a business setting that would round out my previous career experience in the non-profit world. YGEA has met and exceeded all of these expectations while also offering opportunities to learn about emerging technology, new industries, and corporate investment. It has been a wonderful experience, building upon my growth and education at Johnson and in the SGE Immersion.