It’s called financial engineering and it is the only way to fund big solar projects, CITI Managing Director and Alternative Energy Finance Head Marshal Salant insisted at the Smithers APEX solar event in San Diego last week.

The key differences between PV and CSP, Salant said, is that “PV can be done on a much smaller scale and be economic and a large project can be done in phases. It’s a lot easier to finance $ 250 million or $ 500 million than it is to get $ 3 billion all at once.” CSP requires vital economies of scale “so you’ve got to raise $ 2 billion all at once. That’s a lot harder to do than to raise $ 500 million four times.”

For either, “the real mission is to obtain the lowest cost capital,” Salant explained. That means “you want bank, bond, LOCs, fixed rate, floating rate, guaranteed, non-guaranteed loans,” he said. “You go wherever you have to go to find investors. It’s that simple.”

Things are more difficult now, he said. “1603 is gone, that was the most successful program Washington ever came up with.” CITI’s deal makers, a big and dedicated team that covers every aspect of financial engineering, Salant said, are turning to any and all federal, state and local programs, and “the funky structures, the partnerships, leveraged leases and inverted leases” as well as “tax equity and project level equity.”

And, Salant said, “financing is more than ever about serious corporate relationships.” Everybody involved has to be invested. CITI is “absolutely adamant about this” because “the days of casual dating are over, we’ve got to deal with people where it’s a serious relationship.”

It is vital, Salant warned, to “focus on interest rate risk because if the Fed starts to tighten, the whole project can wither and die.” Commodities and foreign currency must be hedged, he added. And “on big solar projects, tax exempt bonds are essential.”

“In this market, Salant said, “size matters. The way you’re going to do a small deal is very different than the way you’re going to do a big deal.” CITI focuses on “on “super-large deals” which it defines as $ 1.5 billion and bigger. “In 2010, we did the two largest financings in alternative energy. They both were wind deals. In 2011, we did the largest deal, a solar deal, Desert Sunlight. In 2012, we hope to again do the largest deal which will again be a solar deal.”

Salant described the many parts of the 550 megawatt PV Desert Sunlight deal involving NextEra, GE and First Solar.

It was the “largest solar energy project financing to date, a $ 2.3 billion project with $ 1.7 billion of market financings.” CITI “locked in 4.27 percent as a blended cost, which I would argue for a long term, non-recourse project financing is amazing, given that the Treasury, for most of the last twenty years couldn’t finance at 4.27 percent.”

CITI has also “put over $ 200 million of our own money” in $ 100 million or less residential rooftop deals. “We’ve done five portfolio deals, for SolarCity, Sungevity, Constellation Energy, SunEdison and SunPower,” said Salant. “We do stuff as principal. We also find investors. The long term key is finding investors.”

Their 2012 undertaking is the 550 megawatt, $ 1.2 billion Topaz Solar PV project, which has “$ 850 million in project bonds.” They are, Salant said, “ten year Treasuries with basis points, 5.75 percent on a $ 2.4 billion project, again very large bond deals.”

The markets, Salant insisted, “are wide open. Deals are bankable. But they have to be well-structured.” Capital “in the bank market is relatively strong.” Though some institutions are reluctant, “the bond market side continues to grow.” And, he added, “long term, the solution is not banks.” That is, he said, “an historical accident. The right source of long term capital is equity capital. It’s bond and institutional investors.”

Right now, Salant said, “tax equity is available” but “there is a supply-demand imbalance.” CITI calculates there is a need in solar for $ 10 billion to $ 12 billion in tax equity for 2012 through 2014 but not more than $ 5 billion in tax equity is available. That, Salant said, is “a massive supply-demand imbalance” that is not “going away anytime soon.”

On policy, Salant said, “I personally am an optimist.” But, he added, “you better start prioritizing and focusing on legislative policy objectives because it is going to be a difficult fight in Washington for limited funds.”

Sitting in was Stoel Rives law firm partner Morten Lund. “I am a professional pessimist,” he explained. “There is lots of money available” and “projects are being financed,” he agreed, but “only the good guys are getting the money.”

Financing is hard, Lund insisted, because big projects come with big challenges and “that’s not the kind of conversation you have with a bank.” What he does all day, Lund said, “is tell people it’s really hard.”

Money is available, Lund concluded, “if your project is good – and only if your project is good. Therefore, be a good project. That is the very simple and straight road to financing.”

***

Coming in Part 2: the perspective of Deutsche Bank Director Vinod Mukani

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What first Solar does in the next few years is important.

Which is why more than 200 people showed up to attend a presentation by Alex Panchula, First Solar's Manager of Performance Analysis, presented by the Silicon Valley PV Society chapter of the IEEE.  

Last week we looked at the market issues that are compelling First Solar to innovate "beyond the module."

This week — we'll look at some of those innovations and some of First Solar's deployments.

According to Panchula, First Solar must deploy 65 gigawatts over the next 10 years in order to thrive, instead of playing whack-a-mole and chasing subsidized markets. First Solar's goal is to get new sales from utility-scale power plants in sustainable markets by 2014. That means eliminating the dependency on subsidies and getting the price of solar down to levels where it is genuinely at grid-parity at utility scale in developing nations.

Panchula's presentation proclaims that, "Our low-cost technology and captive U.S. project pipeline will help us remain profitable in a shrinking, structurally imbalanced industry."

The First Solar strategy is to go after "open markets" at utility-scale. First Solar will not be addressing residential rooftops anytime soon.

The slide below shows a photo of the Aqua Caliente installation – a 290 megawatt (AC) project currently in construction. One of First Solar's cost reduction techniques is to build these massive projects quickly. At one point Agua Caliente was being built at a rate of 5 megawatts per day. That's more than 50,000 panels per day and about 35 acres per day at peak construction.

In "going beyond the module" First Solar looks to lower total solution costs in O&M, financing, balance of system, and cost of capital. Panchula remarked that the First Solar acquisition of RayTracker in 2011 was one of the moves to lower cost and optimize performance. Panchula spoke of more automated construction methods and lowering total BoS to $ 0.70 to $ 0.75 per watt — down from its current $ 1.00 per watt.
 

Recent records for CdTe module efficiency of 14.5 percent and small cell efficiency of 17.3 percent show that CdTe performance still has some life left in it. Panchula looked out towards 14.5 percent to 15 percent module efficiency by 2015.

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First Solar has over 2 gigawatts of utility-scale solar power plants constructed or under construction.

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What first Solar does in the next few years is important.

Which is why more than 200 people showed up last week to attend a presentation by Alex Panchula, First Solar's Manager of Performance Analysis, presented by the Silicon Valley PV Society chapter of the IEEE.  

First Solar shared its slides with GTM, and we'll pass on the more interesting of the bunch.
 
In First Solar's view, the future of photovoltaics is at the utility scale, but the innovation is "beyond the module." And it's not just power plants or even systems, according to Panchula — but rather about solving problems and providing solutions.

First Solar notes that global capacity has effectively tripled since 2009 in a supply chain without any barriers to entry in c-Si and a situation where supply oscillates between constrained and oversupply.
 

The core markets for photovoltaics — Germany, France, Spain, Italy, California, and Czech Republic — are just a small slice of the world. Still, these core markets, which were 15.8 gigawatts in 2010, dropped to 13.6 gigawatts in 2011. Panchula asked, "Are the wheels going to fall off in 2012?"

And here's the problem with those core markets (which GTM has dubbed 'savior markets'): the subsidy regime has a tendency to peak and fall, or in many cases, crash, as shown in the following slides. First, the Spanish crash of 2008:

Here's the California renewable Portfolio Standard PPA collapse:

And likewise, distributed generation PPAs in California:

Here's the ugly picture for the Czech Republic:

And the German situation (although those estimates of 2011 seem a bit low. We've seen estimates that show 2011 finishing at closer to 7 gigawatts). So perhaps not a crash, but definitely not the growth that First Solar or the solar industry needs to thrive.

Panchula sees it as unlikely that new markets like India will repeat this again, saying, "Countries in the developing world cannot afford subsidies."

So the question that First Solar confronts is: does the firm continue to play 'whack-a-mole' and pursue the less-than-rational subsidy markets? Or do they pick a different game to play?

According to Panchula, First Solar must deploy 65 gigawatts over the next 10 years in order to thrive, instead of playing whack-a-mole. First Solar's goal is to get new sales from sustainable markets by 2014. That means eliminating the dependency on subsidies and getting the price of solar down to levels where it is genuinely at grid-parity at utility scale in developing nations.

We'll look at how First Solar intends to do that in Part 2 of this series next week.
 

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But there is a compelling rationale for concentrating technologies. PV doesn’t entirely answer the needs of the transmission system, while CSP with thermal energy storage (TES) can. 

“Dispatchable CSP can discharge from storage to serve high-price peak loads that occur outside the daylight hours, including the late afternoon and early evening," according to BrightSource Director of Economic and Pricing Analysis Dr. Udi Helman. The value of this extra peak power makes CSP more competitive “by several dollars per megawatt-hour.”

PV cannot be dialed up or down, whereas by channeling more or less CSP output to storage, it can be ramped. Once in storage, it can also be released in varying amounts. This is the kind of flexibility conventional generators have which allows utilities, by altering the level of their output, to accommodate the forecast uncertainty and variability of non-dispatchable renewable generation. This provides grid operators with ramping reserves and regulation services.

CSP plants with TES have the flexibility of conventional thermal plants, according to Helman, and “offer higher ramp rates and ranges than large thermal plants.” This could not only replace some conventional generation but could “provide a more flexible generation mix” that would “result in greater use of non-dispatchable solar PV and wind.”

Finally, Helman noted, “TES allows shifting of the solar resource to periods of reduced solar output,” and it does so, he said, “with relatively high efficiency.”

In doing these things, Helman explained, it saves money. Peak generation has higher value. Furthermore, according to Helman, “as more renewables are added, it will change energy market prices.” First, PV will displace “older, more expensive gas plants.” Then, “right after the daylight hours, as other plants — primarily gas — are ramped up to compensate for the rapid ramp-down of inflexible solar production,” he explained, citing simulations by the California Independent System Operator Corporation (CAISO) that show that stored CSP generation can be dispatched.

“The costs of these reserves are currently estimated to be in the range of $ 4 to $ 8 per megawatt-hour in California by 2020 or at high penetrations in other systems,” according to Helman, especially where “gas peakers or other types of storage to support integration” are built.

As we have reported, BrightSource Energy recently added thermal energy storage (TES) capability to three of its power purchase agreements (PPAs) with Southern California Edison (SCE). 

The implication: A balance between PV and CSP will make it possible to use more PV — and to use more sun.

“Some percentage of solar production could be curtailed more frequently as additional non-dispatchable wind and solar generation is added to the grid,” Helman explained, citing an NREL study. “As [non-dispatchable] PV production increases, this becomes more probable. Dispatchable CSP can be stored rather than produced, and hence allows for integration of more total solar than if only non-dispatchable solar generation is interconnected.”

According to NREL calculations, Helman noted, if a future gas price of $ 4.50 per MMBTU is assumed, a relative fuel savings benefit of CSP with TES over PV is about 0.5 cents per kilowatt-hour.

Depending on the size and storage capacity of the CSP/TES system, the total value is 0.7 cents to 2.0 cents per kilowatt-hour. “NREL’s studies show,” Helman explained, “that at some point, the incremental value of increasing the solar field and adding storage begins to diminish,” because “overnight energy prices are low, so selling more energy at lower prices will not increase the CSP value.”

The total value of CSP with TES has been estimated by NREL modeling and simulations. At 10 percent to 15 percent solar, with gas prices in the range of $ 4.50 to $ 9.00 per MMBTU, the estimated value of CSP with storage is an additional 1.6 cents to 4.0 cents per kilowatt-hour.

The NREL research, according to Dr. Helman, breaks those values into four categories: 1) The energy shifting value is ~0.5 cents to 1.0 cents per kilowatt-hour; 2) The increased capacity factor value is ~0.7 cents to 2.0 cents per kilowatt-hour; 3) if PV is 6 cents per kilowatt-hour, the value of reduction in curtailment is estimated at ~0.3 cents per kilowatt-hour; and 4) the reserve and integration value is 0.1 cents to 0.7 cents per kilowatt-hour.

A real-world approximation of the total value of CSP with TES is that the original PPAs with SCE set BrightSource’s seven solar power plants’ obligation at approximately four million megawatt-hours of electricity per year. With the addition of TES at three plants, new agreements set the same level of production, but with one fewer plant.

“From a policy standpoint, a simplistic approach to choosing a generation technology might be based simply on picking the option with the lowest overall levelized cost of electricity (LCOE),” NREL researchers observed, but “deployment based simply on lowest LCOE ignores the relative benefits of each technology to the grid, how their value to the grid changes as a function of penetration, and how they may actually work together to increase overall usefulness of the solar resource.”

***

Editor's note:

Read the first three parts of Herman Trabish's series:

Getting 33 Percent Renewables on the Grid,

Grid Integration: The Rubik’s Cube of Renewable Energy

What Will It Take to Integrate Renewables Into the Grid and How Much Will It Cost?

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Executives from the two family funds, Argonaut Private Equity and Madrone Capital Partners, will be called to testify at a hearing as soon as Friday — that would be Steve Mitchell, managing director of Argonaut Private Equity and Jameson McJunkin, general partner of Madrone Capital Partners. CEO Brian Harrison and CFO W.G. Stover Jr. are also expected to testify Friday about the collapse of the startup, the recipient of a $ 535 million loan from the DOE.   

According to Dana Hull of San Jose Mercury News, "Attorneys for Solyndra CEO Brian Harrison and CFO Bill Stover say their clients intend to invoke Fifth Amendment Friday."

Allegations have been made by the Republican Party that the loan was rushed through because George Kaiser of Argonaut Equity was an Obama fundraiser. Argonaut was the largest private investor. Note that Madrone is the Walton family fund, which tends to invest in the Republican direction.

Having sat through the previous week's hearings featuring Jonathan Silver of the DOE, I feel safe in saying that little will be discovered other than that our grandstanding politicians are not serving the people very well.

 ***

House Judiciary Chairman Lamar Smith (R-Texas) has asked Attorney General Eric Holder to appoint an outside investigator to investigate whether the Obama administration had political motivations when it approved a $ 535 million federal loan guarantee in 2009 for Solyndra, according to the Huff Post.

***
Dan Primack of Fortune performs his usual succinct analysis on the Solyndra financing:

Solyndra: While everyone continues to ignore Solyndra’s fundamental business model mistakes — and how they were missed in DOE due diligence — lots of attention is being paid to the fact that some of Solyndra’s investors are scheduled to be repaid before the federal government. More specifically, Argonaut and Madrone — earlier equity investors who contributed $ 75 million in debt restructuring after the DOE loan — have priority if Solyndra actually has assets that anyone wants to buy.

(2) I’ve also heard that the restructuring itself was some sort of partisan politics, since Argonaut is the investment vehicle of Democratic bundler George Kaiser. First, this ignores the fact that the $ 75 million was new money (i.e., new risk for Argonaut). More importantly, it also ignores that Madrone is an investment vehicle affiliated with Wal-Mart’s Walton family, who generally contribute to GOP causes.

***

Media Matters does a fine piece on what the mainstream media gets wrong about the Solyndra debacle here.

***

Here's the Washington Post on the "pseudo-debate" on Solyndra.

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It looks like Friday is the day that key that the senior executives in Solyndra, the now-bankrupt Fremont, California thin-film solar firm, get questioned by Reps. Henry A. Waxman (D-CA) and Diana DeGette (D-Colo.) at the House Energy and Commerce investigative subcommittee to testify about the collapse of the startup, the recipient of a $ 535 million loan from the DOE.   

But they won't be talking. They'll plead the fifth. Here's the relevant excerpt from the firm's statement:

…on the advice of their counsel, they [the CEO and CFO] will be unable to provide substantive answers to the Subcommittee’s questions and that present circumstances require both gentlemen to exercise their fifth amendment rights in the face of questioning that might occur.

Here's the full statement from the company:

Statement Regarding Hearing of Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, U.S. House of Representatives
 
Today Solyndra’s President and CEO, Brian Harrison, and its CFO, Bill Stover, communicated to Chairman Stearns and Members of the House Subcommittee on Oversight and Investigations that, due to the ongoing Department of Justice investigation and on the advice of their counsel, they will be unable to provide substantive answers to the Subcommittee’s questions and that present circumstances require both gentlemen to exercise their fifth amendment rights in the face of questioning that might occur.
 
The company is not aware of any wrongdoing by Solyndra officers, directors or employees in conjunction with the DOE loan guarantee or otherwise, and the company is cooperating fully with the office of the United States Attorney for the Northern District of California in its investigation.  The company believes that the record will establish that Solyndra carefully followed the rules of the competitive application process, starting in December 2006 under the Bush administration and continuing under the Obama administration. The Department of Energy (DOE) conducted extensive due diligence on Solyndra prior to final approval of the DOE loan guarantee.  Consistent with the DOE loan guarantee program requirements, all loan proceeds were used to build out the company’s state of the art Fab 2 facility from green field to a working fab that was already producing panels at an annual run rate of over 100 megawatts when operations were suspended in connection with the Chapter 11 reorganization filing.
 
At the same time Solyndra was successfully building out its Fab 2 facility, the competitive landscape for solar photovoltaic panels was changing dramatically. Market conditions led to an oversupply of panels worldwide, which had a substantial negative impact on pricing of the company’s panels and the company’s ability to rapidly ramp its sales.  As late as August, the company believed that existing investors and the DOE would come to a financing arrangement that would have secured the capital the company needed to achieve positive cash flow from operations.  The Company’s investors had offered a transaction pursuant to which the required capital would have been invested, however, the terms of such transaction were not acceptable to the DOE.  Ultimately, it was a failure to secure this financing that left the company with no other option but to seek to reorganize through a bankruptcy filing under Chapter 11.
 
The decision to suspend operations and file for reorganization has had a devastating effect on the company’s talented workforce as well as a negative impact on the businesses of Solyndra’s valued partners, suppliers and customers. This was not a decision taken lightly. The majority of Solyndra’s workforce was in the United States and the company did all that it could to keep these manufacturing jobs that are so vital to the country, in place. A small number of employees remain while Solyndra evaluates options, including a sale of the business and the licensing of its advanced CIGS technology and manufacturing expertise in order to maximize the value of the assets for Solyndra’s creditors, including the DOE.
 
The company is confident that the investigation will clarify the facts surrounding the events leading to the DOE loan guarantee to Solyndra and looks forward to a time when its executives can more freely discuss their views on these events.

Dana Hull of The Mercury News obtained the lawyer's letters and you can dowload the Harrison letter here and the Stover letter here.

This is a perspective piece so allow me to offer my perspective.

Behind all the political posturing and grandstanding, accusations of graft and cronyism, and mispronunciations of the word "photovoltaics" by politicians and newscasters — here is the opinion of your humble narrator, a reporter, technologist, and veteran of both failed and successful startups.

The core technology of this company was novel, innovative, and not worth commercializing. As reported – I've spoken to one of the original Solyndra inventors and patent holders who told me that the packaging requirments for this design rendered it incapable of being competitive. He told me this three years ago. After he left the company.

Entrepreneurs fall in love with their technology and become blinded to market reality every day. Venture capitalists are supposed to know better than to let this happen to them but that's what happened here. This technology was a bad bet before China Inc. came onto the solar scene and before solar panel prices plunged to their current levels. The DOE is guilty of the same misjudgement on the technology. The DOE also made market misjudgements.

Optimism and denial by the company? Yes.

Poor due diligence by the VCs and the DOE? Absolutely.

Criminal activity? Not at this point in the company's timeline, at least. No smoking gun email with political motives will be found because none likely exists. Save the desire to get a factory built, money deployed, and jobs created. Maybe a few corners cut to get to that objective at the DOE.

The problems start to occur when the IPO is suspended, the reality of cost targets become clear, and a new CEO is put in place.

Brian Harrison, the new CEO, is installed at the helm of this Titanic at a salary of more than $ 400,000 and not to defend him, but he's inserted into an untenable position. No management skills or manufacturing process skills could alter the course of this company.

Harrison looked me in the eye at a recent interview and told me to my face that the firm would not need to take any additional funding. He was either in denial or disingenuous.

The more solar modules the company shipped the more the company lost and the faster the money was running out.

The CEO and the CFO had to know this.

Somewhere in a file, wastebasket, or hard disk drive is the evidence that the FBI is seeking — that the officers of the company knew, as their auditors declared a year ago, that they were not a "going concern," and that the hammer was going to come down hard and soon.

That they failed to notify their investors and the DOE in a honest fashion is the issue here. Is it corporate malfeasance and negligent? Without a doubt.  Is it a crime? We'll soon find out.

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