How SunRun Applies Financial and Software Muscle to Home Solar Installation
Sometimes we tech reporters get so wrapped up in writing about cool new technologies that we overlook other, equally important forms of innovation. Recently I visited SunRun, a San Francisco startup that installs photovoltaic panels on residential buildings and charges homeowners for the electricity they generate. I was expecting to hear a lot about the latest ways to engineer solar panels to produce more power—but I came away with a notebook full of thoughts about power purchase agreements, tax equity financing, and pricing engines. So while there are certainly people at SunRun who spend their time figuring out how to optimize the power output of the company’s 3,500 installed systems, this is largely a story about how three-year-old SunRun is spreading solar to more homes through clever financial engineering.
Despite the rapid growth of the Bay Area’s three leading residential solar companies—SunRun, Solar City, and Sungevity—there’s still a big puzzle about solar homes. It’s why there aren’t a lot more of them. California Governor Arnold Schwarzenegger signed the California Solar Initiative into law in 2006, making more than $2 billion in cash rebates and tax credits available to utility customers who put solar panels on their roofs. The goal was to get a million residential rooftop systems installed in the state, but all that free money hasn’t translated into the envisioned acres of solar panels. “We’ve soared past a million Priuses shipped, but in terms of solar homes in California, we are only at 100,000 since the beginning of the solar initiative,” notes Steve Vassallo, a Foundation Capital general partner who oversees several of the firm’s energy investments.
It’s partly an awareness issue: the state’s Public Utility Commission has issued dozens of news releases since 2006, and has designated August as “Solar Energy Awareness Month,” but it hasn’t done much else to publicize the rebates or explain how consumers can get them. But it’s also an economic issue: homeowners hammered by the recession don’t have a lot of extra money to shell out for home improvements these days, and they aren’t sure how much money they can save on their utility bills by installing solar.
And that’s the first thing that’s so ingenious about SunRun’s business model. It’s designed to take most of the risk out of solar installation, by asking homeowners for a tiny down payment (averaging $500), lining up equipment and installers, handling all maintenance and repairs for 20 years, and finally guaranteeing that homeowners’ post-installation electricity payments to SunRun will be lower than their existing utility bills.
That simple pitch has won SunRun 7,000 customers in seven states—Arizona, California, Colorado, Hawaii, Massachusetts, New Jersey, and Pennsylvania—and made it the fastest growing residential solar company in the country. But it has taken a lot of careful planning, and quite a bit of creativity on the financial and administrative sides, to make it all work.
“It’s a simple concept to take away the hassle and up-front costs of solar,” says Vassallo, who’s been working with SunRun since Foundation made its first investment in the company in mid-2008. “But to make it happen behind the scenes, a lot of fascinating challenges had to be overcome.”
The story starts back in 2007, when Edward Fenster and Lynn Jurich, who would eventually become SunRun’s CEO and president, respectively, were students at Stanford’s Graduate School of Business. Fenster had M&A experience from the Blackstone Group, and Jurich had worked on technology and financial services investments for Summit Partners. The two friends were looking to apply their finance skills in a new area. That was when a high-school friend of Fenster’s came home from the war in Afghanistan and convinced Fenster he should do something to reduce U.S. dependence on foreign oil.
Fenster approached Jurich for help, and the two noticed that companies like Sun Edison were beginning to make money selling solar-generated electricity. “We very quickly discovered that everybody was trying to solve the problem of building big commercial solar projects, but nobody was focusing on residential,” says Jurich. “But retail electricity for residences is more expensive than other segment, so that is where you are going to get to grid parity [electricity that costs no more than utility power] first. Also, it’s much harder to scale up. So we felt it would be a better, more defensible business over time.”
But in choosing a business that would be defensible against competitors, Jurich and Fenster had carved out a huge obstacle for themselves. Installing solar panels and the associated electronics can cost $40,000 per home. SunRun’s plan was to cover part of that cost by requiring homeowners to sign 20-year contracts to buy the electricity from the panels—so-called power purchase agreements. But that revenue would come in slowly over two decades.
As the builder and owner of the systems, SunRun would also be entitled to any renewable-energy subsidies provided by the homeowners’ local municipalities. That still wouldn’t be nearly enough.
So SunRun raised its first venture round—$15 million from Foundation Capital—in June 2008, and started paying for the first wave of customer installations from its own cash. “We were funding all of these assets from equity, which you normally wouldn’t do—it’s very expensive,” says Jurich. “You need to get project financing into place.” In the case of builders like SunRun, project financing usually means tax equity.
When developers like SunRun install solar panels in states like California, homeowners sign over the associated tax credits. But developers don’t usually have enough taxable profits themselves to use the credits, so they raise capital by selling the credits to banks, along with a share in future revenues from electricity sales.
Before the Great Recession, this was one of the major ways renewable energy projects got funded. But it was now the fall of 2008. At a time when the financial world was crumbling and consumer credit seemed increasingly toxic, SunRun was going to banks and asking them to hand over tens of millions of dollars to finance a consumer-facing business. It also had to make financiers believe that the company would still be around in two years, let alone the 20 years specified in the power purchase agreements.
“It was a huge effort to convince them and to eliminate the risk in these capital projects so that we could get capital in an affordable way,” says Jurich. But eventually, the startup signed up its first tax equity investor, U.S. Bancorp.
“These guys, to their credit, worked tirelessly on this through the fall of 2008, when the world was falling apart,” says Vassallo. “The Dow would lose 10 percent on the week, and to be out on the market as a very young company that had just been financed, run by a 28-year-old and a 32-year-old, raising your first $20 million in tax equity, was a challenge…When they were able to close their first tax equity fund with U.S. Bancorp, it felt a little bit like we were the last helicopter out of Saigon. It may have been the only tax equity solar deal done in that quarter.”
Part of SunRun’s success landing U.S. Bancorp, according to Jurich, lay in the innovative way the company “sliced and diced” the tax credits, depreciation, local subsidies, and 20-year power contracts. But traditional engineering played a big part, too. I talked with Matt Eggers, SunRun’s vice president of operations, who described all the work SunRun does to make sure that the thousands of systems it has now installs actually keep producing power.
“We’re basically a utility with thousands of power plants,” Eggers says. “Solar is a very reliable technology, but when you have a lot of systems you have failures.”
To minimize those failures, each rooftop system is outfitted with a wireless smart meter that takes readings every 15 minutes and uploads the collected data to SunRun’s servers four times a day. “If one capacitor goes on one panel, [the homeowner] will never know—there is enough variability due to weather,” says Eggers. “But we are monitoring all of those power plants and comparing them to each other, so we have a pretty accurate sense of where the problems are. We can wash out the effects of weather and detect dirty panels, or quickly notice when an inverter has been disconnected or a squirrel has chewed through some wires.” Sometimes that means rolling a truck; sometimes the company decides it can afford to wait until more dust or grime accumulates on the panels.
Building the monitoring system wasn’t just an efficiency measure, according to Jurich: it was key to winning project financing. “Figuring out the systems to keep those assets up and running and to bill against them—we had to build all that information technology so that the banks would feel comfortable,” she says.
And there was one more ingredient needed to help SunRun expand into all of the states with significant solar-related grants, rebates, and tax incentives: a way to generate automated price quotes. Not only are the subsidies in each district different, but utility commissions regulate the amount of power providers can charge. Figuring out all of that by hand for every zip code in all seven of the states SunRun covers would be “impossible to scale,” says Eggers. So the company built a “pricing engine” that takes into account everything from local tax laws to the pitch of the homeowner’s roof and spits out a price quote on the fly. (Consumers can even decide whether they want to pay a higher down payment in return for a fixed price per kilowatt hour of electricity used, or a lower down payment and an escalating price.) Between January and October, the pricing engine generated 168,000 proposals, according to Eggers.
Software engineers make up the biggest chunk of SunRun’s staff of 75. (Much of the company’s sales effort and all of the actual solar installation work is outsourced to local contractors.) The big investment in software is necessary, according to Jurich, because other companies will eventually figure out how to slice and dice tax equity investments just as SunRun has. “Ultimately, that will become more and more commoditized, and that’s why the other things we’re building—like the software systems to bring down transaction costs, having smart pricing models, building a consumer brand, getting the best distribution—are going to be the better long-term value for the company,” she says.
SunRun has how raised $85 million in venture funding from Foundation, Accel Partners, and Sequoia Capital, and this June it lined up a second tax equity investor in the form of Pacific Energy Capital, a unit of Pacific Gas & Electric. The company got some good news last week: the tax bill passed by Congress and signed by President Obama contained a one-year extension of a stimulus-bill program that provides cash grants in lieu of solar investment tax credits. Solar industry lobbyists had argued that the grants were partly responsible for the industry’s 100 percent growth in 2010, and SunRun says that the program’s continuation will enable it to build 36,000 more residential solar installations than it could have otherwise.
So the future looks sunny for this company full of engineers, both financial and classical. “SunRun has gotten rid of every excuse someone might have not to put solar on the roof,” says Vassallo. “It’s a special company—and I say that having spent enough time in venture to know that you’re lucky to have two or three special companies in any one portfolio.”
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