Open Energy Group
An Interview with Graham Smith, CEO at Open Energy Group
I sat down with Graham Smith, former Olympic rower and CEO of Open Energy Group, to discuss OEG’s mission to make capital more accessible in the renewable energy industry. In our conversation, Graham breaks down solar finance and provides advice for those looking to jump into the industry, just as he did a little over 5 years ago.
Can you briefly describe Open Energy Group’s business?
We are a capital access platform for renewable energy. So what does a capital access platform mean? It means if you’re a renewable energy developer and you’re looking to access capital for yourself or for your clients, Open Energy Group aims to make that job successful and easier and faster. These developers are not building a new panel or technology—they are building projects that produce power. They take months to build and there’s something very tangible in the end. In the case of solar, the sun hits the panels and then that can be sold. That’s our job—to know all about that—to help those people get access to capital, to loans or leases, or equity that enables them to fund those projects and take them to completion so they can generate electricity.
Open Energy Group started in solar but has expanded into other renewable energy sources. Can you talk about that?
Yes, we started in solar, because that was my background. Solar was a pressing, immediate need. We found that when you do a good job, your clients may ask you for help in other renewable technologies that they do. We are looking at storage, energy efficiency, geothermal, waste to energy, and hydro now. And it’s hard to predict which will be the next we look at, because it depends on what our clients are getting into.
Can you share how OEG came about and how the sport of rowing was a big part of that?
Open Energy came about because I saw that renewable energy finance was a bit broken after the Crisis^. Banks weren’t really lending and renewable energy was perceived as extremely risky. Banks don’t like lending to risky things, and about 5 years ago, there was the rise of alternative lending. The concept was simple—if individuals and small businesses can get funding, why can’t renewable energy? It’s also a good thing, and the returns are attractive.
Why rowing? Well I am a rower and the two co-founders are rowers as well. When you start a business, it’s hard to do much on your own—you need a team. I knew Michael and Alistair (OEG co-founders) for many years, and you need people you can depend on. In rowing, you also have to depend on crewmates. In rowing, the three of us had been successful, so there was a pairing of skillset, personality, and that trust that you need to go through the hard times of a little business.
So when and where did you guys row together?
It was in London, which is where I am from. I rowed with Alistair on the varsity team and the national team. I rowed with Michael in London as a part of team of ex-internationals. It was a nice melting pot of British, American, and French rowers. We also worked in finance in London, so we had lots of opportunities to talk about the early stages of Open Energy before it came to fruition.
What made you jump from the European to the American solar industry?
I moved here in 2012 for the company I was with at the time. I saw the European sector grow extremely quickly despite the fact that there’s not much sun in the UK. I noticed the dynamics in the U.S. were very similar to those in the UK. The U.S. market was less mature but you had this big long runway. It was more challenging but the opportunity was much larger. I could have packed up my bags and gone back to the UK, but it felt like the right time to tackle the U.S. market.
How did OEG choose Manhattan for its headquarters?
I lived here, and my family was here. Plus, New York is a great place to access capital and start a business. You don’t have to travel.
Finance can be an opaque part of the solar industry. Can you provide an overview of solar finance?
It is pretty opaque, because it’s less tangible than the panels, for instance. Finance is fundamental, because that’s how these things get built. It comes down to how the power is consumed and paid for in the U.S. There are two broad ways – they’re either selling the power to somebody to use or the power is being used right there. A good example is a solar project in a remote area—that power is connected to the grid and is getting used elsewhere, along with all the other electrons. Somebody is owning the system and selling the power to somebody else. The first example is project finance, where there is an asset, a solar plant, and what we’re going to look at is how it sells its power. On the basis of that, I’m going to put a pseudo mortgage on that. You’ve got a series of cashflows, because somebody is paying for the power. I’m going to put a mortgage on that based on somebody paying that, and that’s how the debt pays down. This may be a little overly simplistic, but project finance is like a mortgage in a lot of ways. Everybody understands a mortgage. A lot of banks do it—some you know by name, and others are smaller regional banks you may not know by name.
The second way is the solar project is located right where the power is used. The second example describes a more intuitive situation where a pizzeria, church, or business owns the system and is using the power too. In this situation, solar finance is really small business lending, which is very common. The pizzeria probably has a local bank or has a loan from the bank, but in this instance, solar finance is addressing the need to borrow money for the specific purpose of solar. What’s different is that in this situation, you have to look at energy costs. If my bill is $100 a month, if my monthly loan payments are less than $100, then this may be a good deal for my business.
We hear that commercial solar is an underserved part of the market. If you could wave a wand over the commercial solar industry, what would you do?
I’d say that all of us want to fast forward the clock. I conjecture that this is what it would look like—there would be platforms in place (one of which would be Open Energy) that would be go-to resources for vendors that are trying to sell solar and get accessible financing for their customers. So this magic wand would build out familiarity—it takes time for people to realize that resources are there. It’s a bit like how when you’re looking for a credit card, you don’t think twice about going to Lending Tree or Credit Karma. You know there are options are out there; you just want to know which one is going to give you the best rate, for instance. That’s not the same in solar. If I could fast-forward in solar, I’d fast-forward to a time when that framework is in place. Ultimately, finance slows down the growth of solar and these other technologies.
What part of the commercial solar industry is OEG best positioned to serve?
There’s a lot of job growth in the people who build the solar plants themselves. These are the people who drive around and pitch businesses to “go solar”. Those groups are relatively unknown. They are really good at selling solar and building solar. What they are not as good at, is finance. Those businesses could consist of 1-2 people or 20 people. Sometimes these were electricians that are expanding into solar; they typically do come from another area into solar. These companies may not have natural banking partner. They don’t have a bank to turn to. The pain point is that all these businesses are not able to access capital for themselves or their customers. The sector needs a platform that allows them to solve their pain point. These players aren’t going to hire a banker, and the big banks move more slowly. The big banks aren’t suddenly going to say “Solar, I get it.” They need an intermediary to link up bank money, and help educate banks on this new set of customers. Vice versa, these builders of solar need to understand there is a way to access capital. We allow them to do what they do best, to sell and build solar. The reality is that there is this underserved group of businesses across America building solar.
Can you share how you have witnessed the solar industry evolve?
What’s interesting is the coming and going of different names. A good example is the banks who were lending prolifically in solar but are no longer. It’s difficult to say why. Maybe it’s because they were acquired by another bank, and that program stopped. We’ve also seen the likes of Solar City and SunEdison, which achieved great success, but sadly, didn’t continue or where subsumed (as Solar City was bought by Tesla). Solar City was once the preeminent name in solar, but it’s not anymore. It served an amazing role; it served as a blueprint for other companies to come. We’ve got to understand what worked for them—they were very good at marketing, but they couldn’t control their costs. That’s a great lesson for everyone running a business. SunEdison raised billions and billions of dollars on the stock market, and convinced people that it was a fair return, but there was a bit of a distance between that return and what the expectation was in the market. At one level, those are the big lessons you can take from a far. Now, it’s the rise of the new wave with companies such as Cypress Creek, that have really grown in the last few years and are driving the growth.
So Graham, you and I are both strong advocates for solar, but not all Americans support renewable energy. One argument I’ve heard is that these individuals “don’t want to support anything that is government subsidized.” What are your thoughts on that argument?
There are a couple of responses. The first, while a bit facetious yet accurate, is that the fossil fuel industry still receives massive subsidies, but you don’t think twice about it. The U.S. incentive system is full of tax breaks to encourage various business sectors. Another point is the concept of the levelized cost of energy (LCOE). The LCOE is the cost of energy stripped of subsidies. The reality is that right now looking at LCOE, it’s economically cheaper to go solar or to use wind. So that addresses “is it really economic for me to choose this?” In terms of the idea of receiving government subsidies, I’d ask these people what is the issue? If you have a problem with government subsidies, name an area that receives no subsidies.
Right, look at the auto industry. The auto industry was bailed out by the government. I don’t know of anybody refusing to drive a car because of that.
Yes, that’s a great example. And I think you can come back and say well cleantech has gone beyond a niche sector. It’s one of the largest job creators in the U.S. sector. Why would anybody have an issue with that? Period. And also, if we anonymously told a business owner that he or she could decrease their costs and increase their profits, I think most everyone would be interested in that.
If we took out government subsidies such as the Investment Tax Credit^ right now (even though that would not happen) do you think the industry would change dramatically?
It would slow for a period of time inevitably. The subsidy makes it easier for people to make money, so they are more incentivized to take risks. If you take the support away, there is more risk and there is less return. It’s an asymmetry. That would slow down some investment, because that which may have penciled before may not pencil now. That said, you would then see competition drive costs further down. It would pick up again, but it would be leaner. You’d see some people fail, but because the fundamental economics are still there, it would pick back up. In Europe, for instance, they are building consistently without subsidies, so it can be done. The European programs have been rolled back. Storage has also become a big part of this, because storage allows you to sell more.
In the next 10 years, what do you think could happen in the market (in terms of companies and forms of renewables)?
The solar market has grown rapidly, which will continue. It will be interesting to see the involvement of storage. Up until now, 95-98% of the conversations are solar only, without a plan to store that power. Due to the price of batteries, those two will become bundled more and more often. The fires in California recently shut down power for businesses that can’t afford to be without power. Now there is an alternative. Those businesses can have solar and storage, which could keep the lights on. In the next 5-10 years, we’ll continue to see growth in solar plus storage and storage on its own. I also think you’ll see other renewables. I think the U.S. market has been behind other Western economies, on taking waste to energy and extracting value from other waste products.
What advice would you give someone who wants to get into the cleantech industry?
First, I look at my own career. While there were less opportunities when I was looking to get into cleantech, it was one of the things I was very passionate about. If you want it that much—you will find it. Now how do you tangibly do that? In renewable energy, you need to figure out what you are good at and what you want to do. If you are a people person, you may be interested in sales. There is a lot of sales going on in renewables. There is a need for personnel. These are new companies that need fresh blood. What’s also interesting, is that the more evolved companies are starting to have graduate programs and more formal training programs. Depending on someone’s level of entry, someone may be looking for that and looking for the appropriate compensation as well. Those programs are starting to emerge. New York is a great place to be looking because you’ve got finance. You can try one of the big banks and go through the program there. There are specific solar lending units in many banks. The people building also need talented graduates. Finding yourself in New York is a great thing. The sunny West Coast is also a great place. And you’ll find solar across America for that matter.
Notes from Watts Up:
^Crisis: Short for the Global Financial Crisis which began in the U.S. in 2007 and spread to global financial markets.
^Investment Tax Credit (ITC): a 30 percent tax credit for solar systems on residential and commercial properties.