You may have heard that SunEdison, the world’s largest renewable energy firm, has filed for bankruptcy.
There are a few fairly obvious ways it could have avoided this fate.
It could’ve grown more slowly (but of course, then it wouldn’t have attracted Wall Street’s attention in the first place).
It could’ve taken on less debt (but of course, without its $11 billion debt pile it wouldn’t have grown as fast).
It could’ve been more transparent with its shareholders and creditors as disaster unfolded (but then its demise would have likely occurred even more rapidly).
Could’ve, should have, would have — this is the hindsight story everyone has been writing.
But in the jargon-filled world that is renewable energy, there are nuances in that narrative that investors — and anyone concerned with the health of this burgeoning industry and its impact on the environment — need to understand. SunEdison’s demise does not mean the rest of the renewables sector is going to go the same way.
To get at those nuances, Business Insider spoke to Andrew De Pass, CEO of Conergy, a firm that made the same mistakes SunEdison made two years before SunEdison started its precipitous stock slide in July.
At its peak Conergy was a the largest renewable energy firm in Europe with 350 employees, operating in 15 countries around the world.
“Conergy did what SunEdison did three years ago,” De Pass told Business Insider. “It took on too much debt, had too aggressive an expansion plan — then it hit a wall.”
That wall is what brought De Pass and Conergy together. He collaborated with the former CEO of Conergy to bring the company back to life through Kawa Capital, a $700 million asset management firm where he was formerly a partner. Now Kawa is Conergy’s majority shareholder.
Last year Conergy made $500 million in revenue designing and constructing projects for sale. In 2016 it became an independent power producer (IPP) and started holding assets for itself.
According to De Pass, SunEdison made two critical errors. It overpromised and undelivered, and it housed debt in the wrong place.
To him, SunEdison is the exception, not the rule, to today’s renewable energy business models. By that he means the model in which companies manufacture, develop, and manage solar projects from start to finish.
Under this model, the parent company creates subsidiaries, called yieldcos, that own and manage projects designed and constructed by the parent.
“Suffice to say there’s nothing wrong with the yieldco model,” he said. “You just can’t over promise investors growth you can’t deliver.”
For example, SunEdison was trying to deliver 3.5 gigawatts of electric power in a year just to break even. A gigawatt is 1 billion watts, and doing something like that would cost $3.5 to $4 billion to build.
To anyone trying to pull that off, De Pass says simply “good luck.” He doesn’t think Wall Street really understood the complexity of wind and solar development, let alone at such a large scale. The sector is actually a slow growth game. It’s the only way to play and stay alive.
There are levels to this stuff
It’s not just about how much debt you have either, it’s about where it’s kept. When De Pass got to Conergy, its debt was held at the corporate level. SunEdison made the same mistake. Debt, instead, should be kept at the project level where all the uncertainty and complexity of development is held in a separate capital structure.
Those projects, some of which hit major snags while SunEdison’s stock was in free fall, will be attractive to investors like De Pass, who have the resources and cash to pick up where SunEdison left off. They will take over, bringing in their own management teams.
“It’s real estate without the occupancy risk,” De Pass said, explaining why pension funds and sovereign wealth funds are getting into the sector.
Of course: “If anyone’s buying this stuff, they’re going to want to take control,” he added.
That can be done easily on the project level where a new buyer just comes in and takes over. Other assets are more contentious — SunEdison’s shares of its yieldcos, for example. Those are going to be fought for in court, where SunEdison’s management will likely be wishing they had kept things slower and simpler.
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