Selling the Sun
"I am a capitalist," announces Jigar Shah, the 34-year-old founder of SunEdison. We have just sat down for dinner at a bustling noodle joint in Washington, D.C. Upon hearing Shah, who is wearing pressed khakis and a crisp blue oxford shirt, the couple at the next table nearly choke on their pad thai. A brash entrepreneur banging the capitalist drum isn't going to win many friends here, especially now. It's December, and a few blocks away congressional leaders are debating whether to give foundering automakers billions of dollars in bailout money. Ineptitude has ruined Detroit, greed has soiled Wall Street, and Democrats on Capitol Hill are counting the days until their guy steps into the White House.
But Shah can't help himself. An iconoclast among greens, he's a devoted environmentalist who champions market economics and believes American business acumen can conquer climate change. Shah has spent the past six years leveraging his convictions to build North America's largest and most successful provider of solar energy.
In 2003, Shah launched SunEdison to smash the decades-old paradigm that required anyone wanting solar to pay huge installation costs up front. Depending on its size, a rooftop array or a ground-based solar farm can cost anywhere from $10,000 to $10 million. This infuriated Shah, who has always believed that having to own the means of producing solar power is woefully out of step with how the energy industry operates. "Do you want to be in the power-plant business?" he asks. "Or do you just want to buy solar power?" Imagine having to own and operate a satellite to get DirecTV and you begin to understand why Shah scorned the prevailing model for solar energy.
A born pitchman, Shah is impossible to ignore during his spiel. When he cold-called Mark Buckley, vice president of environmental affairs for Staples, to make a case for SunEdison, the VP told Shah he'd give him two minutes. "Two hours later I got off the phone and we'd hammered out the beginnings of a deal," Buckley recalls. "He is a visionary."
Shah has acute features: a square jaw, a sturdy nose, and a tsunami of ebony hair. His wire-rimmed glasses frame deep-set brown eyes that demand attention. During our meal I notice diners leaning closer to hear Shah, whose speech is imbued with the confidence and vigor of a man who knows that he knows more than you do. I doubt they can make out what he's saying through the din, but they're sure it must be important.
For Shah's part, he didn't invent any groundbreaking technologies. He just repackaged ones that already existed and convinced people to buy them. SunEdison customers pay nothing for their solar systems. That's right, zero. Instead they sign what is known as a power-purchasing agreement, or PPA. These agreements are commonplace in the coal, oil, nuclear, and natural gas industries (the Hoover Dam was financed in part with PPAs). But Shah figured out how to make PPAs profitable for solar, something that nobody had been able to do before. When SunEdison installs a solar array, the customer agrees under a PPA to buy the electricity it produces at a set price for at least 10 years. "When we priced out owning the system ourselves, it didn't make sense," Buckley tells me. "We wanted a way to establish price certainty in a volatile market. SunEdison gave us a long-term hedge against that price uncertainty. We're paying less for electricity and reducing our carbon impact. And 15 years down the road, when the price of electricity is higher, the savings will be even more attractive."
A spokeswoman for the Kohl's department store chain, which has SunEdison arrays on the rooftops of 67 of its stores, puts it this way: "There was no capital investment, and Kohl's pays a fixed, predictable rate for its electricity that is less than the local utility rate. This gave us an important hedge against escalating energy costs."
The average solar installation produces enough power to meet between 10 percent and 20 percent of a typical big box store's annual energy needs. That may seem small, but traditional electricity pricing -- in which power purchased from the grid during peak-demand hours commands a premium -- works in a solar user's favor. A solar array reaches its maximum potential between noon and 4:00 p.m., supplying more than 75 percent of a store's daytime energy consumption and dramatically reducing the need for grid-supplied electricity when it is most expensive. "Peak demand charges might represent a third of our bill," says Buckley of Staples. "So the savings really add up fast."
Once Shah has locked in customers through PPAs, he can then approach banks, investment firms, and private backers to borrow money for building new solar systems, using those PPAs as collateral. Revenue collected through PPAs goes directly toward repaying SunEdison's lenders, who earn a tidy return on their dollar, pocket city and state solar rebates, claim an accelerated depreciation benefit, and take a federal investment tax credit, a whopping 30 percent write-off. Banks, in turn, pay SunEdison a development fee and cover the cost of monitoring and servicing the installations for the duration of each PPA. Mark Cirilli, managing director of MissionPoint Capital Partners, one of the first venture capital firms to invest in SunEdison, says, "They simplified solar and made going green easy and cost-effective -- a real win-win."
Solar is reliable and robust, and by selling it through PPAs, Shah has created something the market finds irresistible: clean, renewable energy with no up-front equipment costs, packaged as the kind of rock-solid, low-risk investment that banks love. And now, as solar scales up and the cost of installation falls, Shah and others are convinced that the Obama administration's new policies will bring solar to a tipping point, making it competitive with conventional fossil fuel-generated grid power and turning it into a formidable player in the mainstream energy market for the foreseeable future. Shah says that "2009 will be the year of solar." And from there? Energy experts believe that continued increases in the efficiency of panel manufacturing and installation as well as the emergence of utility-scale installations will soon make solar cost-effective not only in states where grid power is expensive, but across the entire nation. When that happens, the solar industry will thrive without a single tax credit, subsidy, or incentive -- a feat that has never been achieved with any other form of energy.