by Dan Vickery
However buzzwordy the term “Great Resignation” might be right now, it is at least interesting to acknowledge the fascinating change in landscape happening to corporate (and personal) society. At Segue, we’re noticing this “Great Resignation” of sorts happening in a unique way within the renewables space too; specifically, we are seeing a very meaningful increase in developers leaving their larger development shops to break out and start something on their own.
Segue has an interesting viewpoint here – we’re often the first call (or we’d like to think we are) when folks want to understand their options for breaking out on their own – so we’re likely seeing this more acutely than most. It’s spurred some good internal discussions about whether this is simply part of the “Great Resignation” trend or if there are different, specific underlying drivers to what is happening. We think it’s the latter, and here’s why:
First, our market is dictated by supply (MW) and demand (capital that wants to be invested in MW) just like every other market, and today’s market is in extreme disequilibrium, with far more capital than MW. Anyone who can produce more supply right now – and who is cognizant of the extremely healthy demand out in the market – is likely to see an opportunity to do something where they stand to benefit more directly from adding to supply. More markets are opening for potentially profitable project development, and large shops are often stretched too thin (or are too flat-footed to go after them). Developers who see these opportunities first are best positioned to capitalize on them, if they have the resources…
Second, development capital is more available to smaller shops, and providers are willing to enter projects earlier in the development cycle than has historically been the case. What this means: the intimidating need to bootstrap project development is substantially reduced. Whereas traditionally you’d have to turn a concept into a mid-stage development asset with your own dollars, the bar has moved to where developers are now able to capitalize projects/portfolios much earlier in the process – avoiding putting six to seven figure sums of their own money at risk. The result is that this is now a viable option for a larger subset of folks in the industry.
Third, your upside in these deals can be significant. Capital markets are hungry, and the risk/return spectrum of starting your own development shop (in our opinion) has shifted meaningfully toward a developer. We often joke internally that we should start our own dev shop and get a capital facility from, well…Segue. A third-party will fund materially all project development costs and you retain a very meaningful piece of the upside pie. Life doesn’t present that many opportunities to personally benefit from using other people’s money and downside risk – that door is as open as ever in our industry, and lots of folks are rightly noticing.
And finally, with the right dev-cap structures out there, you can maintain independence without capping a future sale price. Historically, “development capital” often required horse trades of obligations to a big shop, or pre-selling your projects with capped upside (read: “free options”), or both. But that is no longer the case. Newer capital options and structures strike a better balance of developer independence without requiring you to concede corporate autonomy, pipelines, capped sale prices, etc.
It's worth taking a moment to consider what our industry would look like with the opposite supply/demand imbalance. If nothing else, doing so might instill a sense of gratitude for the incredibly healthy capital markets we currently enjoy. (This isn’t normal…we should savor it). Conveniently, we don’t have to use our imagination; as my colleagues describe it, we just rewind 10-12 years:
On the heels of massive utility-scale rollouts in Europe (Germany, then Italy and Spain) and the bellwether Alamosa Project in Colorado, US utility scale pipelines in California and Arizona lurched from almost nothing to long queues and massive early/mid stage pipelines of PV projects. The vast majority of these projects were owned/developed by smaller shops without big balance sheets – many were venture-backed firms who hadn’t really figured out what they’d do when other sources of capital were called for. Economies and capital markets were still recovering from the global financial crisis, and, moreover, renewable energy as an asset class was still incorrectly viewed as a “tech” industry instead of the infrastructure play that it’s accurately understood to be today.
The capital markets were intrigued, but mostly driven by FOMO or green-washing motives, and therefore fickle, unreliable, and slow. There was a plethora of MW needing capital support of all varieties – development capital, construction capital, permanent debt, tax equity, cash equity – and a palpable shortage of providers of that capital. The resulting dynamic was that i) the projects that “made it” were mostly the ones which found capital support, and ii) capital support was sought/accepted wherever one could find it. Such support often came as a corporate acquisition, where smaller developers were bought be larger firms like SunEdison or module companies like Sharp, or GCL. The best – often the only – avenue for people who’d developed assets with significant profit potential was to see their projects through under someone else’s roof. Doing so came with huge sacrifices – giving away a ton of the value/upside, losing control, needing to stomach an “earn-out” at a big shop – but it was kind of the only option, so folks considered themselves lucky if said option was available to them. So, in other words, when MW were abundant relative to capital, MW tended to get consolidated into fewer, larger, better-capitalized shops – the exact opposite of what we see now. This was understandable back then, and the opposite trend makes perfect sense now that the scarcity is flipped.
So, what does this all mean for the industry? To start, if the changing landscape makes it easier for entrepreneurial developers to break out on their own and develop assets that would not otherwise exist, that’s good for the industry (and our planet). And, since these developers are unlikely to have the resources to own their projects long-term and larger developers will need to find the volume, it’s a safe bet that project M&A will continue to be a driving force in our sector – only perhaps shifting into the later stages of M&A if the development community is properly taking advantage of current market conditions. All in all, we think this trend only means good things for the industry, and we hope to help facilitate it here at Segue.