A blog on using the power of Disruptive Business Models to build successful businesses...and other stuff. by Joe Agliozzo

Thursday, November 15, 2007

Solar Power in California - Disruptive Opportunity?

For the last couple months I have spent some time learning about the solar power opportunities here in California. The market is being fed by two financial engines - (1) The California Solar Initiative (CSI) which is a subsidy program from the state of California and (2) the Federal tax credit (30% for commercial installations) which is scheduled to expire at year end 2008, but many are working to extend this in Congress.

There are currently a number of companies that are taking advantage of these programs by offering the consumer what amounts to a fully financed installation by using a power purchase agreement (PPA). The customer pays the vendor (instead of or in addition to to the local utility) and gets a solar power array in return.

The interesting dynamic here is that installation and materials costs are widely expected to fall, in a fashion similar to the semiconductor industry. With tech companies like Google jumping into the fray with funding and the stated intention of driving the cost of solar below that of coal, there is almost an incentive for many consumers to wait and see rather than jump in with a commitment to a PPA that could last many years. Maybe a new type of PPA will have to be crafted that takes into account the falling costs (of course, once the array is installed it is a fixed sunk cost, but what if pricing and installation costs fall so quickly and sharply that it is worth removing and replacing the array? What about "upgradeable" arrays? Will companies that can offer this type of technology or agreement have a competitive advantage?).

I also wonder if there is an analogy to the PC industry of a few years ago, when prices were falling rapidly and power was increasing rapidly. There the hardware makers had the friendly software makers who were able to give consumers a reason to upgrade to faster machines to run more complex software. Is there an analogy in the PV industry? Rising power costs could be one motivator, I suppose.

Friday, November 02, 2007

Private Equity for Real Estate

For the last year or so I have been working in the world of raising money for investment funds focused on real estate. Primarily we are building a database and calling on university endowments, state and other public pension funds as well as private pension funds (like corporate pension plans). The fund managers that we are raising capital for are all first time managers.

The process is an interesting one. There are literally billions of dollars in investment capital available but the pension fund reps are so overwhelmed with inquiries seeking capital that it is very tough to break in a new manager.

The system seems very "broken" when you start to learn about it. There are undoubtedly many, many new managers that could produce excellent returns for these pension funds (and given the increasing demands for returns by the funds, they need high returns), but because of the information asymmetry problem (no time to vet new managers or manage the risk inherent in a new manager), few new managers are given a chance.

Shouldn't there be some kind of "farm system" for new managers? Something where an investment club of save 5-10 similarly situated endowments or funds like Harvard, Yale, MIT, UC or Calstrs, Calprs, NYSTRS could invest relatively small amounts (say $5M each) and fund a new manager or group of managers? Then as the manager are vetted they can "graduate" to the next level where they have their own fund with larger amounts from each investor? And the investors, for their hard work and risk get the opportunity (and right) to invest in future funds?

Seems like technology could also enable this. By having a simple web based management/governance system that goes from gathering initial submissions to monitoring investment performance, you could somewhat automate the process of managing this small program and make it functional for the large funds to try this.

There are a couple firms with allocations from Calstrs doing this now - but they are really creating their own fund in cooperation with the emerging manager and taking a piece of the promote -which is not as attractive for the manager, obviously.