The last decade has seen the sustainable energy industry make significant strides in the United States and across the globe. Supply chains for technologies such as LED lighting, solar panels, and batteries have become far more efficient, and costs have fallen dramatically with developing economies of scale. This, in turn, is a function of increased financial flows moving into the space and driving more projects.
However, if society is to quickly migrate to the low carbon economy that is necessary to avoid the worst effects of climate change, an issue put in the spotlight this week with the release of the recent IPCC report, significantly more investment will be required. That’s where companies like Hannon Armstrong – a sustainable infrastructure finance company – have a key role to play.
In a recent interview, CEO Jeff Eckel outlined the philosophy of his company, its successes to date, and its goals for the future. Eckel – who has served more than two decades with the 38-year old firm – described the company’s driving philosophy, “First, we think climate change is the defining issue of our generation and it’s primarily a finance problem. To make a difference, investment has to ramp very quickly. Second, we see disruption and opportunities to make money in the big trends of decarbonization, digitalization and decentralization of the power system.”
To that end, the 50-person outfit annually invests approximately $1 billion, and has put $5 billion to work since going public in 2013. That money has largely gone into energy efficiency and renewables projects in the U.S. Over that same timeframe, Hannon Armstrong has outperformed the S&P and provided shareholders with a 175% total shareholder return through the end of 2017. The stock (NYSE: HASI) currently yields a dividend north of 6%.
Eckel indicated that the process for determining investments involves “a rigorous investment screen that measures whether the investment is incrementally reducing carbon or, at worst, carbon neutral.” Those investment calculations get performed prior to submission of projects to the internal investment committee.
The screen involves dividing the estimated carbon avoided by the proposed investment to get a ‘carbon count.’ In practice, this means that identical investment opportunities in two different locations might yield wildly different outcomes. As a consequence, Eckel said, the most impactful investments tend to be located in carbon-rich energy environments, “You rob a bank because that’s where the money is. You go to the Midwest and make investments there, because that’s where we are burning coal.”
An example of a project that fits within Hannon Armstrong’s profile is the microgrid being built by Ameresco for the United States Marine Corps Recruit Depot in Parris Island, South Carolina. The undertaking involves sophisticated engineering to integrate energy efficiency investments with renewables, storage, and back-up cogeneration. Just over 100 buildings are being retrofitted to reduce lighting, heating, and cooling load. Simultaneously, 7.5 megawatts of solar panels will be combined with 8.5 MW of energy storage as well as a cogeneration unit. The military base will ultimately benefit from lower energy costs, a reduced carbon footprint, and a critically important higher degree of resiliency.
To realize this type of project, Hannon Armstrong partners with large and established companies with significant engineering capabilities such as Ameresco, Siemens, Schneider, Johnson Controls, and SunPower. They all have one thing in common, Eckel commented, “They need financing, which is what we provide, whether senior debt or equity or a combination of both.”
Although the 25-year Parris Island project is on the larger end, many of the efforts financed are relatively small, averaging around $10 million in size and 20-25 years in duration. Eckel asserted that this scale is too small to attract many financial institutions, “that’s the niche we have carved out rather uniquely. We have competitors in each asset class, but no single firm spanning across both behind-the-meter and grid connected projects.”
The trick to making smaller project financing work is to standardize as much as possible, developing long-term and trusted relationships with clients having repeat business where each successive project looks a lot like the previous one. As an example, Eckel cited one company for whom they have financed over 100 projects under the same basic contract.
While no single stand-alone transaction would be profitable, he noted that on a programmatic basis the entire ecosystem is. The counterparties provide performance guarantees, while Hannon Armstrong spreads its financial risk among the multiple investments. As a result, aside from one bad investment in a geothermal project related to drilling costs, Eckel states that the company has had no appreciable loss history in any of its investments.
In some instances, Eckel believes that Hannon Armstrong can help play a transformative role in the space, though the company is not an investor in early stage technology, “That’s not our type of investment. Where we can be constructive is on those types of things when a client says ‘we want to do a pilot, and it’s a million dollars.” Nobody makes money on the first project, but if it works out, the company may have a whole new area to invest in.
Although the climate challenge is significant, Hannon Armstrong’s CEO noted that he is seeing some encouraging trends. When the company went public, “we had only one investor who cared about sustainability. Now 25% do and half of the remaining investors indicate some level of concern.” He asserted that times are changing and, “The equity tide is coming in our direction.”
Generally, these investments are economic, they save money, create jobs in all 50 states and do not cost the energy user any money – they get it out of savings. It’s a win-win and our capital enables the continued progress towards a clean energy future.”
Eckel is extremely bullish on the implications of a rapid evolution of technology and energy markets, combined with the critical need to reduce carbon. With an estimated $100 trillion to be spent addressing climate change over the next 35 years, he said, “this is one of the greatest opportunities to make money that I have ever seen with the added benefit of making a difference for generations to come.