Author: Ben Debski

The solar energy market has been transformed over the last decade. From a market for the hyper-green-conscious, the largest corporations or simply the experimental, it has become one that is self-sustaining and rapidly growing. It has even become extremely profitable to asset owners, with a very attractive return on investment in the long-term. The New Economy had the chance to speak to the CIO of Sky Solar Holdings, Sanjay Shrestha, about the evolution of the solar energy sector and what the future looks like for this global industry.

In what major ways has the market for solar energy evolved over the years
One of the biggest things that we have noticed in the evolution of the sector is that the industry has largely gone from being a subsidised industry to an unsubsidised industry. As such, solar energy is now competitive in many parts of the world in comparison to traditional fossil fuels. Contributing to the economic value proposition has been the maturity of the supply chain, allowing for significant reduction in overall install costs, along with a meaningful reduction in the cost of capital for solar projects. We have also seen an overall maturation of the supply chain, which in the early days of the sector was set up more like a cottage industry.

Solar energy is now competitive in many parts of the world in comparison to traditional fossil fuels

When we think about the industry, say 10 years ago, or even five years ago, one would have thought that the larger profit pool resides in the manufacturing sector. However there is an increasing focus on the true value of solar energy, and that owning these assets provides you with a steady cash flow over the course of the next 20 to 25 years. There clearly seems to be a lot more focus on the value proposition of these renewable assets and their long-term cash-flow attributes.

Since the company was founded in 2009, we have always been focused on the downstream segment of the business; we were never focused on being a manufacturing company, even though we had a lot of different relationships with various manufacturers on a global basis. One of the differences that we have today versus, say, 10 years ago, is that our business then was to build solar plants and sell them to players, which we refer to as a “build and transfer model”. But in light of the attractiveness of the cash flow from these renewable assets, we have transformed our business model to become an independent renewable power producer.

So, overall, the business model in some sense has not really changed per se, which is, instead of selling these power plants, we now own them, and we think that actually allows us to have much better value on a long-term basis than we would if we had continued to flip these assets on a one by one basis.

What are the biggest opportunities and challenges in setting up solar parks?
I think, on the opportunities front, as long as we are focused on the right markets, financing becomes available, which allows the construction of solar plants and the return profile of these assets to be very attractive.

Having said that, I think that one of the challenges is that we cannot have the repeat retroactive changes of the subsidy that unfortunately we saw in some European countries. Retroactive changes in subsidies have an impact on project returns and make it challenging to manage the overall return proposition of these projects.

One of the most important things for the industry, and what policymakers really have to think about in order to continue to propel the growth of the sector’s economic value proposition, is that any subsidy programme or policy must have a long-term view. When we think about solar energy, we need to think about it more from the perspective of a levelised cost of energy, which must continue to go down in order to compete with more traditional sources of energy. And for that to be possible, we need stable policy, ongoing reduction in the system costs, and, more importantly, we need the continued formation of capital and reduction in the cost of that capital.

Which markets have been most receptive to solar energy?
We have always been very selective in terms of which markets we target; we think about it more from the perspective of the returns and sustainable growth that we can achieve, rather than trying to go after every possible market that might be open to having solar opportunities. We are very mindful and focused on keeping our general and administrative costs in check, because we want to make sure we are building a company that is very profit-orientated, cash-flow-orientated and return-on-equity-orientated.

In light of that, of the markets that we have had very good success in, I’d say at the top of that list would be Japan, then secondly Latin America, and more specifically Chile and Uruguay. We think we will actually have strong traction in the US market as well, as we look forward. We also have some presence in Canada, where the returns are highly attractive and we expect that market to show some growth for us – not as much as, say, Japan, but some growth certainly. And last but not least, we always have an option to be a large player in China – that said, we are trying to be very balanced about what kind of return we can get there, so we are monitoring that market very closely, rather than making any real moves at present.

What are the driving principles that unlock shareholder value?
That is a very important focus for us, especially as a public company. We remain very focused on execution and have the following key driving principles: one, discipline on type of projects and equity returns; two, reduction in our cost of capital by pursuing the most cost-efficient source of capital; and three, a tailored strategy to each market, where the path to growth can vary from primary development activities to a partnership structure. Ultimately, our focus remains to unlock shareholder value, which we achieve by generating cash and high return on equity. We continue to remain disciplined about the markets we want to be in and would not chase after every market.

When you are a solar IPP, your key objective is on optimising the capital stack and working with external financing partners

How has your strategy changed, if at all, over the years?
We have successfully transitioned from being a build and transfer model to being a build and own model, which has made us essentially a solar IPP. Even though this has been a change in terms of how we do business, all the driving principles are actually very similar. The only missing piece between the two models is that, when you are a build and transfer model, you are more focused on managing your working capital, but when you are a solar IPP, your key objective is on optimising the capital stack and working with external financing partners. This results in having the most cost-efficient, long-term capital structure on our projects. Again, all this ties into our focus on return on our invested capital.

What are the company’s medium- and long-term goals?
From a medium-term standpoint, I would say we aim to continue expanding the presence we have in existing markets, such as Chile, Uruguay and Japan. We are also continuing to build our presence in North America, either by working on primary development on the permit side, by potentially entering into a joint venture, or by potentially acquiring an attractive asset.

From a long-term perspective, cash generation remains our top priority along with securing and building solar assets in our target markets. As we leverage our existing presence in some key markets, we are open to potentially exploring other asset classes, such as energy storage or other distributed generation solutions. The critical element for us is technology that has been largely de-risked, and that the return profile is higher than the return we can get on solar assets.