Will Solar Panel Tariff Save Tesla Energy?

– In late January 2018, the President of the United States approved duties to foreign manufactured solar panels sold in the United States That is a tariff and it starts out at about 30% which sounds like a lot

It sounds like it's a real big blow to the renewable energy here in the United States But I wanted to dig deeper and really understand the context So I called up my friend Bryan Birsic who is the founder and CEO of Wunder Capital to help me understand the true context of it And what it means for the future of renewable energy, solar in particular here in the United States Now if you're unfamiliar with Wunder Capital, what they do is they let investors like you and me invest in commercial solar projects

Because things like hospitals and schools or warehouses, office buildings, banks don't understand how to give them the financial tools they need to install solar and save money on their electricity bill But Wunder does because that is their background and that's all they do So on top of helping small businesses succeed and save money and thrive really, it also lets investors like you and me earn a return You actually can get paid out monthly upwards of 75%

So all in all a win and I thank them for sponsoring this video as well as for Bryan to take the time and actually explain this to me We had a really insightful conversation so I'm real excited to share that with you now Welcome to the show – Thanks so much – Glad to have you on

There's been some really interesting stuff going on in the US with solar lately And I thought you were the perfect person to talk to So tell me if I'm mispronouncing this or misquoting this New laws in the US have added a, what is it? Is it a 30% tariff? – 30% – 30% on foreign manufactured solar panels

– Correct – And does that apply to commercial and residential? – It does – Okay – It applies to residential, commercial and actually utility scale systems as well – So anybody, anybody

– Yes All panels – And in terms of who makes panels that we know of, who are the big ones? 'Cause I'm a little in the dark I only know my little section of the world so – Sure

It's a relatively distributed global marketplace with a lot of concentration in East Asia So China actually as early ago as 2013 was the biggest source But actually recently Malaysia and Vietnam are the top two And there's a variety of countries including China and East Asia that each represent, you know, 10, 20% There is actually a fairly good bit of solar manufacturing being done in Canada

It's called Canadian Solar that is a big player in North America and it's kind of unclear how this tariff interacts with NAFTA – Hmm – I don't know what that does means for Canadian biz players And then there is a fairly steady European contingent particularly in Germany that tends to be a little higher priced but also a little higher quality and more expensive warranties And then of course, we do have a somewhat smaller manufacturing base here in the US

– Yeah and so obviously we know Tesla's making stuff and I think it's in Buffalo, New York which formerly was the SolarCity stuff I believe, right Is there anyone else really? I mean any other major US based players? Or I mean are they even a major player? I'm so you know – Yeah, so they are I think still getting off the ground in a lot of ways with Gigafactory 2 as they call it in Buffalo where they'll be producing high efficiency panels with if I'm not mistaken Panasonic But I don't believe that that facility is currently kicking off meaningful volumes So, Tesla right now, they've announced in reaction to the tariff that they intend to double down on or accelerator at the very least confirm their US manufacturing plans

But they're not a big player right now And frankly, you know the reason that there was a trade case at all was because they really are particularly substantial US based manufacturers – Hmm And I recall someone telling me or hearing something on the radio about this that this is a fair deal because China was kind of selling at things at a loss or selling them for you know, basically no margin in order to kind of conquer the market Is there truth in that? Or am I hearing that wrong? – Yeah I think there was you know some, let's call it supply demand mismatch or some flooding of the market if like that terminology

Actually not so much recently as there was a big price drop in 2011 that a lot of people put on China's plate as it relates to flooding the market with panels But I would actually say that if you look at the substance of the way that China is playing in this market It has less to do with direct subsidy across kind of pricing as it has to do with just systematic support of that industry in China So it's less that they're coming in and somehow buying down the price of Chinese panels and more that if you're a panel manufacturer in China, you are getting a fairly extraordinary amount of support from the government to make sure that you continue to succeed So it's actually less to do with kind of cuteness in you know dumping products here or there or that I think maybe it makes better headlines and more to do with just a systematic five to 10 year decision by China that this is an incredibly strategic industry that China needs to win

And a variety of steps they took to make that the case – Right, so the idea wasn't for them to conquer the US market so much as it was a much broader agenda of just pushing hard on renewables and that happened, this happened to be kind of an effective ad, right – Yeah, I think one thing to observe about this market is it's very much a global market in terms of supply and demand And so when we think about the impact of US pricing on let's say total global manufacturing volume or global pricing, we are important but not nearly important enough to be setting the agenda And so exactly right

I mean what China is interested in is owning the global manufacturing center for not only what the US is using but what is growing across the world as prices come down And you know the fact that it has an impact on the US is I think to your point, probably a secondary consideration for them Or potentially not even the intent at all – Right And so, you made a Tweet and you put a chart out there and I love that because it's speaking directly to my heart

And you had a little blip showing the difference So explain that chart to me (laughing) And uh – Yeah – [Ben] And I'll put it on the screen so people know what we're talking about

But just kind of walk me through what this is, that chart that you published there – Sure, yeah so the first thing we wanted to do is you know, a lot of the headline, you know, coverage of this was around the 30% number That's what people hear That's what they interpret as the impact to solar And if you look at what the industry is anticipating folks like Goldman Sachs analyzing the tariff, they're looking at single digits increases in solar price

And so we just wanted to A, lay out you know, why that was the case Why you're hearing 30% in an article And Goldman Sachs is telling you it's only gonna impact solar pricing by 5% The second thing we wanted to do was show just how small 5% was as a cost increase as compared to what we've seen in the last, I think we mapped out the last six years as it relates to the price of solar So, on the first point, the really simple math is this

If you look at the 30% tariff, it actually doesn't get applied until we bring in two and a half gigawatts of imports So it's not all of the imports There's a huge portion of imports that don't get any tariff applied And then you look at things like Canadian Solar are small but you know still exist in domestic manufacturing base And basically, what you see is that only about 60% of the panels that are used in the US on a average year, looking at last year let's say, will actually see the tariff

So pretty quickly, you're going from 30% down to about 18% as a price increase on panels And then, going from there, panels are only about a third of the cost or our projects So, it's a tariff on panels but it's not a tariff on inverters There's not a tariff on the construction work that's required to install these things The acquiring of the customer and that sales work, right

So, when you look at this 30% headline number, it only applies to 60% of the market So you get the 18% You then cut that again by a third so it's about 6% just using this really simple math of looking at how 30 ends up impacting When someone goes and buys solar, what is that quote, right? – Right, right – And what the industry tells us is if it was a million dollar quote without the tariff, it'll be a million dollars and 50,000, right? – Right

– It'll be a 5% increase So first we just wanted to get to that number 'Cause that's the real nitty gritty When it hits the ground and we're pricing our customers, that's what they're gonna see, is about a 5% price increase And the second piece is, you know in a lot of markets, a 5% price increase might really move the market

It might really change the dynamics There might be people who are really anchored into the current pricing and their business model didn't work if they're input cost of what they're selling is 5% more expensive The reason that's not true in solar is that our projects were 5% more expensive six months ago They were 10% more expensive a year ago – Right

– And four years ago, five years ago, which is kind of the point we make in this chart, there were 2x more expensive Two and a half X more expensive And so in solar, the price is coming down so consistently, that you know the blog posts that we had that graph in, we called 2017 all over again Because at worst– – Right, it's – Right? – It's similar, yeah

– Similar pricing, similar pricing, right? So, what we tried to show is you know that graphically where we show that this little 5% pop actually just moves you back to what the pricing was in July of 2017 And that if you just go back two years, the pricing was much, much, much higher And we still had a growing solar industry So, it's really just about contextualizing historically what a 5% increase means for the solar industry And the short answer is, not that much

– Right, it set us back six months but – Yeah – The momentum and the progress on the prices coming down is still, still happening, right? – Exactly right – Is there a floor to this? I always wonder about that you know Like when I think about the costs of batteries, the costs of anything

You know, we always talk about, oh yeah, as economies have scaled and all these things like happen, the price will just keep coming down I mean, how cheap? Like I think I, I forget what I paid man I paid like 20 grand for my 56 kilowatt system – Ha, yeah

– And yeah and then that was before the tax incentives and all that Like what do we think? Like could we get to the point where a typical home which in San Diego, which is my data point is Right now, I think the average install is around $15,000 Could you get to the point where that's like a $5,000? I mean, how much more can these things come down? You still have to pay for labor and other parts But

– Yeah – Like where's it going? – Yeah, um It's a great question And in some ways a somewhat unanswerable one – Sure

– In the sense that you know, you look at these technology cost curves and the most famous one being Moore's Law and semiconductors Where you have this very, very consistent decrease in price driven largely by technological innovation And there's been a lot of debate when Morse's Law going to run out – Right – And uh

(laughing) You know a lot of people have been wrong predicting that it will And I'm not nearly the on-the-ground physical scientist in solar to substantiate exactly when this runs out But I think I can frame up the two different driving factors of that cost decrease And speak to when they might run out – Sure

– So, there's really two factors at play One you alluded to, a simple economies of scale So, we see this in every industry You double the manufacturing volume And you see some decrease in costs due to inefficiencies and some fixed costs getting spread over more things, right? So in solar, that has been roughly attended 15% price decrease per doubling

Which is a pretty good number across industries actually So that over the last six to seven doublings of solar volume, we've seen a 15 to 20% price decrease So that can continue as long as solar is growing rapidly And solar can grow rapidly unless it's fully penetrated into the electricity market So, we do have you know, definitely a few more doublings before solar was the dominant, you know, electricity generation source

But if you look forward, 20, 30, 40 years, I don't know that you can consistently apply that decrease I think you know in that time frame, we may reach the point where we're not seeing doublings – Right – We're growing with population or GEP – Right

And there's something about that, yeah Because, so Part of the weird phenomenon I'm seeing out here in California because there's a lot of residential solar installations, is the utility companies I don't know what the right, like general phrase would be, pushing back a little bit You know, by adding a surcharge to net metering as well as things like a connection fee And I've even heard of some cities making it illegal to disconnect which is like, – (laughing) Sure

– Really rubs some people the wrong way (laughing) So yeah That totally makes sense because at some point, the entire grid, we're gonna kind of have to rethink it, right Because how it was designed, it takes – Yeah

– What, I don't know, 40 years to develop the infrastructure that we have now And with the residential stuff happening and proliferating so rapidly, there's gonna become a point where the rules are gonna have to change at some point in time, right? – Yeah, yeah And I think that's a great observation And there's going to be a we think a reimagination of how the electricity grid works forced by the penetration of solar And probably also the penetration of batteries

– Yeah – Just to hit on a few of the kind of ways that you can interact with the grid You know, one is, I don't think that you should have a fundamental God-given right to produce extra power whenever you want to And get all you want for it Right, the utilities should not be

That's like showing up at Walmart and saying I made these white shirts Like, you have to buy them 'cause you sell white shirts, right? – Right (laughing) – That doesn't make a ton of sense – Right – And so one of the ways that people are pushing back is saying hey, you're giving these really great deals to people just sending extra power back in the middle of the day, and we think that's really fair as a pushback

We think if you're generating power on your facility, and you're avoiding buying more power from the utility, that's something you can do with a Honda Generator right now in your backyard Right, like that should not be regulated When you start to get to sending power back to the utility, you gotta figure out how to strike a fair deal And I think that's where the transition happens is when the utilities figure out that they're not going to be a unidirectional top-down system where they generate power at these huge off-site locations And their only job is to push it down to you safely

That instead, with the penetration of solar and its self-storage, you're gonna have a much more complex bidirectional relationship with the power grid where you might be selling excess power in You might be selling excess storage in You might be consuming that You might be doing both at the same time, right And that depends on what kind of generation or storage facilities you have onsite

– Right – So that, they're going to be utilities that kick and fight all the way through that There are going to be utilities that see that as the future and adopt it quickly And we're lucky in that, we're in 20 states and we can kind of jump around and invest where we see good investment opportunities on the ground and good projects But yeah, I think as a consumer in a state, you need to pay really close attention to what your utility is doing and how they're engaging with solar

– Yeah and I've heard some crazy stories about people in Nevada having serious issues with this and all kinds of stuff going on So it's gonna be a bumpy road I guess is the theme, right – Yeah, the only thing to point out and this is true even in Nevada which is really the best example of kind of a negative movement by a state against solar They've always grandfathered in existing systems So, you know one of the great things is if you pay attention and when you execute your system, it's a fair shake for you

There's not been a single state or jurisdiction in the country that has gone back on that initial deal They have just changed the treatment going forward – Right – As long as you're going in eyes wide open and doing your research, you should be fine But you do need to be really clear about what's going on in your state at that time

– Yeah, and hopefully your installer will help clarify all of those things I know I had a really great one here And it was really nice because they explained to me, we have the original net metering thing they had here in San Diego They changed And they added essentially like a two cent per kilowatt hour surcharge or something

– Right – So Basically the same function still exist You're just not getting as much as you were before So it's like, okay, that's fair

Right, you know to me, it made sense And it's like cool, now that we have that squared away, let's go forward here – Right and I think that's exactly the sort of thing that will come to us as a solution which is hey, you shouldn't quite get what they're paying You know just to be clear, the utilities' business model is basically buying power for three or four cents on average and selling it for 10 cents an average And they get paid, that delta is because they have this enormous transmission and distribution asset that they have to maintain

– Right – And so when you send them power and you get 10 cents of credit, if that's what you're paying and they get exactly zero share of that, to you know transmit that across their wires and maintain that asset – Right – That just doesn't make a ton of sense, right So if solar is gonna grow, it's gotta be that kind of meet in the middle

They take a small piece but you also get credit for the power And then we can move forward as an industry – Yeah, and 10 cents Man, I wish that was even close to what I pay (laughing) – I should have used a more southern California specific example

– Yeah, I think our peak rate here is like 42 or something It's insane – Wow, wow – Yeah, we have some of the most expensive stuff So that's why solar of course

It's weird, I did a video on this I explained it So, in southern Cali, like in San Diego or southern California, the weather is so agreeable that you actually don't use a ton of power So for a lot of people, solar didn't really make sense It's like, yes, it's sunny

And yes, you can generate a ton of power But you don't necessarily need a ton of power either So, there's some real math that you had to do about huh And then of course, once you get an electric car, two electric cars in my case Yeah, hands down it makes sense economically so

– Right – Okay, so that was one thing was Morse's Law was and how that affects the price and then what was the second thing you were gonna mention about the price of solar coming down? – Yeah, right So one is that manufacturing scale, right? That 10 to 15% every time it doubles The other is simple technological innovation and that really manifests most directly as the efficiency of the panels So efficiency of panels is actually really simple, I think intuitive calculation

At a 100% efficiency of a solar panel, the panel would be capturing literally every bit of energy on that square foot that the sun was delivering to the Earth Which is a theoretical but not reachable level, I think it's fair to say – Yeah – And just in the time that we've been investing in solar the last four years, we've seen the efficiencies being put to work on the field and lab efficiencies are obviously you know, always a step or two ahead of this, have gone from about 15% to about 20% And so really substantial increase you know, 33% gain in terms of what you're getting for the same costs, right, for the same panel

And that is driven by just a million kids, not a million, thousands of kids at Caltech and MIT and you know RPI and the great PhD candidates around the country that are playing with every possible coding and combination and you know chemical cocktail to tweak out as much power as we can from these things And that actually is a lot closer to kind of how you think about the semiconductors moving forward which is just a lot of iterative technical innovation that over time and with a lot of different labs working on it leads to more power per dollar – Right – Right, from a technical basis – And I saw something about this recently where somebody I think in Europe had an idea to put a second layer underneath the solar panel to capture the added, extra heat

And that was gonna be some major advancement, so So barring you know, getting into the weeds of that, are there any of, it seems like every day I see some new headline about some new tech that's gonna push it to 80% I mean – Right, right – How much creed to do you give to any of these kind of headlines that you see out there? Is there anything that's like really promising that we know, you know, we have faith in or is still very much like, like every time I hear about a new battery that's gonna change everything

It's like great! – Yeah, yeah, yeah – It worked in the lab once (laughing) – Right – It's like – Right, right

So that would be my reaction I mean generally until we see it working at manufacturing scale – Right – Global manufacturing scale, we're not betting on too much Now the other good news though is from maybe every 10 or 20 of those breakthrough innovations that show 70% efficiency in a lab, some portion of that makes it through to actual manufacturing scale

– Right (laughing) – And so you see these incredible potential breakthroughs and you know, every two or three years, one of them actually gets incorporated into how they vast majority of panels are getting cranked out in a very systematic way on frankly, you know, manufacturing facilities that use to crank out flat screen TVs – Right – So just really, really large scale standardized stuff So, yes, I think your skeptical to look at any given article and think, can that get through the gauntlet of manufacturing scale? But that is also the place where some of that stuff does come from

– Right, right It makes sense if that's where it starts I get kind of fatigued by seeing you know, a huge breakthrough and it's gonna change everything And it's like, that's the last you hear of it, you know – I– – Yeah go ahead

– I think the other point to make there is that you know, Bill Gates has this new multi-billion dollar fund, I forget the name of it But I think it's called the Frontier Fund or something like that And the idea is to work on some of these very, very you know far out there but potentially breakthrough energy concepts like nuclear fusion Or you know small scale nuclear or using nuclear waste or there's some geothermal stuff that's kind of you know out there And the one thing that might be interesting to listeners thinking about you know, particularly Tesla Solar business or just solar in general, is I think that there's a real false equivalency that people apply the way that technology penetrates other markets like consumer electronics, let's say

And the way that things penetrate the energy industry and it kind of speaks to what we were talking about When you look at the penetration curves going back you know, a hundred years of what are the input sources, you see very, very slow changes as opposed to the really rapid changes we see in some other places And it really has to do with two things One is just the scale associated with this market, generating all of the electricity needed for the country Like you can go from the lab to one, you know maybe it takes two or three years to prove what one manufacturing scale facility and then you use that traction to raise some more money and you build 10

And then you go from 10 to 100 And you are still just a hair on a rounding air of (laughing) (overlapping dialogues) You still made absolutely no progress And so you know, you look at something like solar You look at something like wind They've been doubling their volumes for like 20 years every two to three years

And they are just getting to the scale where they're starting to show up on total electricity production in the US So I think the other thing to realize about this market is when you hear about breakthrough small scale nuclear some of this, you know, really interesting and cool stuff that's happening that's not wind or really straight forward solar, that stuff is not coming in and competing with solar and wind at real scale – Right – For 20 or 30 years That's just what the history of the energy market tells you

And so, when people see those headlines, that might be helpful to contextualize when they're thinking about, hey, is solar gonna be competitive in five or 10 years I think you can be comfortable that it will – Yeah, absolutely, that makes a lot of sense That exact same concept of people trying to impose the trajectory and progress in one technology onto another and assuming it's the same thing, that happens all the time Like I always talk about that with self-driving cars

You know, like making a better way of taking selfies is not the same thing as making a car learn how to drive itself in rain or snow or something like that It's like a completely So just because we can you know, advance the internet in digital technologies incredibly fast, doesn't mean that the physical world operates the same way, you're right, so – Yeah, I think – (laughing) Glad you brought that up

– Ray Kurzweil is pretty famous, right He's kind of made a career of extrapolating relatively simplistic lines, right And I agree with you I think one of his biggest mistakes is taking places like processing power or frankly the price of solar or you know, some areas of like data analysis around AI where it's a really understood problem space and we just have to keep getting better and better at it And they confuse those with spaces where the problem space is really murky and it's unclear how you solve it

And you can't just march though technologically You have to figure out what is special about the human brain that we can drive in the snow – Right – And there's a lot we don't know there And so yeah, I very much agree

And you know, one of the examples that Kurzweil kind of tripped over that we like to talk about is he predicted the mapping of the human genome which was really a question of the data processing power And so he mapped it really, really beautifully But he thought and a lot of people thought, once we map the human genome, that we'd be able to play with human genetics very easily, that we could code humans – Right – And as soon as we understood the human genome, we very quickly understood that actually, yes, it's one code but the way that it's manifest in our bodies goes through this whole separate process of our DNA and RNA

And open up this whole separate field of epigenetics and so it's one of those things where you knock down one problem and because you didn't really know your problem space, a whole 'nother problem you know, crops up – Yeah, you don't know what you don't know kind of a thing – There it is – Right? – Yeah – And you solved one problem and that's just, I've been you know, in the data science world, we always talk about that a lot

I would always use the analogy, it's like doing repairs on an old home You really don't know what you're getting into until you open up that wall and see what's in it And then, you know it's so And then once you do that, it's like, just every step of the way, you just have more questions than you had before, so They're different but they're more questions

So, talk to me about whether or not Tesla is going to benefit from the tariff Because this was a question I had It seems like an obvious yes But I've wondered what your thoughts were you know kind of with your context and knowledge – Yeah

You know, it's interesting because you have to think through a couple of different portions of their business, right (laughing) Right, which So obviously you know, looking directly to SolarCity which if I understand roughly Tesla's market cap and where SolarCity was purchased at Let's say it's 10% of their business, right, 10% of Tesla's business might be SolarCity SolarCity is probably hurt by this but only in a moderate way

Because SolarCity has more revenue coming from solar installations which you know, to our point and you know, the graph that we were discussing, it's a small price increase It's not a huge hurdle But it's hardly a positive You know, no one wants to go back to six months before You'd rather just go forward

So probably a small hiccup to the SolarCity division And you know the observation there being, from what I've seen, their manufacturing is not big enough to make up or the positive for the manufacturing is not big enough to make up for the negative on the installation front – Gotcha – Now if you look at Tesla more broadly as, in a lot of ways, a battery company more than anything else – Hmm hmm

– You know, then I think you have to start looking to what is the impact of solar moving a little more slowly on whether storage starts being put into the grid in a lot more aggressive way like we're seeing in southern California right now Like we saw Tesla so famously do in Australia recently And actually, there's kind of an interesting argument that the reason storage is getting put in is largely to replace or enhance natural gas peaking plants and natural gas peaking plants are often required or more required because of the intermittent nature of solar Natural gas peaking plants can turn on and turn off really quickly, that's kind of their value in the system So, actually, solar's penetration creates more of a need for the thing that Tesla is kind of looking to replace

So, kind of unclear how that all shakes out You know, I don't think it either sinks or helps Tesla – Yeah – But they're playing in enough different spaces, there are enough countervailing forces that I think probably it ends up being a wash – Yeah, I feel like a lot of people's perception was that Tesla makes truckload of solar panels and now because of this tariff, they're just gonna, you know, skyrocket and everyone's just gonna order Tesla solar panels and all that

But it sounds like yeah, the manufacturing scale that they're at now is pretty insignificant overall And like you said, the price, the real price impact of 5% isn't really enough of an edge for them to I don't know, put LG out of business or somebody else right – Yep – Yeah so, okay, okay good So, overall, it seems like we're gonna be fine in terms of our solar future

And we talked about you know, in the advancement and panels and thinks like that, are there efficiencies to be gained outside of the panels becoming more efficient themselves, right? 'Cause you talked about another way was you know, just the panels getting better But there's a lot, no not a lot, but there's several other key components to solar installation Do you see other advancements in those areas that could help us, help the price of solar come down? – Yeah It's a great question because it has been a real focus the last several years in the industry as hardware prices came down due to the factors we talked about What is often called balance of system costs, basically all of the other things needed to facilitate a project, started becoming a bigger percentage of the total

Right – Right – And we've seen really two area One is installation efficiencies So relatively straight forward stuff

The things like pre-fab and you know including the inverters, they're called microinverters into the panels so you don't have to connect them onsite, you can make that part of the manufacturing process You know, some seemingly straight forward things but surprisingly efficient Things around like how you get those things up and tools you use and how those things connect And how racking connects to the roofs So, as the industry scaled and matured, we have seen a bunch of installation and construction efficiencies

The other place I would point to is frankly, what we focus on which is financing And the other big one is customer acquisitions So, if you think about the two parts of this system as all this stuff that you think of yourself as buying, so the hardware and then the installation and the construction of it, that stuff is what we've discussed There a few other things you're actually paying for and it's the sales effort to close you, it's the profit margin for the developer, it's some regulatory and compliance The big two pieces there are really officially lining up financing so not having to go through a 90 day process with a bank that's really arduous and adds a lot of, you know, man-hours to the project

And the other one is acquiring those customers in a really efficient way So you compare for example, you know, someone coming, walking up to your home and trying to sell you is pretty inefficient Relative to you know, a really great website that gets you through the education curve, gets you to a preliminary quote before you talk to a human So those are the two other big pieces the industry's really been focusing on is financing and customer acquisition – Yeah and I agree

And one thing that surprises me specifically about that 'cause I think this will transition as well to talking to me about what you guys actually do I was surprised at the interest rates on solar loans Even for residential, they were pretty high, I thought It was surprising to me that I could get something I remember at the time, like a 15% interest rate on a car which would be, I mean to me like okay cool, that makes sense

But I think it was like five and a half or 6% on solar – Right – And I thought man, I could take this car, drive it to Mexico and be gone And you'll never find me again Chances of recouping versus like solar

I'm not gonna like take my house with, like you can repossess this if you really had to – Yeah, yeah – So I'm looking at it going, from a bank's perspective, I imagine the risk has to be lower on something like solar versus a car or whatever other loans So is that true as well in the commercial space? And if so, why? (laughing) – Yeah, totally So it is the case that you given the same, you know FICO score for an individual, you will most likely get a more expensive solar loan than you will get an auto loan and then respective to that, even cheaper, a mortgage

And it really comes back to how comfortable is the broader financial community with that asset And how well developed are the channels to recover value from those assets if you are forced exercise your rights and claim them – Right – So most of the reason that you're paying more for solar is a combination of it being a relatively novel industry, particularly for understanding what happens five or 10 years into a loan You know, only in the last five or 10 years has solar gotten real scale in this country and so, there's like almost no debt portfolios in solar that are 15 to 20 years old

And there's very few that are 10 years and we're getting more and more that are five years So, there's just not a ton of history And then you're also frankly just dealing with a relatively conservative industry, right? This is not an industry that jumps really quickly into new anything, asset, classes, issuers, right 'Cause they're risk adverse and they probably should be So, a lot of what we're doing and so, you know for context, we're helping not homeowners but commercial entities, municipalities, hospitals, schools finance these projects

And a lot of what we're doing that a bank doesn't do and the reason that we have a business is we actually, because we're aggregating across 20 states about a billion dollars of borrower demand We are specialized solar underwriters We evaluate the people doing the installations We're evaluating the warranty for the hardware We're doing onsite inspections

We're understanding exactly what the economic value is in recovery all the way through the life of the system and pairing it our you know exposure as an investor to that loan And so those sorts of things are things that aren't rocket science – Right – But a local bank or credit union does not have a special solar underwriting group that knows how to do that work Probably even more importantly, there is a not a ton of track record and they almost certainly haven't themselves gone out and gotten value in the case of having to recover

So even though you and I both know sitting here just thinking through the logic, of hey, this thing has value, you can't run away to Mexico with it (laughing) You know, their underwriting committee, right Their guys are evaluating risk for the bank are sitting there saying, hey, I don't have data from the market, a ton of data about what the recovery is and we've never done one of these things Like, hey Joe, are you gonna sign up to recover the value on this thing 'cause I know I'm not going to – Right

– Right And so a lot of it is just that they haven't specialized and they don't have the data and the expertise to know that like a car, or like a home, there's a really well understood path to recovery and they know almost exactly what they're gonna get There's just a lot more uncertainty about that for them around solar So that is why we add value to our customers being a solar specific underwriter 'cause we can come in with a competitive quote, having underwritten the system knowing how to value it and recover it and using it in the way someone would use not over a home In a way that a broad-based bank just hasn't probably developed the capability to do

– Yeah and so for the projects you guys finance and kind of customers you work with, who are they? Like who's the typical or kind of you know, an average customer that's coming to you guys saying, hey, I want to get solar My bank doesn't have a clue what I'm talking about (laughing) Help me Who are those people and if you have a favorite project, I know you have a lot of stuff going on I mean just

– Yeah – Just break that down for me 'cause I think that's, it's still a little nebulous in my mind I think it could be helpful – Yeah absolutely Frankly, you know, driving around any part of this country beside like dense urban areas, you're gonna run into a lot of our typical archetypal projects

So, we really like generic commercial office space So, that's not too tall because if it's too tall, the high-rise stuff, the roofs aren't big enough to support much power generation Right? – Right – So, you get too many stories, you get thrown off But, think of like the suburban place that we probably got our teeth cleaned growing up if you grew up in the burbs like me

(laughing) Like those kinds of spaces are great The warehouse space that's up and down, all the major thoroughfares in this country where you see, you know, 16 different spots where a truck can back their bed into it and unload and reload Those are great facilities for us You're kind of generic commercial owner operated office space We think of a municipal building, a university building, a hospital building

Just an owner operated commercial entity are great for us and that's our sweet spot Oh, one other archetype we do a lot of is we do a lot of retail commercial space So think of like the Big Box store that has five or six smaller stores next to it We've done, I don't know that I can mention directly our borrowers There might be a violation of– – Sure

– You know, personal identifying them But there's a couple of like big retailers you would know where we can underwrite them as the primary tenent and you can get four or five smaller businesses that you can kind of lop into that loan So that's the kind of stuff we do It really is what you run into again, besides dense urban areas This is kind of a non-residential space that you're gonna see around the country

– And how often does the, so I imagine these conversations are basically a math equation, right? Where you basically look at it, how much electricity do you use? How much will it cost to set this up? You know, amortize that up for me across whatever period I mean, how many of those times does it not work out? It's seems like– – Right – Like almost always, you're gonna look at it and go, okay, that makes sense, let's do it I mean, does it happen that there's a lot of uncertainty about it? I mean it seems like it would be pretty straight forward – Yeah

I think it's a really insightful observation to narrow in on the fact that particularly when you're not talking about home owners, you're talking about– – Yeah – You know commercial entities or hospitals It's just, am I gonna save money Right, that's it? – Right – It's a simple decision, right

It's, I am paying X to the utility right now This solar system could offset Y That's whatever percentage of my bill And then can I get a financing package where I pay less than my savings – Yeah

– That's it right? I would say and for folks that are interested in going solar, there is a little bit of nuance in figuring out what those economics look like particularly over time And one of the nice things about working with someone like us that needs to make sure the system makes sense as a standalone Because we're investing in a lot of ways in the viability of this system and in your positive economic experience as a borrower Our incentives are a little more closely aligned than maybe someone selling you the system who you know, once they sell you, our average system is about half a million dollar system Once they sell the half a million dollar system, I'm sure they hope you have a good experience

– Yeah – But, you know If you're losing money in year seven, they're not necessarily on the hook for it So, we are a little more conservative we find in figuring out what those cost savings are There's some things like, you know operation and maintenance costs and to be pretty de minimis, but we like to assume occasionally something goes wrong, right and add that in over time

We're doing really conservative things like estimating that as soon as a piece of hardware's warranty has expired, we're gonna assume that you get really unlucky and in that next year, it fails – Yeah – Right, where as you might say, have someone who says, yeah, you know, it's only got 10 years of warranty but let's take it to 15 years 'cause we're seeing a lot of that So I think there's some ways that you can kind of play with it and you want to be careful if you go to particularly someone that you get a sense that's somewhat salesy on that installer developer side – Hmm hmm

– You know, it is one number but the calculus getting to that one number has some nuance – Yeah Yeah and I can echo that, that was my experience from a residential side, as well You know, and I'm sure it's the same kind of thing because the incentives aren't totally aligned, right So working with you guys, it sounds like because you have investors, and you're trying to show them a return, as well, that you truly, the incentives are much, much close, much more closely aligned

– Yeah and like the short story there is you know, if you're paying more for your power and you were sold a bill of goods that you were gonna save money, you might just stop paying the loan on that system, right Like that's a reason for you to start defaulting is if you feel like you got a bad bill of goods or this is a not an economic decision and so, our incentives really are very well aligned Where we want to make sure our borrowers are in fact saving money in total including our costs Because if that's the case, why would you ever stop paying? If you're gonna go and pay more to the utility and I can turn off your system As long as you're in that space, you're gonna pay me

Where as if it's more expensive, who knows, right? – Right – So, yes You've very, very much aligned and I think if you're looking at someone doing the financing and you're a customer, I think that is someone you can go to as almost a fairly objective third party or at least an incentive aligned third party and say, hey you know, how did you get comfortable that in year seven, you know, these panels would still be working And they'll say to you, hey, well this is the warranty and they've got this great reassurance policy and I think you can have a more straight forward, honest conversation with the financing entity than the installer for that reason – Yeah, that's fantastic

And so, something I've been confused by a little bit, is how a normal investor like me could actually get into this space Because it is, there are some steps and some qualifications, right? And those aren't totally clear to me – Yeah (laughing) – And even when I looked into it, even when I looked at like how to become an accredited investor – Yeah

– It seemed really murky So explain to me like what the options are What the steps are and all those kind of things If I, or someone else, you know, wanted to actually support one of these projects and see a return and all that – Yeah, absolutely

So I'll assume folks listening to the podcast are familiar with the stock market I presume a lot of folks might even be Tesla investors I think I can disclose that I am a Tesla investor (laughing) And so you know, for a long time through particularly the stock market, you could have bet on you know, the underlined companies that were gonna win this market, right, that were gonna take market share and either sell a lot of panels or sell a lot of systems And what we're opening up and some other companies are opening up is the opportunity not to be the person, if you want to use the home analogy

You know, you're not betting on who's gonna build the house or what hardware they're gonna use and who they're gonna buy it from You're just betting on the rent coming off that house because it has underlined value and that has ongoing cash flow associated And you know, there wasn't really a way and there's still not a way for all investors to bet on the ongoing production of electricity from the system once they're billed which has this historically, in the industry, pretty predictable cash flow dynamic As opposed to what could be a pretty you know, rough ride and a pretty risky ride with the public markets So, the first thing to say is that we're kind of opening up a new space is I think why the government looks at us differently than investing in a Tesla stock, let's say

So the lay of the land there is we issue what is called Regulation D Securities This was established by the 2012 JOBS Act which had a bunch of crowdfunding kind of previsions in it And also along with a bunch of other folks in industries like real estate that's really taken off based on these regulations we basically have been able to open up a bunch of lending spaces that frankly were previously the purview of big lending institutions and banks And make them available unfortunately not yet to all investors but at least through accredit investors

So, accredited investor in the United States is defined by the SCC as either one of two things So you don't need both of these You need one of the two Either you can qualify through income which if you're in individual filer, tax filers, that's $200,000 in annual income the last two years and some reasonable expectation to make $200,000 this year Or as a joint filer, as a family, $300,000, same criteria last two years, expectation this year

Or you can qualify through net assets And so this is more than a million dollars excluding your primary residence – Right – So – That disqualifies a lot of people right there, right? – Well you see, yeah

You can do either or so basically what you end up seeing is you either have folks that have relatively high incomes You know we see a lot of you know, not so much twenties Some twenties can grasp on to those folks A lot of 30, 40, 50-year olds right, that as a family in particular exceeding $300,000 And then, most of the folks we're seeing hit the million dollars, largely have a bunch of retirement accounts that they have had retirement accounts long enough

These tend to be older folks, that between two people Again, so the million can be as a family So between two people, they might have more than a million in their 401K's And then to the extent they have a secondary home or a piece of a secondary home, that can get you to a million So yeah, you're either basically a relatively you know, high paid professional in your younger years or you're old enough that your retirement accounts and maybe a second home get you to a million

So there are seven million families in the US that are accredited roughly so it's not, it's not just you know the real cream of the top 1% But it does exclude an extraordinary number of people and Lord knows there's no one that would be happier if we were available to everyone than us – Sure, sure – We hate turning people down

But it is nice that, since 2012, you know as an investor, you can go into some of these spaces that return some, what we think, really compelling yields Real estate, some of those platforms have some really compelling projected yields We have, I think, some really strong projected yields in places where, you know, banks really dominated before those securities So, you know it's starting to open up Not quite where we want to be

But still a lot more open than we've seen pretty much, ever before – And yeah, thank you for that explanation 'cause that definitely helps And one one of the things that came to mind when you were saying that was, the older folks that qualify because, you said, having the retirement accounts and those kinds of things, as I understand, a lot of them are actually, it aligns really well, right Because they actually see a dividend from this, right? They actually get paid Is that right? – Yeah, that's exactly right

So, you know, the mortgage analogy is apt here in the sense that we are amortizing these things over a relatively long term But just like your mortgage payment, there's a piece of principal coming back – Yeah – So if you make an investment in a Wunder Fund, a small portion of that every month is getting paid back to the fund and then distributed to you And then you are receiving a monthly interest payment on that outstanding principal

So yeah – That's perfect Yeah, because this is like the, I think what's the term? Dividend investor, where people invest in certain stocks because they have a dividend and because they want to live on that money, right Where as like me or someone you know, in their younger years, you're not really interested, you're not concerned with that You're more looking for the growth versus the dividends so yeah, that sounds to me like the perfect alignment especially for someone that qualifies in the first place because of those things

Well man, I really appreciate the time I think this was super insightful It sounds like the future is bright, not only for collecting energy but also for financing and doing all those kinds of things Any final thoughts about 2018 projections? Like, big picture type stuff? – Yeah, I think what's really helpful and I thought you did this really beautifully when you were talking about, what does the world look like when solar's a third of the costs that it is today? I think it's easy, you know, just our tendency in general is to kind of focus on that myopic moment and what's happening in this quarter, this month or what's the most recent data or to focus on some of the you know, both positives and negatives on the policy front But if you pull back to a five to 10 year perspective and this is what that graph really tries to show

You know, the number one, number two and number three story is the cost reduction in solar, right If you just extrapolate this thing out 10 to 15 years and it's been going for 40 years in a very consistent fashion, if you put that out 10 or 15 years, you know, it's not this nice incremental story of let's save some money on your power, it is a, you know, a required piece of any build And almost a fiduciary duty of any enterprise to put up solar because the prices are gonna be so compelling And so, I think at a macro level, I would just encourage folks to look at some of those underlined trends and think about what the world looks like in five to 10 years which I think just don't get a chance to do as much as we want to And I think when you do that, you see a really exciting future not only for solar but for that utility dynamic or grid of the future whereby it's bidirectional, it's multimodal

You can add resources and get fair value And frankly, it's also just a hell of a lot more stable, a hell of a lot more resilient which we see in places like Puerto Rico is so important – So I hope you guys enjoyed the interview with Bryan Birsic, the CEO and founder of Wunder Capital It was perfect how it came to the head of exactly what we do here We free the data so our mind will follow

And that's exactly what happened with this whole story Was that, it seemed very sensational and like you know, the sky was falling But truly, when you zoom out just a little bit and look at trends and everything in the industry, it likely is not gonna have much of an impact at all Of course, we don't want it to have any impact We want to keep moving forward

But still in the end, the trend is the same And this little blip is really not gonna make a big impact So, I'm curious what you guys think about that Leave me a comment down below And stay tuned for more content related to solar in the upcoming episodes

Because I'm really fascinated with how this is gonna really change our world as well as what it means for Tesla in their energy division which may become the biggest part of the company very quickly here So thanks for watching And I'll see you back here at the next one

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