The Democratization of Energy Distributed Solar Energy in Chile

1. The Democratization of EnergyDistributed Solar Energy in Chile UC Berkeley Haas IBD Team June 2013

2. About us • “Experiential learning” based class during 1st year of Berkeley MBA program • Students are paired with client organizations in countries across the globe • This spring, Berkeley has 25 teams across 21 countries Four UC Berkeley MBA students International Business Development Ben Hamlin Maika Nakagawa Doug Peck Laura Tilghman

3. Overview Chile’s leadership in solar energy Business models Policy and regulation Financing Education and capacity building Geographic and structural advantages

4. Geographic and structural advantages Chile’s leadership in solar energy Business models Policy and regulation Financing Education and capacity building Geographic and structural advantages

5. Chile has a looming energy imbalance • Demand growth rates forecasted to be 4-5% per annum until 2030 • Demand growth corresponds to Chile’s economic development and rise in GDP • Requires additional 8GW of electricity by 2020 • Imports ~70% of energy (dependent on unreliable suppliers such as Argentina) • Renewables are ~4% of installed capacity in Chile today, though growing at ~12% annually Demand is rising Supply is inadequate % Installed Capacity (SIC and SIG) 2012; 100%=17.469MW 4 14 22 34 Hydro Coal Diesel Natural Gas Renew- ables Total Renewables can plug supply gap and help Chile achieve energy independence

6. Global solar PV growth forecasts are robust, Chile is positioned to lead in South America (Cumulative capacity additions, 2012-20, GW) • Global PV market is nascent but quickly growing internationally • For distributed PV specifically, 220GW of installation is forecasted worldwide through 2018, representing $540.3B in industry revenue • South America is forecasted to have least installed capacity, creating opportunity for Chile to assume regional leadership position and change trajectory Growth in solar PV can transform power markets

7. Distributed PV is increasingly attractive for Chile Electricity prices are rising in Chile PV prices are falling internationally PV module prices have fallen 80% since 2008 and 20% in 2012 alone

8. Chile is uniquely positioned for distributed solar • Geographic • Solar radiation supply improves economics • Energy transmission complications • Political • Centralized decision making can reduce soft costs • Learning curve • Experience on utility scale solar • Second mover advantage on distributed scale solar • Competition • Region lacks market leader Advantages for distributed solar Chile has strongest radiation in S. America

9. Renewable energy and distributed solar offer Chile many benefits Benefits of renewable energy Benefits of distributed solar • Provide Chileans with a direct choice about their energy source • Decentralize energy production and limit transmission costs • Create new industry in Chile for more diversified economy and quality, service-oriented jobs • Increase sustainable energy supply using Chilean resources • Diversify energy mix for greater stability and security • Reduce the country’s GHG emissions

10. Policy and regulation Chile’s leadership in solar energy Business models Policy and regulation Financing Education and capacity building Geographic and structural advantages

11. Policy choices will impact the rate of adoption of distributed solar in Chile Adoption (%) Theoretical impact of select policy choices Time Chile today Net billing Net metering Incentives Strong distributed solar adoption over the next decade requires a suite of proactive government policies and incentives

12. Three policy objectives are required to quickly develop distributed solar in Chile 1 Define a national vision and concrete goals for solar generation Suggested policy Status • Renewable Portfolio Standard • Grants for pilot projects 2 Create incentives for utilities and regulators to support distributed solar • Decoupling • Mitigate soft costs • Utility cooperation 3 Seed market development through improved economics and financing • Net metering and shared solar • Cash incentives • Tax incentives • Loan guarantees

13. 1 Define vision and concrete goals for distributed solar generation Renewable Portfolio Standard (RPS) Importance Opportunities for improvement • Establishes national goal to guide market for non-conventional renewable energy (NCRE) • Increase the RPS to more significant level • Adopt a solar carve-out • Ensure rooftop solar generation is included Grants for pilot projects • $10 million fund for co-financing solar projects from CORFO • Government grants provided through periodic contests for innovation • Strategic, dedicated program for funding solar R&D to drive innovation and cost reduction (e.g. SunShot in the U.S.) Amend existing law as little as possible to simplify process

14. 2 Create incentives for utilities and regulators to support distributed solar Decoupling • Rate set for fixed ROA • Aligns incentives • Reduces volatility • Changes profit model of distribution companies • Requires long-term business model innovation Structure Stakeholder implications Standardize installation & permitting • Regulate costs of permitting, inspection, etc. • Waive or limit costs for small systems • Requires political will to standardize costs at a national level • Reduces autonomy of regional utilities Utility cooperation • Mandate data sharing to improve grid management • Ensure grid reliability and safety • Necessitates creation of public-private mechanism for information sharing

15. 3 Seed market growth by enhancing project economics via financial incentive programs Tax incentives • Rebate or credit owner of system • Tier by income • Allow for new and retrofit • Politically challenging • Build upon solar thermal precedent Structure Stakeholder implications Net billing • Move toward net meter, at or near 1-to-1 price on daily interval • Break out fixed cost in consumer bill, allow for differentiated rate structure for solar customers • Allow shared solar installations • Promote grid safety and reliability • Balance incentives with distributors’ costs Cash incentives • Balances economics between early and late adopters • Provides time limits, which incent earlier adoption • Create a long-term cash incentive, that steps down with aggregate installed capacity • Model after California Solar Initiative Loan guarantees • Loan guarantee through multi-lateral banks or government funds • Positively seen by government, financiers, and industry actors

16. Financing Chile’s leadership in solar energy Business models Policy and regulation Financing Education and capacity building Geographic and structural advantages

17. Three key hurdles for distributed solar financing in Chile 1 High upfront cost and long payback period • “Upfront cost of solar PV systems is not affordable given income levels in Chile.” – Chilean academic • “Average payback period of PV systems is 8-10 years. Consumers want as short as 3 year payback period.” – System provider Interview insights 2 Small scale of individual systems • “The biggest problem with residential solar is the small scale. We usually look at projects bigger than 3MW for loans.” – Chilean bank • “Need a scheme to bundle small scale individual projects.” – Chilean bank 3 Unclear risk for financiers • “Banks will join only when they fully understand the long-term technical risks.” – Chilean banks • “Banks are unwilling to lend because the future risk of solar PV systems is still unclear.” – System provider

18. Financial mechanisms can help distributed market overcome hurdles 1 • Third party ownership (TPO) models (PPAs and leases) can minimize upfront cost and remove barriers for home and business owners • Bundle individual projects to induce financing from banks and other institutions • Aggregate community demand to drive down cost and achieve scale • Introduce mechanism(s) to reduce financing risk (e.g. loan guarantees) High upfront cost Key hurdles What Chile needs 2 Small scale of individual systems 3 Unclear risk for financiers

19. 1 Stakeholders support leasing Distributor System provider Financiers Users “We are thinking of solar PV leasing as a potential business of ours.” - Distribution Co. “Financing is common in Chile. You can finance many things, from leasing an automobile to payment plans on small purchases at the supermarket.” - Int’l system provider “As long as the cash flow is transparent, we are willing to participate in leasing schemes.” - Chilean bank “Solar leasing is not available yet, but we would be willing to consider the option. We lease nitrogen gas equipment and are considering leasing micro-hydro power.” - Local winery

20. 2 Several solar financing company bundling models exist in the U.S. Models to bundle individual projects Models to bundle individual projects Sales Financing Monitoring Installation Lead-Gen Vertically integrated model Installer partnership model IInstaller Partners IInstaller Partners Financing focused model IInstaller Partners(use sales software provided by CPF) IInstaller Partners

21. 2a Solar developers bundle small-scale systems for large investors Tax equity investors • Investors can benefit from commercial tax incentive available for solar • Investment Tax Credit (30%) • Modified Accelerated Cost Recovery System Tax equity structure (sale-leaseback) Benefit Installation 1 2 Lease • Requires >$USD 75M, corresponding to 2,300+ systems Scale Sell syst-ems Lease payment Lease back 4 3 Avg. return • 10-15% Example Investors Tax equity

22. 2b Community-based initiatives also provide a mechanism for bundling projects • Started by Portland area neighborhood association, now expanding nationally • Interested neighbors come together to choose a contractor and bulk purchase, resulting in 15-20% discounted price Group-purchase programs Examples in US Description • “Groupon” model for solar • 1BOG negotiates with contractors for a ~15% discounted price on behalf of users • The deal is posted on 1BOG’s website and potential customers sign on (One block off the grid) • Crowdfunding platform for solar projects • Can invest minimum $25 with a 4.5-6.5% expected rate of return • For-profit, certified B-Corp Crowdfunding Collaborating with a municipality is one bundling option for the Chilean market

23. Education and capacity building Chile’s leadership in solar energy Business models Policy and regulation Financing Education and capacity building Geographic and structural advantages

24. Lack of education and capacity across the value chain impedes market development “Gov’t-led education is currently overly complicated and too costly.” – solar customer “There is no one who can do it [install solar PV].” – solar customer • Interviews revealed a widespread lack of education and capacity re: distributed solar in Chile • Education must be focused on multiple stakeholders • Education must be reinforced by experience • Public incentives can accelerate learning curve Key insights “Gap between low-skilled labor and upper-class academics. Need technical installers in the middle.” – solar service provider “Most communities know only a little about solar.” – environmental activist Installers Consumers “Government is in early stage of capacity building…next step is to start training programs.” – Gov’t official “Educating banks is critical so they can assess risk and understand industry potential.” – solar service provider Financiers Government “Bankers are uneducated due to no [distributed solar] industry conferences and not participating in the due diligence process.” – Chilean banker “Government must be educated across departments” – Gov’t official

25. Education requires a strategic, coordinated approach Phase Public Exit • Transfer responsibility: from public/private to private 6 5 Deployment • Capacity building: vocational, experiential 4 • Education: academic 3 • Awareness: public campaigns with endorsements from trusted actors 2 Foundation • Stakeholder buy-in and participation: contributions from actors across the value chain 1 • Vision: set by public sector at national level Market maturity

26. Many education and capacity building campaigns are needed to affect multiple stakeholders Primary School Prgms Community Workshops University Programs Local Vocational Training Start-up Competitions Industry Conferences Scale of effort Certifications Public Endorsements Awareness Campaigns National Online Platform Vision Financiers Government Installers Consumers Targeted stakeholder group

27. Chile can emulate California’s successful education and capacity building campaigns Vision Awareness Education Capacity Building

28. Business models Chile’s leadership in solar energy Business models Policy and regulation Financing Education and capacity building Geographic and structural advantages

29. Chile needs a strong solar provider to catalyze market development and prove concept Three pillars Fundacion Chile’s objectives Sun Co. Policy and regulation Lead Chile’s adoption of clean energy Financing Create a new economic sector Education and capacity building Incent foreign direct investment

30. Incubating a full-service solar provider alignswith Fundacion Chile’s long-term objectives Long-term objectives Role of service company • Connect currently disparate actors in the value chain (e.g. solar leasing, education) • Go-to-market Lead Chile’s adoption of clean energy • Leverage newly formed policies and provide proof of concept • Train workforce • Connect ancillaries (e.g. software) Create a new economic sector • Partner with reputable multinational(s) • Import equipment and technology • Seek foreign financing / capital through growth story Incent foreign direct investment

31. Sun Co. needs to define four major elements of its go-to-market strategy 4 1 • Go-to market • Product / service offering • Partnerships 3 2 • Branding and communication • Target customer segments

32. 1 Sun Co. needs to define its product and service offering Proprietary quoting software, solar leasing, connects customers to installers Integrated solar provider, includes boots on the ground, financing solutions, O&M Traditional utility scale developer, entered rooftop solar through subsidiary, vision of autonomous households Marketing, lead generation and sales Financing solutions (e.g. solar leasing) Design, engineering, construction Operations and maintenance Utility scale synergies Self-contained systems Private, ~$40M+ VC funding Recent $125M lease funding 9 U.S. states, 3 countries $3B market cap ~$129M revenue 15 U.S. states ~$8B market cap ~$8B revenue 16 U.S. states, 9 subsidiaries

33. 2 Sun Co. should target customers with clear economic case and low implementation barriers Wave 3 General residential High Wave 2 Low income housing Wave 1 Barriers to Financing Community solar High income residential Low Government buildings Light commercial Low High Relative market size Barriers to Implementation

34. 3 Brand building will be key to Sun Co.’s success This house is powered by the sun Leverage consumerism “Market as a luxury item that is aesthetically pleasing.” – Chilean entrepreneur #1 Interview insights point to the importance of brand Make “green” trendy “Chilean people are “style oriented.” In order for a new technology to be adopted, it needs to be recognized as “cool” for end-users. ” – Chilean entrepreneur #2 Sun Co. Create reputation of trustworthiness “Chileans do not trust entrepreneurs.” – community leader xwlkasjfd “I’d probably hire a German company.  I trust them [German companies] a lot.” – Chilean banker

35. 4a Key partnerships will allow Sun Co. to rapidlybuild reputation and gain requisite scale • Sun Co. needs to partner with reputable equipment providers • May partner with international service provider to bring best practices • Int’l brands allow customers to trust Sun Co.’s quality early • Int’l partnerships provide exit opportunities • Allows Sun Co. to operate a lean funding model and focus on core competencies • Minimizes transaction costs • Exhibits credibility • Provides breadth of offering to customers • Facilitates knowledge exchange and standardizes operating procedures Financial partnerships Int’l solar partnerships

36. 4b View existing solar players as complementors; approach education and policy with one voice “Boost NCRE adoption, with special emphasis on solar.” Education & capacity building Public policy Create public awareness Certify partners and products Encourage development of installer best practices Promote favorable policy Encourage national requirements Advocate for NCRE incentives ü ü ü ü ü ü

37. A strong foundation and strategic choices will enable Chile to lead in distributed solar Chile’s leadership in solar energy Business models Policy and regulation Financing Education and capacity building Geographic and structural advantages

38. Distributed solar brightens Chile’s future Insulate from price volatility Supply energy to support industrial growth Economy Create service exports Diversify economic growth Sustainable Growth Smart jobs Chile’s Future Reduce carbon footprint Democratize energy generation Environment Society Healthy Population Environmental leadership Reduce wealth inequality

39. Thank you