By Carolyn Gray Anderson
Renewable energy is one of the world’s fastest-growing business sectors. In California, the statewide goal written into law in 2015 is to generate 50 percent of its energy consumption from renewable sources by 2030. A more recent bill was introduced to increase the goal to 60 percent. The industry is said to employ hundreds of thousands of people.
But while wind, solar and other clean energy sources may be sustainable, accessing and financing them sustainably remains a challenge. This is why a UCLA Anderson team of MBA students won the first place $10,000 prize in the prestigious NRG Energy Case Study challenge hosted by the Economist’s Which MBA? Ean Mulligan (’17), Vishal Saheta (FEMBA ’17) and Julian Trobe (’18) solved the biggest pain point for their proposed client with an innovative financing model that breaks down silos between universities and commercial third parties.
Leading integrated power company NRG invited teams from universities across the world to submit a proposal to solve an energy problem. The challenge involved a choice of six technologies and four possible project locations. Teams had to work out the best combination of at least two technologies at one of the sites. That’s roughly 600 possible combinations.
Mulligan, Saheta and Trobe envisioned a large California university as their client and tackled three of the six technologies: biomass, PV solar and battery storage. They recommended a distributed energy system that used a combined heat and power (CHP) technique to substantively reduce carbon emissions.
“Our models predict a reduction in carbon emissions of more than 75 percent,” says Mulligan. “We projected improved resiliency with 5MW of backup power and a reduction of costs for the campus itself.” Saheta adds, “We developed a customized optimum solution that includes a healthy return to investors and an IRR of over 50 percent for NRG.”
The team arrived at the solution using a financial structure unheard of in the industry at present. They combined a property-assessed clean energy (PACE) model designed to finance energy efficiency and renewable energy improvements on private or commercial property with a power purchase agreement (PPA) between the university and a commercial client. PACE alone would mean the university would have to own the distributed energy system and couldn't take advantage of the tax benefits. Combining it with a PPA means a third party can own and operate the system while cash flows are still secured by a municipality, making financing more readily available.
“It works just like a normal PPA,” explains Mulligan, “but all the payments go through the property tax under the PACE program. By financing the project with a PACE/PPA structure, NRG can monetize the tax benefits and leverage its return with cheaper debt, generating a very high annualized rate of return for NRG.”
Mulligan entered business school with a history of five years in oil and gas. He says, “I quickly turned my sights from consulting to renewable development when I started at Anderson, largely because second-years coached me about all the possible opportunities. For the last two years I’ve been working hard to build up opportunities for Energy Management Group club members as well, and it feels like it’s paid off in terms of my group-taught industry knowledge, networking and full-time jobs.” Mulligan interned last summer at Southern California Edison and is currently interning at Santa Monica-based Cypress Creek Renewables, the second-largest renewable energy developer in the country.
UCLA Anderson’s Energy Management Group was founded six years ago and has typically been driven by a small but dedicated group of MBAs. The club has about 75 members, of which 10 to 20 are particularly active, and the group hosts at least 16 events each year. “We’re on at least a three-year streak of winning national competitions like this,” says Mulligan, who is the current president. “And we are finalists in even more.”
Trobe is a vice president in Keystone Capital Markets’ investment banking practice, helping to provide mergers and acquisitions advisory, institutional capital and strategic advisory to Keystone’s clients. Saheta has 17 years of experience in different functions that include technology development, marketing and product management. He is currently a project manager for energy industry technology leader Schlumberger (Fortune #287).
For the NRG case competition, Saheta drew on his experience competing in similar challenges: He was on the UCLA Anderson team that placed first in the 2015 Challenges in Energy competition against seven other business schools; and his team won first place in the 2016 PwC Fiercest Competitor strategy competition. He says the gamut of his experiences and training give him a competitive edge: “I honed my consulting skills in my Global Access Program field study by devising a U.S. market entry strategy for a €3.5 billion Finnish firm.” He has passed three levels of CFA and to date holds more than 24 U.S. and international patents.
The judges of the NRG challenge observed of Anderson’s first-place proposal that it was “clean, concise and well thought out.” They considered it an elegant solution to the growing need for financing of emerging technologies.
The UCLA Anderson team made it look easy to prevail. “We worked for two weeks during many long nights and full weekends, and put together a 23-page report and a five-minute ‘elevator pitch’ video,” says Mulligan, who led the team’s general knowledge of renewables. Trobe’s finance background was instrumental in evaluating different financing options, while Saheta’s product management expertise and understanding of the application of different technologies helped them craft the value proposition for different stakeholders.
But you don’t just walk up and collect $10,000 in a competition that demands a workable, applicable solution to a 21st-century business problem. “Commercial energy projects are hard to get financing for in part because each commercial customer is so different,” says Mulligan. “There’s no FICO score for a business, and private companies are difficult to underwrite without driving up financing costs. We had a creative financial structure that is currently not in use and we showed it has actual viability to solve a pain point when developing these kinds of energy projects for commercial clients.”
The UCLA Anderson team wishes to acknowledge kind support from:
- UCLA Anderson Office of Student Affairs
- Laurence and Lori Fink Center for Finance & Investments
- UCLA Anderson Marketing and Communications Office
- UCLA Anderson Energy Management Group
PACE idea could be advocated world wide especially Africa where renewable energy needs to be Impressed
Posted by: masinde maurice | 06/29/2017 at 11:29 PM