Lesson 2 Overview

MARK: Hi, this Mark Kleinginna. You're professor for 801, EME 801, as well as ArchitecturalEngineering, AE 878. I have with me today, Nicolle Natali, who was a graduate of the RESS program in 2022. And just wanted to sort of chat with Nicolle today a little bit about her experience in project finance in the renewable energy space. So with that said, Nicolle, can you introduce yourself a little bit? Tell us what you're working on now and what you do.

NICOLLE: Of course, thanks for having me Mark. As Mark mentioned, I am a graduate of the program about two years ago. Previously, I was working at City Group in the sustainability part of the org, doing a lot of sustainable debt and equity transactions. After finishing the Penn State program, I moved on to Forefront Power, which is a small solar developer in California. We do commercial solar and so includes behind the Meter and community solar, and we're also an asset manager. I work on the project finance team specifically, so I work on financing our projects with investors.

MARK: Excellent. Thank you. Nicolle, why is project finance sort of one of the most important things today to understand in the renewable energy and sustainability sector?

NICOLLE: It's a good question. Project Finance is basically the only way to get these projects built. In my opinion. Basically, project finance is typically been in the past financing for infrastructure projects that haven't yet proven themselves. They don't have any cash. They're not businesses. They don't have any credit yet. So how do you get an investor to provide the upfront capital for these projects, and renewable projects are very upfront capital intensive. So Project finance is really important to show that these projects have contracted cash flows. You can structure them in a way that allocates risk to different parties in the transaction, so that makes investors more willing to invest, and then also you can put them in special purpose vehicles. So it makes the project have limited liability in case of any bankruptcy or other event.

MARK: Excellent. Thank you. That's a very good overview, and I really really appreciate that from a finance professional on the ground. So let me ask this. If I were to consider project finance as a career, are there any relevant skills you think that are valuable in that space?

NICOLLE: Definitely. I think mainly it's a lot of data, heavy work. It's very much building or perform a financial model, collecting data on the inputs and making sure that they're supportable assumptions because investors are going to do their diligence on these models and make sure that they're realistic. Also being able to understand policy because as Mark mentioned, policy is always changing the renewable space, and it's really impactful for the markets. A lot of financial incentives offered by federal and state governments. And then also, I think, a big one that's underrated is risk management and being able to communicate risks because throughout the project development timeline, there's a ton that could change, and you have to be able to communicate that with investors or with your engineers with your legal team, it's very cross functional field. So being able to manage deadlines, communicate, having an interest in a lot of, detailed financial and modeling work, I think those are really important skills.

MARK: Excellent. Thank you. So Nicolle, what does a day to day look like for a finance professional in the renewable space?

NICOLLE: Also, a good question. We do a lot of, like I mentioned, financial modeling and analysis, running scenarios, basically to see different options we have to make a project more profitable or more easily marketed to investors, and that's changing the assumptions, reviewing the returns. Another aspect of our role is a lot of pricing. If you're working with a customer way earlier on in the process to build solar for them, you're going to have to give them a price usually with a power purchase agreement. We'll also do a lot of modeling to make sure that we're delivering savings to the customer on their electricity bill, which is really important for a lot of customers to make the jump to solar. So other day to day stuff, I guess, a lot of like due diligence outside of the modeling, answering a lot of investor questions, making sure that you prepare the data in a usable way and can present it. Then also managing a lot of third parties, you have to manage OM providers, you have to coordinate with your project managers who are developing a project. A lot of times you need insurance providers or an appraiser to evaluate the project, so A lot of working cross functionally outside of the modeling work. And then also, once you get higher up in the project finance world, you do a lot of the negotiations to structure the deal with investors.

MARK: Right. So on stuff, it keeps you busy. Absolutely. No. No doubt about that. So suppose you got an interview for a project finance type role, or anything in particular you would suggest to do to prepare for that interview?

NICOLLE: Definitely, I would review your program courses, specifically the ones focused on project development and finance because those are really good experiences to be able to talk about to an interviewer. Then also doing your own research is just really helpful being able to talk about current states of the market, either policy or otherwise. Norton Rose Fulbright is a good one for news there. Then if you want to take other courses, a lot of project finance roles require a modeling test. You can practice using courses on Pivotal 80 or Corporate Finance Institute, both offer great courses. Also just reading up on policy or current solar market trends, CIA is a big one. They're an industry group that offers a lot of really helpful summaries of really complex things going on in the space. Just doing your research, I think is really important.

MARK: Excellent. Well, our students in a 878 and in 801 will be building a financial model. Do you have any suggestions on best practices on how to do that?

NICOLLE: It is a fun project. I'll tell everyone that since I also did it, but my suggestions would be, I think, to make sure you have an understanding of the three financial statements. Making sure your assumptions that you're inputting into this model make sense and are supportable and that they make the project profitable. Another would be building in just like error checks and formatting it so that it can easily get out of hand when you're building a model. Making sure it makes sense and all the inputs and outputs are organized neatly, I think is really helpful. Also, you're probably going to build the model and then realize your project is maybe not financeable or not profitable. You want to make sure it's dynamic that you can update inputs and assumptions as you go so that you're not stuck reworking the entire thing. And you also want to incorporate all the coursework that you're working on because you're going to talk about subsidies and incentives that are really important for your projects?

MARK: Right.

NICOLLE: Profitability. So don't forget about those.

MARK: Exactly. Exactly. That's that's all very good advice, particularly the part about the dynamic inputs to be able to make sure that you can test sensitivities and things like that. That's real key. So let's kind of veer off a little bit and talk a little bit about policy that might be of interest to folks. Do you want to talk a little bit about what's going on with state policy at this point?

NICOLLE: Sure. I guess I'm most involved in California, but there are a lot of really impressive state programs going on right now. They have a lot of great support. New York is also another state with a lot of really impressive programs for community solar and solar and storage, in general. In California, though, a recent policy change that has really impacted the solar market is a change from NEM two to NEM three, which is basically just what the utility will pay those who have solar for any excess electricity generated. The rate is lower now and a little more complex to calculate, so that's been a big sticking point, I guess for the industry now because you have to make your project even more profitable and tighten the assumptions even more because you're not going to get as much dollar value back from the utility for any excess generate.

MARK: Excellent. What about with respect to investors?

NICOLLE: For investors, there's a lot to think about right now. I think the market is changing quite quickly with the Inflation Reduction Act. And also with other somewhat related policy or regulations that are proposed such Basel three, which is one where tax equity, which is usually the main investor for these solar and other renewable projects. Tax equity is seen as more risky now for banks and they have to have additional capital to cover that risky capital. So that's kind of pushing away, I think some tax equity investors, but still it's just proposed regulation. And then generally just a lot of higher interest rates right now make. The cost of capital higher. So It's definitely important to keep your model assumptions very tight because it's just a tough market right now with higher cost of capital and some investors may be shying away because of proposed regulations.

MARK: Right. And finally, what about federal policy? What are you seeing out there at this juncture with respect to federal federal policy?

NICOLLE: Federal policy is really interesting right now because especially when you're building your models, you can play with different investment tax credit assumptions. Right now you can get an investment tax credit anywhere from 6% to 70% on a project 70% is quite impressive for covering the upfront capital cost. That can make a big difference. Making sure your project a lot of times pays prevailing wage is important. For large projects specifically, such as higher labor costs going into your model, so it's going to hurt, but it's worth it for the additional investment tax credit. Also a good one to run scenarios on. Transferability is also another really interesting federal policy development. I like I mentioned, some tax equity providers are shying away because of regulations, higher interest rates, etc., but a lot of corporates are now getting involved in investing in renewables. We can transfer the tax credits rather than structuring a really complex deal. In elective payments, another one, which is a really cool provision from the IRA where If you're an eligible entity, you can just get direct payment from the IRS for the value of your investment tax credit, which is really great and makes things a lot less complex as well.

MARK: Absolutely. Absolutely. That's great. Well, Nicolle, thank you very much for your time here in talking about the stuff. I'm sure that the students really appreciate it. I know I do always great to see successful RESS students out there making their way and enjoying working in the renewable energy space. So thank you and congratulations on your career development since graduating with the degree and look forward to having conversations like this going forward.

NICOLLE: Awesome. Yeah. Thanks so much for having me, and I hope everyone has a great semester.