In just three years, Cypress Creek Renewables has gone from nonexistent to managing a 1-gigawatt solar portfolio, with a total of 4 gigawatts currently deployed or in development. The Santa Monica-based company is now the second-largest utility-scale solar developer in the U.S., behind only First Solar.
That impressive growth was achieved by taking a highly disciplined approach to project development and market expansion. It’s an approach CEO Matt McGovern believes is prepared to withstand changes in the solar marketplace, including the step-down of the federal Investment Tax Credit (ITC).
“Our average fixed-tilt system we're installing today is, give or take, in the sub-dollar range [per watt]. With trackers, you're a little bit above,” he said, speaking at a recent UCLA Anderson School of Management event in Los Angeles. “My prediction-slash-hope is that by the time the ITC starts to step down in 2020, we'll be sub-75 cents.”
The 30 percent solar tax credit is currently scheduled to drop to 26 percent in 2020, to 22 percent in 2021 and to remain at 10 percent from 2022 and beyond for commercial and utility-scale projects. “If we're going to lose 10 percent or more as our ITC steps down, then I have to be able to show that [my cost savings are] more than 10 percent…and I think it's there,” said McGovern. “I think it's happening.”
In June 2015, Jim Hughes, then-CEO of First Solar, said that his company would be “under $1.00 per watt fully installed on a tracker in the western United States” by 2017. Hughes’ ambitious projection has proved more or less accurate. According to GTM Research, average EPC pricing for utility-scale fixed-tilt PV systems in the U.S. recently hit the $1.00-per-watt mark, and is expected to be around 95 cents per watt in the second half of this year and around 80 cents per watt by 2020. Tracker systems will come in a little higher at an average of $1.08 per watt in the second half of 2017.
If McGovern’s hope comes true, that will put Cypress Creek on the leading edge of the cost-cutting quest. Getting costs below 80 cents won't necessarily be a windfall, but it will provide some assurance the company can weather the incentive cuts.
McGovern added that pure cost reductions aren’t the only thing that matter in a declining ITC world. There’s a middle piece, which is: What is the PPA rate a utility is going to offer? “It’s not clean math,” he said, because different utilities in different locations have different resource mixes and unique ways of calculating avoided cost, which affects whether or not solar makes financial sense.
“There certainly is a connection between the ITC and what that value of energy's going to be,” he said. “But more importantly, between now and 2020 when we see our initial step-down, is how much daytime energy is being created and what's that worth. [That] is going to drive what the pricing is.”
Why solar developers need to lead on energy storage
Managing the ITC step-down is only part of what McGovern thinks solar companies need to do in order to be competitive in the coming years. Going forward, energy storage will be another key piece of the value puzzle, he said.
“This is, I think, the hardest question for those of us who have always been pure cleantech, or pure solar, to grapple with,” he said. “It's this moment of honest reflection that we bring an intermittent resource to the grid. Is there an upper limit to the amount of solar and penetration you have? Absolutely.”
“However, if we can get smart enough around this move into coupling storage, it's a really different analysis,” he added.
The duck curve is a real thing, so if solar companies can’t move closer to becoming dispatchable power, they’ll be in an endless search for new markets, in McGovern’s view. But if solar companies can cross the chasm and become a more stable delivery option, by allowing utilities, homes, or commercial customers to load shift and manage consumption when it’s beneficial to the rest of the grid, that completely changes the conversation.
As for who should spearhead this solar-plus-storage solution, McGovern put that responsibility squarely on the solar developers.
“I think it's a self-preservation question,” he said. “If we sit back as an industry, and we say, ‘No, it's up to the utilities, or it's up to the grid operators,’ we're not going to like the [outcome]. I think the opportunity is for us to be thinking a little ahead, understand the pain of the utilities, and actually come forward with solutions.”
To that end, Cypress Creek is preparing to deploy its first 6 megawatts of energy storage later this year for a municipal utility in North Carolina. The company has up to 50 megawatts of additional energy storage deployments also in the works.
McGovern admitted it’s early days for the storage market, and so the use cases and financing processes aren't entirely clear. The tax treatment, for instance, is murky. The industry has two private letter rulings from the Internal Revenue Service on how to set up energy storage deals, “but at the end of the day, somebody's just got to do it,” McGovern said.
By taking a leadership role, he believes Cypress Creek will gain the real-world data and expertise needed to get more financiers and utilities on board with energy storage projects in future.
“We're having to put significantly more equity into this initial portfolio, because it's just hard,” he said. “I think that's why I say the ownership sits with us [the solar developers], if we want to ensure the highest probability of a good outcome.”
“We have to be truly humble and honest about what we know how to do”
McGovern places a high value on predictability — he wants to understand a market inside and out, and find ways to systematize and streamline how his company operates within that market’s parameters. That’s at least how Cypress Creek has been approaching the utility-scale solar market to date.
When McGovern set out to launch Cypress Creek, no other developer was offering the type of integrated business model he had in mind, he said. One of Cypress Creek’s defining features is that it has the finance, development, EPC, sales, asset management and O&M pieces of the business all in-house, with the flexibility to partner externally.
Controlling development “enables predictability, which is actually this unbelievable resource for the rest of the stakeholders in the chain — the utilities, the financiers, the local communities too,” McGovern said. The consolidated model not only appeals to customers, but it also creates a cost decline cycle because Cypress Creek has insight into nearly every aspect of the business.
At present, however, McGovern doesn’t see much value in becoming a true vertically integrated company, with 100 percent of the business functions in-house. “We have to be truly humble and honest about what we know how to do, and what we don't know how to do,” he said.
“For example, I can't ever imagine a scenario where it would make sense for us to vertically integrate technology. We get such a benefit out of being agnostic,” he added.
On the development side, Cypress Creek often partners with local contractors on permitting and construction, while maintaining oversight. “It’s a local relationship that makes that stuff actually get over the finish line,” McGovern said. “I want to leverage that, not try and cannibalize that.”
The science and the art of developing 4 gigawatts of solar
What Cypress Creek has become really good at is aggregating portfolios of projects that all look and feel the same, said McGovern. This approach minimizes the due diligence a tax equity investor or lender has to do, because every lease agreement is the same.
It also streamlines Cypress Creek’s internal processes and guides which markets the company enters; the company only goes after markets where it’s possible to standardize the procedure and reach scale. “We wouldn't step into a market where we could only get one, two, three projects that are 3 or 4 megawatts in size,” McGovern said.
New York is a great example of a market that does make sense, in his view. “We have 1,400 sites in New York and they're only 2-megawatt AC interconnects, but the fact that we could step in and aggregate that at scale means that I will systematize…my development process, my interconnect and my build to make that work,” he said.
Cypress Creek is now taking this approach to the community solar market to serve retail electricity customers in Texas. Again, Cypress is looking to deploy a critical mass of solar projects to serve the market’s needs. The difference is that this time the company is also finding retail customers to offtake the energy. After launching the company with a focus on PURPA markets in North Carolina, South Carolina, Oregon and Montana, Cypress Creek is now becoming a residential solar company almost by accident.
“It’s funny — we are now de facto active community solar developers and operators,” McGovern said. “I think community solar is a huge part of the renewable energy future, for so many reasons.”
On the other end of the spectrum, Cypress Creek is going after markets where utilities are looking for transmission system projects. The company has four projects operating today that are between 50 and 100 megawatts AC, and will probably have another 15 or 20 of those projects to install between now and 2020, McGovern said.
These new developments come as the company fights back against proposed policy reforms in North Carolina — Cypress' most established market — that would shorten contract terms offered under PURPA. The solar industry argues the changes would make it impossible to finance projects.
Cypress Creek is currently operational in eight markets and developing in 20, with 4 gigawatts of solar under site control. If process and procedure constitute the science driving that expansion, the art of it is finding talented people to work with, McGovern said. “It's my job, on any given day, to make sure we can attract those people.”
All of these components factor in to McGovern’s broader view of Cypress Creek’s role in the solar market. “I think our fundamental job, and what has us motivated every day, is that we have to be able to deliver energy to consumers more cheaply and more reliably than other developments,” he said. “Whether that's other renewable developers, or developers of other energy classes — even fossil fuels — we have to be able to do it cheaper — and better.”
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