Herve Billiet (00:00)
Hey everyone, welcome to another episode of What Solar Installers Need To Know. This episode is sponsored by sunvoy.com, your customer portal and solar fleet management tool. We have the pleasure to invite Luk Verdonck. Hey, Luk. Good morning. Luk Verdonck, you're the VP of a commercial at BluePath Finance. They fund, own, and operate commercial and community solar projects across the UK. Luk, you've been for 20 years in energy on both sides of the Atlantic. You have an MBA from Oxford,

Luk (00:11)
Good morning, Herve.

Herve Billiet (00:26)
and he's the guy on the other side of the table deciding whether to put his firm's money behind your project. Luk, welcome to the show.

Luk (00:33)
Thank you for having me.

Herve Billiet (00:34)
Well, my first question, Luk, is about the origin of how you got into solar. So tell me the story of how you ended up in solar. What was the moment you knew this was where you wanted to be?

Luk (00:45)
I've been in the energy industry since about 2006, started working for a US merchant generator. And then for a long period of time from 2009 until 2017, I lived in Germany and worked for E.ON, one of the leading European energy companies, worked in corporate developments and covered everything as far as generation types go from thermal to nuclear, from hydro to renewables. And in that time period, renewables

started growing, the market was in high growth mode, as we should say. And I saw renewable prices or cost of installation decline year over year. And then I realized at some point that I needed to join the bandwagon.

Herve Billiet (01:22)
Smart move, I think. Well, walk us through exactly where BluePath enters a project. Are you co-developing from the start, buying an NTP, maybe acquiring fully built assets, or all of the above? Tell us more about that.

Luk (01:34)
We are project investors and we are also the long-term owners of these assets. We buy projects that are developed, so they're at what we call full NTP or mobilization. Sometimes they may be a little bit ahead of mobilization, but in any case, late stage developments. And then we'll fund the construction of those projects. And once they're turned into assets, they reach COD and they're operating, then we put them in our portfolio and we own and operate those for the long-term.

While we're not involved in development financing, we're very much involved in providing the funds such that the systems get built and then we continue to operate on the systems in the long term.

Herve Billiet (02:08)
That means that you work with lot of installers. So what does a solar installer or solar project have to look like for BluePath to get involved and say yes? What is the deal, or maybe on the opposite, like what would kill a deal instantly?

Luk (02:20)
Yeah.

Well, it's a two pronged question. First, with respect to a solar project, what's important for a third party investor is a number of critical development items that have been completed. The first is the site control. There needs to be a lease license easement, whatever the case may be, to establish the access to the site or real property interest. Second is you need interconnection. You need to know that you'll be able to either connect to an off-taker, a host, a building owner,

as the case or into the distribution network if it's a virtual net metered system. Other thing is you need to have an offtake agreements. You need to know where you're able to sell the power and that could be a PPA or it could be a participation in a community solar or similar program. And then also you need an EPC who's going to build the product. So obviously, those four things are really critical. And then from there on, we can evaluate the project and whether it fits within our...

our criteria for investments. And on the second part of the question with respect to the solar installer, we do work very closely with installers and EPCs across the country. We have a dozen or so that we've worked with over the past several years that we've really enjoyed working with. And we obviously evaluate those groups very closely because they are the ones building the systems that we are going to have in our portfolio for the long haul.

Not unimportant is that we know they'll be able to carry the project through to the construction. So we look at their financial stability, whether they have some level of bonding capacity as many products that we fund do require bonding. We also care obviously very much about the quality of their work. So we do pay very close attention to what we've seen in the market in terms of their installation quality and obviously

you know, work with repeat EPCs where we've gotten to know EPCs through the products that they've constructed for us. And then also not unimportantly, and maybe not as obvious as very important for us is that those EPCs have an ability to communicate to us exactly what's going on on site. We're not there every day, ⁓ even if we show up sometimes and kick the tires, but people that can give us good information on the progress on site.

And also our general good project managers. If you're dealing with a CNI customer who is getting a solar PV system installed on the rooftop or behind their building, then you need somebody who's able to manage that process as you have multiple stakeholders involved.

Herve Billiet (04:30)
One piece you didn't mention is relationships. I work with a few developers and once the relationship is strong, you give them projects, they give you projects. Like it's a snowball effect. It just keeps happening, happening. Now you need to make sure you work on that relationship. But

My question is then how is somebody getting the first project in and building up that first trust is key. So do you take on a lot of new EPCs easily or like you stick with the ones you knew when you always work with the same ones or do EPCs approach you constantly to kind of try to get a first project in? Like how difficult is that to get started with a new PC for you?

Luk (05:06)
Well, the first one is always some extra work when you get to know somebody that you have not done business with in the past. So yes, certainly when you're working with a new EPC or developer, that is take some extra attention getting to know people and how they work and obviously them getting to know us and how we work. But also we like to work with people that we worked with in the past because that creates efficiencies and you get comfortable with people that have done work for you previously and certainly that makes things more efficient.

While we have a group of EPCs that we work with on a regular basis and who have successfully built products for us over the years, we are constantly speaking with new EPCs and working with new EPCs on products for sure.

Herve Billiet (05:45)
All right, lot of people in the solar industry that install projects, they work with developers, but from the developer point of view, they don't really know how the developer is funding all of that. Where does that funding come from? So in this specific case, where does BluePads money actually come from? How do you find it, and how does your firm make money at the end of the day?

Luk (06:05)
Yes. Well, we're backed by one of the largest institutional investors in the country and they are our main financial backer. We also have very strong relationships with the large US banks. So those are the people that we work with as far as ensuring that there is capital available for projects. We have a dedicated capital markets team that spends a lot of time and effort on ensuring that ⁓ we have the right capital, whether it's our own money, the tax equity, the debt.

that can be invested into projects. And then, obviously, we deploy that money into the markets, working with our developer and EPC partners to build projects and get them up and running. A long process, obviously, but not unimportant in that not everybody wants to fund their own PV system when they want one for their school district or for their warehouse. So we're there to provide that service to the market.

Herve Billiet (06:52)
So inside BluePath, you have an entire division that continuously looks out for new money, new funds, maintains those relationships maybe, and tries to find the cheapest cost of capital at any moment in time.

Luk (07:04)
We do, you know, there's the principle of division of labor. We have a team that looks after ensuring that the capital is there. We have a group that does origination. We have people that follow what goes on during construction. There's clearly also commercial aspects to all these products. So yes, we have groups within the company to focus on those respective parts to bring together what is effectively the ability to fund projects during construction and then also own them over the long term.

Herve Billiet (07:32)
The reason why I'm talking about this is know several solar CEO's that say like, know what, I'm gonna own some of the projects myself. They some capital and maybe that's already quite impressive to find the first capital, but after that, you need to keep going. You need to have people full time looking for capital. So doing it once, I'm not gonna say it's easy, but that's half of the battle. You still need to continuously find new capital sources.

Luk (07:57)
It certainly is. Project finance is, it's not complex, it's got a lot of moving parts and it takes lot of time and effort. It's very specialized knowledge and so therefore, having people with the requisite experience and relationships in the capital markets is important. And so to be able to provide capital reliably over the course of time, ⁓ it's important to have people that have those requisite skills.

Herve Billiet (08:20)
Now we all learn a lot when things go wrong. So let's speak about something that went wrong. So tell us about a deal or a partnership with an installer or an EPC that went sideways. And what happens? What should other installers take away from it and learn from it?

Luk (08:33)
Yeah, well, we've built over a hundred projects to date and there are always issues, there are always challenges. And the question we ask ourselves is how can we get through it all? And how do we see it through? I have a list of my top 15 reasons for a project not going according to schedule or going according to plan. And what I take away from it is when we're working with a good EPC who's got a constructive attitude, no pun intended.

We get through it. And so it requires a lot of teamwork and understanding what the issues are and being creative in terms of solving issues, whether it's scheduling delays, whether it's issues around procurements, whether it's issues with the off-taker, whether they're contractual issues, it's a question of working with the parties involved and rolling up your sleeves to address the issues. it's the reality of infrastructure.

finance and building infrastructure more generally is that you'll inevitably be confronted with unforeseen circumstances and then it's up to the parties to sort it out and keep it going.

Herve Billiet (09:31)
That's actually my experience too. So working with several developers, some better relationships than others. But I remember one very clear issue where it was one of our early commercial projects. So we didn't have a ton of experience with it. Did the design, the design was reviewed. At the time, we were not confident in our own design skills. We did a lot of residential, but not like larger commercial. So we actually, for the first time, I think also the only time in the company that we paid an outside firm to kind of review the plans and so on.

And there was a problem with the transformer. I think we the wrong one got got put on the design plan I believe and at least got got ordered for sure. It was the wrong one that we ordered And and I like ⁓ shoot we have the wrong one So I remember calling the developer is like, ⁓ yeah. Well, we have the wrong transformer ordered and

The conversation was not easy, but basically ended up like, well, it was clearly like my fault. I should have overseen it, should have caught it. And, and, but in the end it was like, well, let's split it 50 50. And so that is kind of what real relationship is about. Like it was not a developer fault. Uh, we, ordered the wrong one. And then at the same time, it's like, well, 50. So once he did that, I knew I had a bit of a, like, okay, that's very nice. He should, it could have just said like, well, her very, that's your fault. You pay a hundred percent for it.

But then what that did is other places in the project, I did, like I took some more on my costs. It's like, well, he helped me there, I'll help him there. And so you come up with a balance like that. So the interesting part, and I don't know if I'm the unique one in the US doing this, but those commercial projects have very lengthy contracts. A lot of it is stipulated. And then when problems happen, you go back into the contract, like where do you be stipulated? And it's not always the case that

that specific situation was addressed, but then it comes down to negotiate and build long-term relationships because you want the next project to work again together and so on and so on. So there is so much to gain from building relationships. have you seen these similar situations? Is all about relationship building? Like forget about all that. Not forget about like the hundreds of pages of contract, but the contract is a guideline. And then when problems arise, you first try to figure out.

together as a team instead of going straight to the legal aspect. How do you deal with that?

Luk (11:46)
Well, as you pointed out, contracts don't foresee everything that can go wrong or will go wrong on a project. And so it's when you're confronted with an issue, as you indicated, equipment that's installed incorrectly or not delivered on time, or issues with the property that were not uncovered during development that you have to sit together. And you have to rely on the relationships that you've built with the EPC and developer partners and find a way forward.

We expect people to do quality work. We expect them to hear to their obligations under the contract. But when it comes to unforeseen circumstances, then there is some give and take. it is important to be commercially minded about how to address issues and get to a successful closure of the project, then move on to the next one.

Herve Billiet (12:27)
Yeah, I remember also we won some deals from other partners. Developer worked with other installers and the installers kind of couldn't finish or had problems and this is like, well, communication kind of broke down and so we receive more projects like that too. So that was another piece. All right, I have another question for you about smaller installers. There is a push to go and do more CNI projects for some smaller,

residential installers. So the question is like, what do smaller installers or APC get wrong when they try to move into CNI and community solar? Have you seen this before? Can you give us some experience and knowledge about this?

Luk (13:03)
Sure. I'll make a distinction between installers, maybe residential installers that move into the C&I market and are doing cash deals whereby the solar PV system is being purchased outright by the off-taker. That on the one hand, and then on the other hand, third party owned systems such as the ones that we're financing. On the former, the process is a little bit simpler. It's simply that the

product is a little larger. So you're installing a commercial industrial or a system for a commercial industrial customer as opposed to for residential off-taker. And so it's effectively, you know, a more extensive design, more modules, more orders, more equipment and so forth, longer timeline. That's not so different. When it comes to third party finance systems, where we bring the capital, there are more requirements with respect to the communication of what's going on on the project and also documentation.

And the way I like to describe this is the financier and the people that we work with are not anywhere close to the product often. We're sometimes a thousand miles away, 2,000 miles away somewhere in an office building. And so we don't have as good a view on what goes on on the site as the EPC does. And therefore we do require documentation for things that may be self-explanatory or may be obvious to the EPC. And so we do want very detailed engineering drawings and we want to have the structural calculations

that go with those drawings. We want regular or need regular updates on what goes on during construction. And then we do care a lot about the quality of the commission documents. And that's not because we don't believe that the EPC can't do good work, but that's because when we're financing these products, we need to have the documentation that gives us comfort that it's all properly documented so that we can go back and review and make sure that everything is in good order. So that documentation is critically important.

Effectively the administrative portion of installing a system. It takes time. It takes effort and to do it accurately Requires that you have people that are willing to sit down and make sure that documentation is in good order That's that's sometimes difficult for some EPCs where they need people that have the wherewithal to To make sure that the documentation is is exactly right ⁓ such that you know, we're comfortable in providing the financing so biggest issue

we see is delivering the documentation on a regular basis and ensuring that we're well informed. And the better the documentation, the better the project management, then the easier it is for us to finance the projects.

Herve Billiet (15:12)
Makes sense, makes sense. I just bought a community solar. So is community solar still growing in the US and you think some regional installers should get more in touch and trying to do more community solar or is it plateauing these days?

Luk (15:26)
It is still a growing market and it is still an opportunity for folks. Hard to tell what the future will bring, but we've certainly seen a lot of community solar products in the last 12 months and I foresee that we'll need to see more in the near future. So yes, certainly a market that your installers and EPCs should continue to look at.

Herve Billiet (15:43)
All right, I have one more question about red flags. So from your vantage point as a financier, what customer project profile makes you nervous? What does that mean for an installer before you even sign a contract with them?

Luk (15:55)
On the CNI front, one of the more difficult things is funding the smaller CNI projects, practically speaking systems that maybe are sized to 500 kilowatts or smaller, and there may be for a smaller business. And look, the business may be very profitable, it may be well run. It's more difficult for a financier to get comfortable with the small credits, non-listed or non-publicly traded entity. Hard for a financier to know.

whether that business will be around in 20 or 30 years. And we're installing systems that have a useful life of 30 years plus or minus. And that's not always easy for financiers is getting comfortable with the smaller credits, even if they are strong. Larger credits are obviously easier when you're dealing with larger listed companies or large private companies that have a diversified business, have multiple locations, have a balance sheet that's strong.

that makes it easier to make an evaluation of the company's finances over the long period of time and have comfort that the PV system will be there for the long term in terms of its operations and that the off-taker will be your customer for the long haul.

Herve Billiet (16:51)
We're all talking about it along the hall. So BluePath, you guys have your own asset management team in-house. You track and manage asset performance. So tell us a bit more about the data that you see on those larger C &I and community server projects. What can you tell us about how they are performing?

Luk (17:06)
The data does very much show the quality of installation and what goes on on the site day to day in terms of the ongoing maintenance of the systems. We see it in production numbers, whether a system has been well built or whether there were a few shortcomings. We see it also in terms of the corrective maintenance in terms of what needs to be fixed or what's running well in terms of systems. I'd say,

maybe not a good enough understanding in the market of how important it is to build systems right first time. It's very expensive to do remedial work once a system has been built and it's operating. Everyone assumes corrective maintenance, but no one assumes extensive remedial work when it comes to modeling the finances of a project. And it means that on the construction side, even the small things are really important. Cable management, using even the right zip ties,

Those are all small, that's a small detail, but it does matter in terms of longevity. Sure.

Herve Billiet (17:55)
Can you be more specific about that? Maybe you have a list of 15 or

listening, can you be more specific about when you say installing the right way? What does that mean?

Luk (18:04)
Well, for example, if you're going to do proper cable management, then installing zip ties that are large enough to withstand the test of time. And undersizing the zip ties means that your cable management might need to be redone in year three instead of year 15 or year 20. You have to pay particular attention to making sure that your systems are torqued properly or that your MC4 connectors are properly put together in the field. All these small things that you don't want to see fall apart after three years or five years are really important in terms of

of the installation and ensuring that you're doing quality work while the contractor or subcontractor is on site to do that work.

Herve Billiet (18:37)
Do you guys maybe not many thousands of miles away, but do you track how items are stored on site? I mean, if you bring panels, you put them on the wrong side, it rains, there's potential humidity that can get on the panels and the junction box. Do you go as far as requiring a lot more details about how things are handled even before the project starts?

Luk (18:58)
We do, we do, and it is important. And while it may not seem important sometimes to contractors, doing something such as leaving modules outside for extended period of time does have an impact on the quality of those modules. And some module types are less robust than others. And we do address these issues directly with the EPC contractors as far as how they're handling modules, where they're being stored and ensuring that this equipment is not damaged from the time that

that leaves the warehouse to the time that it gets installed on the racking. Those are all seemingly small details, but they do add up over time in terms of ensuring that we have a quality system that's going to stand the test of time.

Herve Billiet (19:34)
Do you require special certifications when you hire a team or company? You may have a mass electrician. That doesn't mean it's that guy on site that's going to do work. So do you require a ratio or do you require certain people to do certain tasks instead of like the company is free to do the task by anybody and leave that up to the company? Or do you have some requirements there?

Luk (19:54)
We typically don't. The EPC contractors that we work with are generally larger contractors with experience in the field. And so we don't get as granular as require them to employ certain types of people as we know that they have the requisite experience to build those larger systems. And most of the systems that we build are one to five megawatts, 10 megawatts. And typically in that market, the contractors do have, let's call it the requisite staff to ensure that the systems are being installed by people with the proper qualifications.

Herve Billiet (20:21)
Mm-hmm. And one of the last events when I saw you, we spoke about the capital that you bring. And you told me that you bring different types of capital to projects. So where does that create friction, and where does it actually make the industry better?

Luk (20:35)
I'd say in third party finance deals, there's more scrutiny rather than in cash finance deals because there is an investor or there's a lender and there may be independent advisors that are advising those investors, those lenders. And so there's more eyes looking at projects in terms of the design, in terms of what's going on during construction, commissioning and so forth. And that does drive quality and ensuring that systems are being designed and built properly.

And in that sense, the third-party capital being invested into markets does ensure that systems are being built properly. It does bring with it additional documentation requirements, as we discussed earlier. It does mean that there are more requests for information with respect to how the product is being managed, how things are going during construction.

We do require regular updates as far as what's going on on site and site progress. When an EPC contractor wants to get paid against the milestone under the EPC contract, then we'll need to see that that milestone has been achieved. And that's in the form of pictures. It's in the form of other documentation. We will go on the site at times, or maybe we'll have our technical advisors go on site and review the project's progress. All those things are additional work and effort for the EPC.

but it also ensures that the financier is comfortable with the project as it gets constructed. And so therefore, in our view, it plays a positive role in terms of the overall quality of the system.

Herve Billiet (21:57)
You mentioned milestone payments. Anytime you work with a new developer, like you read over the lengthy contract, but the first thing I looked at, or at least one of the first things is milestone payments. How are they paying? And that's kind of like, of an entire contract, a lot of it's kind of boilerplate anyway. It's like, yeah, we are supposed to install a good quality work and inform the developers and all the third parties involved. But that milestone payment was so critical to get paid.

before you put boots on the ground or at the moment that you deploy when you have to store material ahead of time. Like make sure those milestones, that was the one thing I kept negotiating on because if that can hurt you really bad as a, I we were a smaller installer so, do you see that's the one thing that gets negotiated again and again or is it like, that's it?

Luk (22:47)
it's always negotiated and maybe less so with the repeat EPCs that we work with where we've done many, projects and where we now have an EPC contract that is relatively well established. But it's understandable that it's critical for an EPC because you do need to get funds to pay subcontractors to pay for procurement of equipment and so forth.

Our job is to provide funding during construction. we want to be able to lay out dollars to help those EPCs meet their financial obligations. But at the same time, we also want to be sure that when we are laying out those dollars, that the product progress is reflected in the documentation. So we do spend a lot of time on the milestones during EPC contract negotiation. And we strive to be reasonable.

We understand that we're there to provide the funding, that the EPC contractor is not meant to use their working capital to carry the products through construction. So we want to provide that funding. It's all a question of lighting the numbers up with the practical realities of when the money is needed at what parts of the construction cycle.

Herve Billiet (23:51)
That makes me think about one idea I failed to implement. We had several developers and they said like, well, Hervè, do you have some projects that we can fund? And several times I try like, could you pay us for the marketing? Not just the marketing, but we could hire salespeople to go find projects. So I have more projects to give you.

And I try with several developers and we never succeed or find it because then as soon as it's like, well, it's kind of your job to go find them. It's like, yeah, but that means I need to invest, make a pure investment to then give them a project. And so I tried several times to find a form of agreement. Like, yeah, you give us funds. We're not going to use those funds for something else. They are dedicated to finding you more projects in a certain area and so on. We tried a few times and never succeeded. Is that?

I mean, you also mentioned that you don't fund project development, but do you know of other firms funding that kind of relationship and even fund marketing dollars or fund directly specific salespeople to go out and fund projects in specific area? Did that try something that nobody is doing or is that ⁓ a more common realistic place for other developers?

Luk (24:59)
There is a large market for development capital and there are firms in the market who are providing funds for origination and development of projects. What I'd say is that development capital is fundamentally different from construction capital and that capital that's invested in systems over the long term. The risk profile is different. You're funding different, obviously it's funding something different. Whereas when you're...

funding a developer, then you're effectively funding overhead. When you're funding construction, then you're funding the construction of assets. And at some point, that funding or that lending to a project or the overall lending of the project will be the collateral to what is effectively an asset in the ground. So it's a different market altogether as far as development capital goes. And it's a market that we do not play in because...

we're focused on those things that we're good at, which is deploying capital into projects.

Herve Billiet (25:52)
Yeah, always using projects, like you said, different risk. Last question for this podcast about AI. We see more more AI being used in companies,

requiring more energy to be installed for them. So tell us more about how you serve on that AI wave.

Luk (26:08)
We are knee deep into AI at this point. We're doing a lot within the organization to implement the tools that are available. We're, I believe, collectively speaking, as an industry in the early stages of the implementation of AI. And we'll see how things go over the long term. But we're certain that it's going to play an important role, not only in our business, but also in the industry in general.

I'd say it's little too early to tell exactly how things will evolve, but there's no doubt in our mind that it'll make us and the industry generally much more efficient over time as we work with the tools that are being developed today.

Herve Billiet (26:47)
thank you very much, VP of Commercial and BluePath Finance. It's been a pleasure to have you on the podcast, Luk.

Luk (26:53)
Thank you, greatly enjoyed it. Bye.

Herve Billiet (26:54)
Thank you.