Renewable energy sources, such as wind, solar and hydroelectric, currently supply about a quarter of the electricity generated by the power sector. The industry has been growing fast, increasing its electricity generating capacity at about 8% annually over the last decade. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Mike Silvestrini, co-founder and managing partner of Energea, a renewable project developer and retail investment platform that’s focused on emerging and frontier markets. Tune in to discover how you can earn cash while offsetting your footprint.
In this episode, you will learn:
- The benefits of renewable energy, specifically solar energy.
- How renewable energy projects work.
- How to invest and participate in renewable energy.
- And more!
Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.
Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Joining us today is Mike Silvestrini, co-founder and managing partner of Energea, a renewable project developer and retail investment platform that’s focused on emerging and frontier markets. Mike took his first company — GreenSkies Renewable Energy — to nearly half a billion dollar valuation before selling it. He’s now focused on connecting investors to renewable energy projects and developing renewable energy around the world. Mike, welcome to the show.
Hey Marc. Thanks for having me, appreciate it.
I think there’s a lot of momentum around renewable energy right now, especially in the investing space. One, there’s the trend of renewable energy and the popularity of that alone. Second, people are more so liking the mission and cause of renewable energy. They want to feel a part of what they may consider good. How’d you get involved in this space?
Mike Silvestrini’s Path to Co-Founding Energea
I started a company in 2007, called GreenSkies. It was fairly early in renewable energy, especially on the East Coast of the U.S. There were a few solar installations, but they had very new technology.
GreenSkies Renewable Energy was part of a whole host of businesses that began around that time, all of which were figuring out how solar energy was going to be deployed in our country. Creating new legal and financial technology enabled us to develop and install solar projects that got bigger and bigger as the businesses matured.
It was really fun to be a part of those early pioneering enterprises. They brought solar to the market. My partners and I sold that company in 2017. Since then, I started a new company called Energea which is for investing in renewable energy.
My family has done pretty well in solar. We built a great business by selecting projects and parking our capital in ones we felt had great long-term value. We kept doing that — it was snowballing — and that’s really been the baseline of our family financial strategy.
So we wanted to share that strategy with more people. This asset class is so important. Like you said, there’s people looking to invest in renewable energy, but it’s fairly complex to get into the weeds of a particular solar project. We wanted to take a complex asset class, make it simple and share it with more people.
“We wanted to take a complex asset class, make it simple and share it with more people.”Mike Silvestrini
What Is Renewable Energy?
You mentioned solar energy a couple of times. Is that the main, or the only type, of renewable energy? Because I’ve also heard of wind and ocean energy. What other sources are out there?
There’s a broad array of renewable energy technologies. Geothermal is an awesome technology, but it only works in certain places — places that have volcanic activity near the surface of the earth, like Iceland. Wind works great in windy places, such as the Midwestern United States.
We’re finding that there is a lot of growth potential for wind energy offshore. You’re from New Jersey, Marc, so I’m sure you’ve heard about the massive offshore wind projects that people are developing.
The Benefits of Solar Energy
At Energea, we specialize in solar energy, and the majority of my background has been in Solar. We have done our fair share of hydro projects, so we’re not exclusively solar, and we would consider any technology to invest in. However we feel that the money is good in solar.
Wind projects, by necessity really, are huge. I’m talking about multi-million dollar projects. That’s great for large institutional investors, like The Goldman Sachs of the world. But it’s harder for those big guys to navigate smaller scale projects, such as those in solar.
There’s a lot of rooftop solar, which is what we call community solar. Those projects vary between $1 million and $10 million a project. That is a particularly challenging price tag for large institutional investors, which leaves a space available to us and our customers.
Can you walk us through the process, from the company that does the project to how an investor gets involved? Are these projects finite or do they go on perpetuity, in terms of the investor’s involvement?
The Process of Selecting a Project to Invest In
There are so many projects out there, that they’re essentially infinite. Solar is in every market right now. We buy the projects with the intention of holding it. We may sell the project at some point during the project’s life cycle. In fact, many of our customers already know that we flipped four to five solar projects this year. But we model this out when we represent our intentions to our investors. We show the most conservative strategy, which is a long-term holding position. We’re opportunistic about selling projects when those opportunities do arise.
There is a huge volume of projects, and it’s our job to select where we want to put capital. We believe that a great solar portfolio is a diverse solar portfolio. So while all of them may be different solar projects — and in some cases, hydro projects — they all have different characteristics, policy, currency, technology, etc.
Who is the initiator of the project?
They come from all shapes and sizes. Sometimes it’s a customer who’s pursuing an energy product, and they have a request for proposals from solar developers. Sometimes it’s a solar developer selling discounted solar electricity.
We’re experienced in this industry, so we know a lot of the participants. When a project is looking for capital for finance, we get called into the picture to bring the project to life.
And how are you providing capital? Is it a check, loan or equity?
It’s equity — we own the thing.
Are you involved in the development process?
The earlier you get involved in a project, two things happen:
- Your returns go up, because you’re taking on early stage risk.
- You’re more useful to the development of the project.
So we’re kind of down the middle. Because several members of our team come from careers of developing projects, we know how to do it. We bring those experiences to our investment strategy and sometimes we’ll get involved with the project before it’s constructed, assisting with contracting and selection of equipment.
That’s nice, because we get to instruct the developer on what types of contracts we’re looking for, and what types of equipment we want to invest in. The earlier we get in, the more say we have in the final product.
Like I said, our business is really directing capital, not developing projects. So if we can find a mature project that’s either operational or ready to build, that’s even better.
What goes into your due diligence to decide whether or not to invest in a specific project?
What’s nice about solar is we’ve built solar projects in Europe, Africa, Latin America, The United States and Asia. That’s pretty much everywhere in the world. They’re all fairly similar in the fundamentals that determine a good deal or a bad deal. We want to understand: How does the project work? Is there a bunch of solar panels on a rooftop? Are solar panels being used as a community solar product? Or, are we selling the power to the utility company?
What is the deal? Is it a hydro project? Who’s the off taker? Really the most important part of a solar project is collecting that monthly revenue. If we’re going to make power, there’s a customer agreeing to buy the power at a fixed rate for a long period of time. The credibility of the customer is important. Who’s buying the power? What’s their ability to make payments?
My first company grew on the tails of Walmart, Target and Amazon. Those were our three biggest customers. With Energea, we do a lot of business with telecommunications companies, large pharmacies and multinational companies. We also do business with water companies, because they have staying power.
Next, we get into an analysis of how the project is going to work. Are there exposures we’re taking on to ensure that the project works?
Then we look at things like: Who’s building it? How confident are we that the plant will produce the projected output?
In summary, Energea considers:
- How the project works.
- The logistics of the deal.
- The purchaser of the power, including their credibility and staying power.
- How the project will work.
- Whose building the project.
- Confidence in output success.
Then there’s a whole legal gaggle of items we need to check as well.
So we bundle up all of these variables and basically look at it through three lenses:
- The legal construct,
- The deal analytics.
- The financial analytics.
How do the projects vary from country to country?
How Renewable Energy Projects Vary From Country to Country
They’re so different. The United States has a super adulterated market, where you’re paying a tariff on the solar panels when they arrive on port, and then get a tax credit for installing the projects. It’s a very bizarre environment. It takes quite a few lawyers and accountants to get through a project in the U.S., that’s the way America likes to do business.
Whereas it’s much different in Brazil, for example. We buy a project for $1 million and it generates $120,000 a year. That’s it, super simple.
In Africa, we’re competing against diesel generators, so we have to use a lot of solar plus batteries to provide a customer consistent access to electricity. That’s what they’re in the market for. They don’t really care as much about discounts of electricity, they care about having electricity on a consistent basis.
It’s really different flavors for different places.
So what does a project look like for an investor on your platform? Do they invest in singular projects, or is it a fund structure?
How to Invest in Renewable Energy Projects on Energea’s Platform
We have multiple funds and we suggest to our investors to mix together across them to get diversification. Each fund is specific to a singular investment thesis, which we bring to the SCC for approval.
Let’s say, for example, our investment thesis is that community solar in Brazil is going to be extremely lucrative and grow really fast. So we create a fund, and open an office in Rio. Our investors can select to be participants in that.
Some investors don’t like the foreign currency exchange rate, or they don’t like Brazil for some other reason, or they want to invest in stuff that’s more impactful. So they might select the Africa market. And some of them say, “You know what? I don’t like either of those. I want to invest at a much smaller return, but lower risk, in United States-based projects.”
You can pick and choose the level of risk and return that is appropriate for your portfolio.
But the product is designed for investors to have a taste of many projects, creating a portfolio of portfolios, which they can see through great user experience on the platform. We hope we’ve done a great job of explaining how the projects work, where they are, who they affect, who the customers are and why we think they make great investments.
You mentioned that some investors might want more or less risk. Looking at your platform, I saw one project with a projected return of 14%, and another one had a projected return of 6-8%. At first glance, I thought, ‘Why would anyone take the 6% over the 14%?’ But I’m sure there’s something behind that. If you’re going to get a higher return, there’s probably more risk.
How does the investor determine the amount of risk?
We have investors that range from climate deniers with an extraordinarily deep sense of due diligence, to people who are just looking to invest in a cool product — maybe they want to participate in climate change mitigation, and they think it’s a logical place to pluck some capital. Some of those people don’t spend a ton of time digging under the covers.
But you can read our SCC filings on our website. We include the memos that we draft for these projects. So every investor is able to understand what each asset looks like.
We’re always available to answer questions about how these projects work. We want people to understand what they’re investing in. We really do.
Over the next few years, we are going to see trillions of dollars transition towards this asset class. It serves a purpose in every portfolio — it’s complimentary to stocks and bonds, and even to real estate as an alternative asset class. We think it’s going to be great. So we’re just trying to make it simpler for people to engage, because until now it’s been a tricky place.
Sure. You mentioned that the main purpose of the investment is a long-term revenue source. How does the money get back to the investor? Are they paid divide nds? And do they have options of what they can do with the money? Is there a concept of reinvesting?
How An Investor Gets Paid
This is a relatively illiquid investment, which some investors don’t like. I don’t know about you, but whenever I try to dabble in any other asset class, I’m my own worst enemy and sometimes I wish it was a little less liquid. In owning solar, you really do own a solar power plant. It’s equity. It’s the real deal. But it’s not particularly liquid.
We ask that our investors hold their positions for three years and then they can sell. So they’re buying a three year bus ticket on the dividends train. At the end of that three year period, they can decide to sell that position, or keep on collecting dividends. The best way to create a lot of wealth through this asset class, like any fixed income asset class, is to auto reinvest the dividends.
We make that pretty easy. You can select a certain amount of money to receive as dividends each month, then you use those dividends to buy more stock until you’re ready to retire. This really is a retirement strategy. It’s long range, financial planning.
Okay. So at some point, the company is valuing what a share is worth in the fund?
Yes. For Energea, the share price is an equalization method, because we have a portfolio that’s going to change over time. It changes for a number of different reasons, such as the contracts getting older. The value of a solar plant is how much revenue is left in that initial contract. As we burn through that contract, it’s akin to depreciate. The solar plant is worth less and less. Meanwhile, we are adding projects. So we get a brand new slate of equity when we drop in another multimillion dollar solar energy asset into that same portfolio.
And then, of course, time value of money, some investors get in earlier than others. In order to make sure that all investors in the Brazilian portfolio, for example, are going to get a 14-16% return, we use the share price to equalize investors. That way, if you come in next year and I came in this year, we’re going to get the same return on investment for as long as we’re receiving dividends.
Then, when we sell, we’re going to sell our shares at the then applicable price.
Makes sense. After a certain amount of time, does the solar infrastructure need to be replaced? Or does it last for a long period of time?
There is a boatload of money in the back end of a solar energy project that financiers and members of the industry right now call zero. It’s not zero. Why the heck would we just unplug a perfectly functioning, mega watt power plant? I don’t think that’s a likely scenario at the end of the contract. Right now, we call it zero.
Is it similar or not similar to an oil exploration, where once an oil well is done—
Yeah. Have you ever had a solar plant that’s still functioning? Can an investor take advantage of this?
Most of the time, customers can buy the plant at the time that they extend the contract, which most customers do. I’ve been at this since 2007, so I don’t have plants that are 20+ years old, but I certainly have plants that are more than 10 years old. In those cases, in the old days, we used to contract these things for shorter terms. We were doing 10 year deals, so I have seen a couple contracts get to the end of their initial term and be extended by the customer.
Now think about it like this: As owners of these plants, we’ve called all the remaining revenue. If there is to be any zero and we are still sitting on this asset fully amortized, we’ve gotten all of our money back. We’re happy. So, we’ll pretty much take any rate to continue creating electricity because it’s found money.
That said, I find it hard to imagine. We won’t be able to strike a deal with that customer to continue providing them energy services or alternatively, they can go back to the conventional grid and pay whatever the price is at that point in time. But I think we can beat that. So again, we call it zero. You got to be fiscally conservative here, but it’s anything to zero.
I know you mentioned the tax credits in the U.S. That’s often a question I get, “Are there any tax benefits to investing?” I’m sure they change, but do some countries have better tax benefits than others for this kind of project?
Are There Tax Benefits for Investing in Renewable Energy?
Solar is technology that people want to see more of, so governments are inclined to incentivize them. Sometimes they do a lousy job at it, sometimes they do it well. Oftentimes, they use the tax code to encourage the deployment of more renewable energy for better, for worse. The problem with that is that not everybody has a real sophisticated understanding of their tax personality.
These can be fairly complex things. If you’re a passive investor in a solar power plant, for example, and you get a tax credit from owning that solar power plant, you can only apply that tax credit to passive income. Now that may not be too complex for people who really know investments, but not everybody does. We have investors that range from teachers to sophisticated financial analysts, and we need to be able to sell a product that is simple enough for anyone to use.
So we take all of the tax attributes that are granted to us through the investments of renewables and keep them within the portfolios.
How transparent are these projects? One of the things I hear investors hate the most is when they have no idea what’s going on. Do you provide transparency? And what’s the user experience like?
That’s the whole purpose of this platform, to bend over backwards and see new levels of transparency. That’s what we’re really trying to accomplish at the business. And that comes in a bunch of different formats. There are a lot of clickable features on the Energea dashboard, which is what we call tool tips, that explain what variables are what, why we calculate them and where they come from.
Ultimately, this is all real-time stuff. So let’s say you’re an investor across all three portfolios: You have some Africa, Brazil and the U.S. investments. You’re helping generate electricity for three different things.
Right now, on the dashboard, you can see that the only thing that stands between you and dividends is the operating expenses of the projects themselves. This includes insurance costs, rent price of land, bank/accounting fees, etc.
With those dividends, you can choose to auto reinvest or buy a Lamborghini. What our investors do with the money is up to them.
What’s next? Do you see things getting bigger on the solar side? Do you see other technologies coming into play?
The Future of Energea
Yeah. I’m down in the Caribbean right now looking into some really exciting project opportunities. Electricity is very expensive in island countries, and we can get a great return on investment for bringing solar here. I could see a portfolio coming from this market. We’re also looking at portfolio projects in Spain. Those would be euro based, so a nice, steadfast OECD type of return and risk profile.
Energea is going to continue adding more portfolios and more investment themes to the marketplace. We’re hoping that our investors are very happy with the product, and feedback so far has been great. We’re hoping that as more investors entertain renewables as part of their portfolio, we can be the brand that retail investors think of when it comes to investing in this type of product.
Great. Well that just about wraps up today’s episode. Mike, thank you for being on the show. You provided some great insight on the benefits of renewable projects, how they work and how investors can participate in them. How best can someone reach out to you or find out more information about Energea?
Energea.com — that’s our platform. If you want to create an account, you can get in touch with one of our account representatives. And if you want to get in touch with me directly, my email is [email protected]. I love to chat with people and answer any questions that people may have. I’m an open book.
Great, we’ll link to all that in the show notes. Thanks again, and thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show. We are currently accepting new clients, if you’d like to schedule a 1-on-1 consultation with our advisors, please do so below.