Financial models get solar projects built. Financial models make deals happen. Financial models make owners, developers, EPCs and investors a lot of money.
So the people who build financial models are valuable. Many people understand financial models from a high level but very few can produce bankable models that close deals. This is what Chris Lord does for a living and it’s what he teaches in his Financial Modeling for Solar PV Projects and Solar Executive MBA courses.
This week I asked Chris to explain the role financial models play in the development of big, lucrative solar projects. You can watch the video above to see what he said, and the transcript is below.
Brian Hayden: Chris can you start by just a quick introduction?
Chris Lord: Sure. I’m Chris Lord. I teach two classes, the Solar MBA and the financial modeling class. My background I was trained as a lawyer and spent most of my career as a lawyer, but working at a financing, a small financing boutique I had to learn to model.
And as a result, I discovered that modeling is an incredibly important tool to understanding any business transaction, but in particular, renewable energy transactions. And that’s how I got started teaching the class of simply because it was a great way for me to learn as I went and over the last 15 or 20 years now I would say my modeling skills have improved dramatically and every day I see the power of.
Brian Hayden: So my job is I talk to a lot of students that take your classes. And I wanted to record this because I think that they don’t often understand how big a deal it is to learn this skill and the analogy I make. I can understand electricity and ohms law, but if I am not an electrician, I can’t earn a living as an electrician.
And I think what you’re teaching people is like a phase change in their career and it helps them level up in a way. it unlocks a whole bunch of opportunities for them. So I just wanted to ask you a couple of questions. One is, can you help illustrate what the ability to do financial modeling has enabled you to do in your career?
Chris Lord: First, let me start with the observation that financial modeling looks intimidating. And it’s not. I’m not, or never was a numbers person before I started modeling. And I have discovered that modeling itself is very simple. And in fact, there’s a premium on keeping the models, simple enough to do the job, but not so complicated that they obscure or the result or increase the likelihood of mistakes.
So I encourage everybody just being able to read and understand how a model works. You may not want them. I may not have the time to model. It’s just understanding how to read and work with a model is a critical skill. And it’s not that hard to mark. Let me start by showing you, or I’m going to share my screen here and show you one of the basic models that we use in pick in the class, and that’s just the basic financial tools that we have here.
And it’s a fairly straightforward thing, but it looks complicated. What we have here is an inputs page and an outputs page, right. And then we have. The actual calculations on these other worksheets. And so the on the dashboard you’ll see that we’re able to pull out and see the results, and this is the power of modeling.
Brian Hayden: People who take your class – what do they do with the skills they learn?
Chris Lord: Well, one thing I will say that this model taught me when I began using it almost a decade ago – and I’ve been updating and improving it ever since – but the immediate thing I saw was the whole PPA price gets people really worked up about what’s the right place to offer the client to produce the return.
But what I learned was that it’s really an important thing to have on a distributed energy project, like a C&I project to have an escalator. Because it allows you to start with a smaller PPA price and you can see that impact of the slow, steady increase, but it assures customers because that lower PPA price makes the project feel more competitive.
So I would say that’s one of the most important things that it taught me, but I also began to understand the better, how the ITC works and the value of the depreciation. And in particular how the construction costs can impact all of the inputs that you put over here, and this model is useful for not just, you know, understanding what the IRR is, but you can experiment with it. For example, you’ve got a PPA price and an escalator here, you can change these, then instantly see the impact on your IRR.
Same thing with lease prices, for example, or, or if you’re going to purchase the site, you can see the immediate impact of the change in price, whether it’s a lease or a purchase on your IRR. So it’s a really powerful tool for figuring out quickly whether a project is economically viable or not.
Brian Hayden: So can you give me examples of ways that you’ve used this in the real world?
Chris Lord: I had a client who was responsible for getting a joint venture negotiated with a large utility. It was a pretty overwhelming task at first. But the idea was that utility was going to acquire five projects from this developer. And they spent several weeks negotiating back and forth on an ever increasingly complex process.
And they had called me in to kind of help them try to a compromise for a reasonable resolution. And so in the particular context of that discussion, I listened to them through an entire call. I was driving a car at the time, so I couldn’t model anything at the end of it. I asked if they modeled it.
They said, well, actually, no, they hadn’t. So when I got home, I built a quick little model, a very simple one, and it demonstrated very quickly that within the multiple scenarios they had. There was only one pricing scenario that worked only one to produce a win for both parties. I showed that to them. They were a little surprised, but we had the agreement within a week of that and executed.
So there was a case where just having some basic modeling skills, nothing complicated, you know, made a large difference.
Brian Hayden: Yeah. I mean, it’s the difference between getting a project built and a deal made and not, and there’s a lot of money in that. Right?
Chris Lord: Agreed. And in fact, in this particular case, both parties made a very, very good bargain.
The developer had five very profitable product. But the utility itself found a they could rate base the projects that achieved the target return in part, because they had I had helped them arrange a tax equity transaction, but you know, enabled to financing.
Brian Hayden: So last question: I know you’ve mentioned that over the years, people who’ve taken your classes have gone on to do interesting, cool stuff.
Without having to name names or companies or anything, can you give me a flavor for what some of those stories are?
Chris Lord: Sure. I will say that for the students who, you know you know, get through the course and then try to apply the skills, they quickly they move much faster up the skill curve, but also it allows them to take on more to students that I’ve had that come to mind right away.
We’re one of them went off and started his own company and it went through several iterations in which solar was simply a small, that was a major part at first and then became a smaller part of an integrated. Package and this guy’s modeling skills improved dramatically. Not just during the course, but even after the course.
And he’s now got a 30 person company that he’s running. I have another student. During the class she worked very diligently to improve her modeling skills and she was trying to move from the oil and gas industry into the renewable space. And the last week of the class, she got a new job with a very significant player in the renewable space.
And I even got a note from her about six months later, exclaiming with excitement about how much modeling has made a difference to her career. Though she too had not been particularly number oriented, I would say before the class.
Brian Hayden: Well, thanks, Chris. I’ll do my best to try to get this info out so people can understand, what it means to actually get this kind of a skill. And I appreciate you taking a minute to explain it.
Chris Lord: Well, thank you, Brian. I also want to point out that in the class, students will work on and develop models, but they also get the full working model that we have here. And just the ability to understand that over the course of the class, you know, most people really will quickly understand how it all pulls together.
I mean, it’s really not that complicated when we get to the unstructured tab, for example, the whole upper portion of it looks nothing different from an income. And it’s very simple formulas. There’s nothing very complex in there. And then we also have the valuation analysis, which just flows from that is just simply looking at the cash and the tax benefits.
The nice thing about this is though you can also look at projects with them without level. And that’s a little more complicated of a tool, but a really useful to understand the role of debt and how it works. And then also we’d have some depreciation tabs in here as well, which while a lot of people are nervous about depreciation.
We walked through it in a couple of lectures and people understand better why depreciation matters now it works. And then a BOLO out above all else. What the value is. Yeah, just getting the working model is huge. And then I also want to point out that we also have another model that we share a Mac class and that’s a load and solar analysis tool.
It basically allows you to take a customer’s load at we do it in hourly interval. So you only have 8,760 hours in a year, but that tool you get allows you to look closely at the load and see how it fluctuates over months, days of the week, et cetera. And then it also allows you to start to size batteries and figure out how and where a storage system will work.
The first time I built that model, about five years ago, I used it in connection with the college load. And I can tell you right now I don’t, I haven’t seen this in any sociological or, or. Educational journal, but students are far more diligent in the fall than they are in the spring. And I can see that in the library hours, fall library hours are much higher.
They go to midnight sometimes even 2:00 AM, particularly. I can tell when spring break comes or fall break comes, but particularly over the Christmas break, you can see the buildup and then the crashes, the school’s load goes to zero. And and knowing all that information allows you to size a battery, very effectively for that outcome.
Brian Hayden: Any big things you’re really excited about opportunities over the next few years, things you see changing with your world that you think are important trends?
Chris Lord: I think the most important one is batteries right now. I modeled that first battery and as I said, five years, And today I just, I know in Hawaii, for example, you have to have a battery on every project, or at least that’s what the new regulations are going to require.
But in addition having that battery knowledge has allowed me to push harder. I recently worked with a client. We use this model to figure out what the value of of 1700 acres of land and PJ. That this, this client had accumulated. We were able to figure out the value of that land. And we sold it in a transaction to a large developer who scoffed at our urging them to put a 300 plus megawatt battery on it.
This was one year ago in 2020, they scoff, but they did put in an application for a 350 megawatt solar farm on that particular site. And they also put in a small battery of about 80 megawatt hours, which they felt was. And I’m nine months later, they came back and they filed a new application for a battery only, and it’s 500 megawatt hours.
They, they realized in that intervening time just how important batteries are going to be. So that’s probably the most exciting trend I see. But I do think that CNI the next three to five years. Utility scale will continue to grow. We cover the utility scale in our class, but we also talk about CNI commercial and industrial projects.
I believe that sector is going to really grow rapidly in the next few years. And there should be some great job opportunities there.
Brian Hayden: Chris, thanks for catching me up on all this stuff. I appreciate you making the time.
Chris Lord: As always, it’s been a pleasure.