Startup Series: Energetic Insurance
Today's guest is Jeff McAulay, Co-founder & President of Energetic Insurance.
Energetic Insurance is an InsurTech startup with a novel, data-driven approach to developing new insurance products for the renewable energy industry. Before co-founding Energetic Insurance, Jeff worked in distributed energy resources at TechBridge Program Manager and solar, storage, and distributed energy resources at EnerNOC. While at EnerNOC, Jeff discovered many small- and mid-sized businesses don't have an investment-grade credit rating. With backgrounds in insurance and renewable energy, Jeff and his co-founder, James Bowen, invented a new kind of insurance product to backstop the credit risk of commercial electricity buyers and make financing renewable energy projects easier.
Jeff walks me through his time at EnerNOC and how that motivated him to co-found Energetic Insurance. He also explains Energetic Insurance's mission, product, and the problem it's working to solve. Jeff and I discuss the key phasing of the company, what success looks like for the startup, and why a PPA model is successful in renewable energy financing. Jeff is a great guest, especially for those looking to deploy commercial renewable energy.
Enjoy the show!
You can find me on Twitter @jjacobs22 or @mcjpod and email at info@myclimatejourney.co, where I encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded July 21, 2021
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Today's guest is Jeff McAulay, Co-founder of energetic. Insurance. Energetic insurance focuses on the real problem with commercial solar financing, which has counterparty credit risk. Their NRA credit cover product can satisfy lender and tax equity, underwriting requirements. While keeping policy premium costs, low allowing more organizations to access solar projects.
The process is faster and more scalable than any existing financing options. Now, I was excited for this one for one, because Jeff and his co-founder Jim used to be office mates of mine in the coworking space that I worked at. Before the pandemic that unfortunately didn't make it through the pandemic, which was a bummer, but also energetic insurance is a really interesting company.
That's solving a real problem. That can be both a big business, but also can really help with the acceleration of solar and therefore the clean energy transition. We cover a lot in this episode, including. an Overview of solar deployment, where the developers come in, where the different sources of capital come in, the incentives for buyers to want to take on these projects.
Some of the barriers that make these projects less accessible to them, some of the changes that could unlock the ability for more of these projects to get deployed and where energetic fits into all of this. Jeff, welcome to the show,
Jeff McAulay: Jason. it's such a pleasure to be here.
Jason Jacobs: Well, it's funny because before the pandemic, we were actually office mates in the same co-working facility.
So I used to see you all the time and talk to you all the time. Although I can't recall ever, just kind of sitting down and having a long form discussion like this, about energetic insurance. So really psyched and honored that we're finally getting a chance to talk about the real. stuff.
Jeff McAulay: Yeah, exactly. I do miss those days too. And you're always have like a million episodes going, but excited to dig in. today.
Jason Jacobs: Yeah, I miss those days too, too bad. That coworking facility didn't make it. because I'm kind of longing to get my butt out of the house here. There's a little recording studio, in my dining room. I don't know how much longer that that's going to last, but at any rate, maybe just take it from the top. What's energetic insurance?
Jeff McAulay: Yeah, happy to. So we founded energetic insurance to accelerate deployment of renewable energy globally and invent new risk management products to help get those deals financed.
Jason Jacobs: And what's the origin story of the company. and, And maybe even further back, what's the origin story for you ending up working in clean energy. How and why, and when did that all come about?
Jeff McAulay: Yeah, I guess I'll start today and work my way backwards. So I would say the founding story of energetic insurance is really about for me and my co-founder Jim Brown, and We loved the problem of trying to develop solar projects for businesses. And we kept banging our heads into this wall of trying to get those deals financed.
And when you get below the big fortune 100 fortune 500 companies, you know, your big tech companies. It's a lot harder to finance projects on most of the businesses in this country and the dream of distributed energy is actually that it's distributed. It's not concentrated on only the wealthiest companies.
So we invented a new kind of insurance product to backstop the risk of those buyers of electricity, So we came from renewable energy and from insurance, we turned to insurance as a way to solve a problem that we experienced. And so, you know, working our way backwards, Jim and I have been working in the clean energy ecosystem in Boston for over 10 years.
We met when Jim was at the Mass Clean energy center, I was working at Fraunhofer in their center for sustainable energy systems working on energy, R&D. So my background is as an engineer. And I've worked my entire career in renewable and distributed energy, starting with fuel cells, but also worked on technology validation for startup companies across any number of different verticals.
So really more of a energy technology generalist.
Jason Jacobs: And you mentioned that you experienced a problem firsthand. Can you talk a little bit about the context around, what were you doing and how did you discover the problem and, and then maybe just be illustrative about the problem itself and what it was that you saw.
Jeff McAulay: Yeah, it really comes back to, I joined a company called EnerNOC in 2013. Now they're Enel X, still in Boston. A lot of people still know the EnerNOC name and the mission of that company is, you know, at the time was to change the way the world uses energy. And for me coming from that background of renewable energy technology development, that meant renewable energy. But back in 2013, that was still, you know, a growing concept and, you know, looking at the business customer base of EnerNOC at the time, there were tens of thousands of commercial and industrial customers in demand response programs across the country. These were great customer relationships. We had bills, energy interval, data facility manager contacts at each of these.
And so this seemed like the perfect opportunity to go out and add on renewable energy to help those customers make informed decisions about, about energy and sustainability. It turned out that was really, really hard. And so despite going out, you know, while I was there built up the first distributed energy resource group with partnerships of top renewable energy deployers and stationary storage providers. And despite working with the best in the business, it was really limited how many of those customers we could deploy renewable energy at? And the main barrier was not cost savings. It wasn't motivation. It wasn't education.
The main barrier that we ran into was credit. And that means that those businesses didn't necessarily have an investment grade Moody's or S&P rating. And what I found from that experience is that most businesses don't have that rating. And that's a big hindrance in financing, renewable energy projects.
Jason Jacobs: And what was the value prop to those customers as the time for why they might want to deploy a renewable energy project in the first place?
Jeff McAulay: Yeah then, and, and the same as now, we're seeing more and more businesses are trying to make renewable energy commitments for a number of reasons. One, the cost savings There's still the primary driver in many cases is an economic savings opportunity Two, they’re definitely increasing. Goals for environmental sustainability, CO2 ESG reporting. And that can also translate to customer value. The reason businesses are pushing for those goals is because their customers want to see that sustainability metric when they're buying products and services. And then lastly, I'd say the third level is resiliency.
And as we're seeing more and more issues increasingly today, but even back over the last decade, Through natural disasters, blackouts, grid events like we've seen in Texas and California. There's a real value of resiliency that businesses are seeing and want alternatives to diesel backup or ways to reduce the amount of diesel that they have to hold on. Site and solar and storage on sort of onsite backup can provide value there as well.
Jason Jacobs: So if I'm one of these businesses, how do I evaluate whether to uh, deploy one of these projects onsite versus maybe using community solar or whatever the equivalent is for commercial? or Maybe it's an Arcadia power, or I guess what are the options and what are the trade offs.
Jeff McAulay: Yeah, there's a ton. And actually this is a lot of what we did at EnerNOC and you know, definitely outside the scope of what I'm doing today at energetic, but I, I can't resist answering the question. Because it is, it's a really big question and there's lots of great consultancies out there to help businesses with that decision.
What we've seen with, you know, apple, Google, Facebook, Amazon, the big tech companies. They've largely had these huge 100% renewable energy targets and are able to achieve those through virtual PPAs, which are not onsite. So they're doing this because they can transact at scale and really cover a large amount of their load you know, with single transactions. There are a lot of companies that have smaller, more diverse sites and aren't necessarily sophisticated enough to do those large virtual transactions and then maybe value some of the local cost savings or resiliency benefits, and therefore want to do an onsite option. And then, you know, there's increasingly blended strategies that those companies can do that are potentially a mix of both. Despite apple having solar on their spaceship, halo building, they're also doing virtual. The exciting thing that businesses are doing is especially for those larger firms, they're even pushing through the supply chain. So now we're seeing demand, you know, once the tech companies go 100%, you know, Microsoft or apple in particular, they're saying, how do we green our suppliers and help them get access to renewable energy?" And that's a a major area of opportunity for us at Energetic.
Jason Jacobs: And then is it strictly the onsite projects that energetic enables?
Jeff McAulay: So that's where we started because we needed to have a, a focus place to start, but we are absolutely seeing market demand pull us from the onsite behind the meter, into offsite virtual, whether that's virtual net metering, community solar, or some of these virtual PPAs. Our product is very, very flexible and can handle off-taker credit across the board.
Jason Jacobs: Uh-huh [affirmative]. And who is the customer for energetic insurance. And what are the criteria within that customer segment that, that would tell you that the fruit is ripe for doing business together?
Jeff McAulay: Yeah, absolutely. So our main customer is a solar developer and we're selling kind of the product that we wanted to buy. So when Jim and I were out there trying to develop projects, We just wanted to define an off-taker, who you believe is good. And then all of a sudden, maybe sometimes later in the development process, you find out that their credit isn't good enough or it deteriorates. And then the deal falls apart. So every developer that we talk to has the story of the one that got away, or they spend all this time and then the deal wasn't able to go through because it fell apart at the last minute or they hit snags due to credit. So we're really selling to those commercial, solar developers who are out there doing the hard work of educating customers and signing up PPAs. And our goal is to help them accelerate their business, to be able to do more deals and to lower our cost of customer acquisition, because they can go knock on more doors.
Jason Jacobs: Uh-huh [affirmative]. And then what is it specifically that you're selling them and, and maybe talk a bit about the, value proposition. So if I'm one of those sort of developers, how can energetic insurance help me?
Jeff McAulay: Yeah, absolutely. And so what we sell is a financial product. It's a form of trade credit insurance. And that basically covers a certain level of cashflow in the event of off-taker default. And so the benefit there is it really makes it easier for the the project. to get Financed because what, this is one of the key risks that financers, whether that's debt or tax equity are worried about in getting the deal done.
So the benefits are, yeah, I think deal velocity, levered, IRR, overall, access to customers, and then it allows the freedom to not request other more cumbersome. Elements like parent guarantee or sometimes there's huge letter of credit requirements in these transactions that slow down the transaction or make it more expensive for customers. So we alleviate some of those requirements.
Jason Jacobs: So who were the capital sources for these projects for that developer? What types of entities? and structures?
Jeff McAulay: Yeah. So typically we're talking about debt and tax equity. So debt would be any major lender in this space. And then, you know, same for for tax equity, those major tax equity providers and those are really the drivers for that credit threshold. And on the other side, those are financial institutions. They want to deploy capital into this space. They're trying to lend in a competitive environment, you know, very low interest rate environment. So we're helpful typically on both sides getting those transactions to close faster and more efficiently.
Jason Jacobs: So I'm going to try to parrot back what I think I'm hearing just to test how much I understand it. So if I'm hearing right, there's these product developers that can stand up renewables onsite for these kind of small and, and mid-size commercial customers.
And in that customer set, because they don't have the credit rating as some of the bigger, more established companies, they can't access. The capital typically via debt to finance these transactions. And so essentially you are providing insurance that then enables them to get access to that capital from the lender and make the lender comfortable that it's de-risked enough for them to, to lend the money, to fund that project.
Jeff McAulay: Yeah, super simple. Right? You got it.
Jason Jacobs: Now, maybe talk a bit about the insurance itself. What is getting insured and what is the I'm going to start getting over my skis in terms of my insurance lingo, but what is getting insured and then what is at stake in getting access to that insurance?
Jeff McAulay: Yeah, absolutely.
And so I will just say, like, this is a very. Esoteric product. So just to get to that description, Jason, we're talking about third party project finance, which is in itself a little bit complex, and then we're getting into the world of insurance and those are not simple concepts. So when we're selling this product, We're not selling to the end business.
We're selling to a solar developer. Who's already buying other forms of insurance. Who's doing these complex financial models. And so we're dealing with very, very sophisticated customers. And if you, you know, our website, all of our communication materials is in the language of our customers, which is this project finance lingo.
So If other people out there listening, it's not totally clicking, It's because this isn't a consumer product. This is, you know, B2B2B all the way through. And so to get to your question, what kind of insurance is this? What goes into that offering? So it's a form of trade credit insurance, and the insured is typically a project.
SPV. So the project itself is typically its own entity. And the way we're able to offer this as a startup is we're partnered with one of the largest reinsurers in the world and they provide the balance sheet behind the product. And we're doing the technical development in terms of the software and actuarial modeling to price the risk.
And then we're doing the distribution and customer education and negotiation around how to structure the product in each of these transactions.
Jason Jacobs: How do you price it? And how does that developer, I guess, at what point during the cycle does that developer know that they need energetic insurance? Because it sounds like they only want it if they can't get the capital on their own.
So is it that they go out, they can't get the capital. They come back with their tail between the legs and find energetic insurance to save them. Or is there a way for them to know from the outset that they're going to need it and be confident that getting it will be enough to secure the capital?
Jeff McAulay: Yeah, that's a great question.And honestly, we're happy to work with developers at any stage of the process. Definitely. We get a lot of those, you know, something, something went wrong in the process or they're encountering more difficulty. So we get late stage deals that already have PPA signed, but we're happy to engage. Anywhere in that process from, you know, first prospecting, all the way to a deal that's already been done and operating for three years and they want to refinance because they just found out that with our product, it might be a way to get better all in cost of capital. So we're happy to engage at any step in the development process, definitely earlier is helpful. And the way for developers to know practically is there are just some categories of business that you can know in advance that it's going to be difficult. One of those, for example, is just in commercial real estate.
Commercial real estate is a case where you've got often, you know, multi-billion dollar. Real estate investment trusts. These are massive companies, but the buildings themselves. Are held in special purpose entities that are bankruptcy, remote LLCs. So that means that even though it's a you know, multi-billion dollar real estate company, they're not putting their parent guarantee behind each individual building.
So the contract that signed for solar, between let's say a landlord entity and a solar project doesn't have that full credit of the master. REIT. So therefore anytime a developer's going out to do one of those projects, there's a good chance. They're going to need some sort of credit enhancement. That's something we can help with.
That's known in advance. Same thing goes for franchise businesses, just because you recognize the name on the sign doesn't mean that there a parent guarantee. And so there's a number of these different sectors that have been very difficult to access for solar, where we can help. And we can do that on a proactive basis.
Jason Jacobs: And what's the batting average in terms of, if someone works with energetic, I mean, have there been cases where they work with you and get this insurance and still can't get the capital?
Jeff McAulay: We haven't had that happen generally because we're involved very closely with the banks and the developers. So. We do have deals that we decline or that are essentially priced out because the risk is, is too high. And we try to tell that to our partners as soon as possible, usually we can qualify something out in just a couple. of days.
Jason Jacobs: Uh-huh [affirmative], And you also mentioned that sometimes it's a case of getting access to better rates. How expensive is this coverage? And I guess said another way. How much better does the rate need to be? To justify the energetic layer of fees?
Jeff McAulay: Yeah, great question. Look, our goal is to not just add costs to a product, our goal is to be the kind of insurance that developers want to buy because it opens more doors. It increases overall returns. So that's exactly it. Interest rates are super low right now and the spreads are very high.
So if you're coming in with an unrated or rated sub-investment grade going from there to a double a, that's a huge difference sometimes night There's a lot of times banks just won't lend at all. Or the rates, if you're within a bank or between banks are very, very different. We're looking at, you know, a 500, 600 basis points spreads, you know, on on some of these deals.
So as long as we're pricing within that spread, and when, in some cases we're able to get, You know, much tighter. It really depends on the risk. But the question to the developer is what's the all in cost of capital and what's the end levered IRR. It's not only about interest rate. We can often help there, but it's also, you know, other levers include debt, service, coverage ratio, and/or loan to value there's other aspects or constraints where we might be able to again, get the overall benefit to that developer.
Jason Jacobs: And what are some examples of qualifying questions that you could ask during the course of a process to know if you can help someone or not?
Jeff McAulay: Yeah, so we try to make it very simple. We have an online application developer can come in, submit that through our portal. We take that information from the application, run it through our underwriting and actuarial models. And then we're able to come back very quickly, usually with a quote in, you know, 24 to 48 hours. Typically the main limiting factor on that return cycle is just, do we have enough information to analyze the project? And then we have a really good indication from there, what the price is going to be. And typically that's enough for a developer to continue with their process.
Jason Jacobs: What do the lenders think of you and your competitive set to the extent that there is one?
Jeff McAulay: We're really helpful to lenders. I think in general, we're trying to help them do more deals. If they don't need us, they can do the deal without us. Like that's totally fine. There's not really a case where we're, we think we're competing in; the case of non-bank lenders. There are definitely folks out there that are maybe alternative options, but this is a huge market. We really, you know, welcome anybody who's working on this problem. Anybody who's making it easier to get commercial finance done. We think there's plenty of room and, you know, we need more options on the table.
Jason Jacobs: Are the lenders a channel for you guys to get new customers, either formally or informally?
Jeff McAulay: Absolutely You're exactly. Right. So developers introduce us to banks. Banks introduce us to developers and, you know, virtuous cycle there and helps us keep lean in terms of the sales and distribution. side.
Jason Jacobs: Uh-huh [affirmative], And maybe talk a little bit just logistically.How long has the company been around? How long have you been in market? What are some of the key phases that you've gone through and what kind of traction do you have today?
Jeff McAulay: Yeah. Great question. It's definitely been a journey. So we started the company four and a half years ago, and I would say even more like five, if you count before Jim and I quit our jobs, we spent three to six months.
just Interviewing customers interviewing up and down the value chain, you know, is this of interest. So we really, I'd say our pre-founding research in terms of designing the solution. And then, you know, started right in 2017. And the first phase was really, you know, we had an idea. We were super fortunate to get funding from the department of energy, very early on under their SunShot program.
And so that helped us really invest the time to build our models And really explore the relationship with insurers. We also raised a small angel round at the time and the biggest first phase was really. to get an insurer to back the policy. So if we're going to go to a bank and say, Hey, we've got this risk covered for 10 years, they say, great you and what balance sheet?
So it was super important for us to, to get their re-insurance collaboration on board. And we could not have had a better result there with one of the top reinsurers in the world. And then once there, we then had to figure out how to sell the product because. this is Not an existing market. We're coming in with a, with a new offering in a relatively new part of the industry.
And so from 2019 to today, it was really getting out, getting traction, selling a product. Oh. And a little thing happened in the middle of that, which was our you know, global pandemic. So today we've now been able to, despite a few bumps in the road, we now have over 140 sites in our portfolio. That's across 12 different states, over 40 megawatts where the average site size is in the, you know, one to 200 KW range. So really interesting there we've closed deals across half a dozen financial institutions ranging from small regional banks up to one of the largest banks in the country.
Jason Jacobs: And then what does scale look like? How do you envision that this evolves and also just from a resource standpoint, what kind and where will you need resource in order to be able to deliver on that scale as the company progresses?
Jeff McAulay: Yeah, great question. We have a super lean team. Now we are in the middle of raising. We hope to have our series a announced in the next month or two, maybe around the time this launches. So that's been really exciting in terms of capital. We will absolutely be posting more job descriptions, including in the slack channel for my climate journey.
member plug as well. [laughs] And then, you know, as we grow, we have a good amount of re-insurance capacity already. We're not limited there, but, we will definitely be bringing on that's another flavor of capital. So as we grow and we get to larger and larger project size we'll increasingly be bringing on other re-insurance capacity.
And then really the growth trajectory immediately is all about. Expanding the relationships with different banks and then getting those repeat channels working, you know, as we go through the, it's a longer process of initial customer education, but once we're there, it's all about driving efficiency and repeat transactions.
Jason Jacobs: And the developer landscape in terms of the types of developers that you serve, is that a very fragmented landscape? Are there a handful of, of big players in a consolidated market? What does that landscape look like?
Jeff McAulay: It's Definitely. A long tail of commercial developers, the barriers to entry are relatively low, but they're absolutely some massive centralized players. We have conversations all the way across that value chain. I think increasingly we're settling in the sort of medium to large stage. But honestly, we're seeing ways where we can play a particular role at the portfolio aggregation stage. So that may be where there's a number of projects that are bundled together and we help at the sort of portfolio back leverage and enable that larger scale as projects are rolled together.
Jason Jacobs: And then what about the end customers? How much penetration is there in terms of customers that have stood up this type of project onsite? Where is it realistic for the market to get to and over what period of time and maybe kind of an adjacent question, or what are some of the blockers that if unlocked would help that market happen faster?
Jeff McAulay: Yeah, we are just barely scratching the surface, the numbers for. Annual deployments in the CNI sector are about in the sort of two-ish gigawatts per year, actually GTM. Now, now wood Mac, they don't even call it commercial and industrial. They call it non-residential because it's kind of this catch all bucket that includes municipal off-takers it includes community solar.
So we think the number there is actually really, really small. When you think about what are traditionally thought of as commercial industrial customers. So there's an absolutely tremendous opportunity, you know, when people do get back into planes, encourage you to look down and look out the window and see how many roofs Have solar on them. It's not many, we're very, very early in this game. And so, you know, I'd say we'd love to see that number. Go from two gigawatts a year to maybe five or 10. There's just a tremendous, tremendous opportunity for growth out there.
Jason Jacobs: And what's holding it back?
Jeff McAulay: This is certainly one of them. This factor, I'd say, you know, the inherent things as well are just, there's a certain amount of customer education and familiarity. There are markets today where solar is less attractive due to some combination of sun, electricity, prices and regulation. However, that's changing. We're really seeing more and more markets open up and hit grid parody as the cost of installation falls
Jason Jacobs: So are there big capital outlays upfront for customers that want to Head down this path.
Jeff McAulay: That is the wonderful thing about the power purchase agreement structure. So typically businesses are paying for the power, not the asset, so they don't have to go out And pay cash for a system, big capital outlay upfront. They can just sign up for a PPA and pay for electricity. Like they were before only they're paying the solar system less than they were paying the utility And that's why the PPA structure has scaled so well.
Jason Jacobs: These, are the virtual ones where the equipment is not actually onsite.
Jeff McAulay: Same, You could have a virtual PPA where you don't either it's on-site PPA or off-site PPA. There's still no upfront capital. commitment.
Jason Jacobs: Is it the same players that are providing the PPAs onsite and offsite, or is it, is it a set of competitors?
Jeff McAulay: I think it tends to be different. There are some advisors that will help structure either, but in general, I think those tend to be separate. players.
Jason Jacobs: What percentage of the, you said there's 160 something installations. If I got that number, right. What percentage of those are via PPA versus some other structure?
Jeff McAulay: We have, most of those are power purchase agreement. We have done both partnership flip and sale-leaseback, So, you know, very flexible in that regard. I would not say that our current portfolio is any representation of what we're going to do. I think we're trending towards the larger and larger projects and seeing some of those large scale virtual offsite deals coming through. So ask me again next year and the answer is going to be different on that front.
Jason Jacobs: So for these, the virtual PPA is, for example, you mentioned the project developer, and you mentioned the commercial customer, and you mentioned the lender. Is there another stakeholder in that equation when there's a PPA? involved?
Jeff McAulay: No, that's the same.
You'll always have those three. There is the tax equity player in there as well, but yeah, it's generally the same.
Jason Jacobs: So Where does like a level 10 energy fit in? I'm just trying to kind of piece together. The landscape of who's doing. what.
Jeff McAulay: Yeah. So level 10 Edison, Schneider, Neo network. These are all platforms that are arranging virtual PPAs or help match projects that are supplying electricity and buyers on that virtual basis And virtual just means that they're not necessarily taking physical delivery of electricity, but there's still a contractual counterparty.
Jason Jacobs: So would they be just adjacent and unrelated or a potential partner or a competitor? Like where do they sit relative to an Energetic?
Jeff McAulay: We're highly collaborative in our business model, we are happy to work with other folks. We started in the onsite behind the meter, physical. So as we move up into these larger scale offsite, virtual, those folks are increasingly collaborators and, you know, happy to follow up with anybody. who is also you know, running into credit challenges at the virtual. scale.
Jason Jacobs: And from a scalability standpoint, I mean, is this mostly just like, kind of, atoms similar to software where, you know, it's digital and it's imminently scalable, or are there complexities that require more resource, more infrastructure, capital?
Jeff McAulay: Yeah, there's a little bit of complexity as you're noting, but some of that's inherent to the market. So most of our challenges are the challenges that are inherent to the solar market, which is systems take time to. build. So, yeah, we can agree on a price and a contract structure in a couple of days, but it might take three, six months, nine months for the larger projects, you know, it might take longer to build.
So I think the major constraint here is that yeah, we are actually talking about getting. real Steel and Silicon and aluminum out the door, and it's got to get built somewhere and permitted and interconnected. So that's the main challenge. That's not fundamental to our business. That's just the nature of solar for energetic to scale.
We have a lot of flexibility because a lot of it is based on our, our software and actuarial models, which can move very easily. We're, you know, across multiple different markets in the US. now, you know, looking over the next year. eyeing some of our first potential international markets. So it is a very scalable business model, very scalable software stack for us to expand within this industry
Jason Jacobs: Is it actually baked into the loan paperwork itself, or is it a separate and distinct contract?
Jeff McAulay: It is a separate contract. We work very closely with the loan agreement. So just like any other insurance contract that would be applied on a project. However there are, I guess the analogy would be in something like a title insurance or private mortgage insurance. These are things that just get packaged together and at scale, maybe just become a standard requirement.
So if you've, you, know, gone through your mortgage process, yeah. There's a bunch of other things that need to be in there. There's insurance requirements, but they're kind of all part of this financing package. It could very be that that's where this. goes.
Jason Jacobs: And in terms of payout to energetic on these contracts. So is it kind of fixed price per year on a recurring basis for N number of years? Or how are these contracts typically structured?
Jeff McAulay: Yeah. So energetic is set up as what's called a managing general underwriter. So our cut is a percentage of the premium that we charge and that's essentially settled between us and the insurers. So yes, we've built a you know, software platform to enable our business. but It's actually better than just a software platform, because we get paid based on the size of the deal rather than a SAAS platform, that would just be a fixed rate and would be agnostic to the deal sets.
Jason Jacobs: And How do you think from an expansion path? I mean, you talked about serving more customers and more geographies, but I mean, is there a world where you actually become one of these insurers over time? Is that something that's ever been considered?
Jeff McAulay: There is we're, you know, we're not trying to, you know, lock anything in. Too soon. However, there is a model where other insure tech startups with this same kind of MGU model ended up in series B or C raising hundreds of millions of dollars and becoming a you know, full stack carrier another term for insure, not necessarily something that we need to do or need to decide on today, but we do see room globally for these are new types of risks and, you know, if we think bey-, beyond solar, this same challenge exists. This counterparty credit risk. These long-term contracts, it's the same in solar in wind in batteries in fuel cells all over the world And there's even more and more opportunities for new esoteric risk management products tailored to renewable and distributed energy. So we do think there's for a new type of energy and sustainability focused insurance company. To really handle more of those, those types of risks. So we'll see where the road takes us, but it's definitely an exciting time to be working on this.
Jason Jacobs: So, So, I mean, if we're sitting 10 years out and this company is wildly successful beyond even your, your most rosy ambitions, what have you built and what have you achieved?
Jeff McAulay: Yeah. I mean, it's wonderful to look out that far. I mean, we have, you know, ten year time horizons, so we're definitely do think about the world a decade on, I think the best simple model for that is, you know, you've talked to Barney Schauble at Nephila. I mean, he started Nephila and, you know, they got acquired by a major insurance company Markel. So I think that is. kind of, I wouldn't say that exact model, but we definitely take inspiration from folks like Barney and, and what he's built. There are other companies, you know, Metro mile lemonade who just started as MGAs, raise a bunch of money, to become a carrier and an IPO. I mean that we're not locking ourselves into any of those. So it's also possible that we get snatched up before 10 years and grow within another larger, organization.
Jason Jacobs: And what about from a risk standpoint, Have you looked back two years, three years, five years out, and it didn't work, what, what do you think happened? What are the biggest risks that, keep you up at night?
Jeff McAulay: yeah, I mean, this is, we didn't start this business because it's easy or the fastest path to other easier ways to make money. We started this business because we think it's a necessary element to scale, renewable and distributed energy globally. So I think the cards were stacked against us. The deck was stacked against us from day one of trying to develop new insurance products. Nobody does that. Right? Most insurers try to sell existing products in existing markets. so There are a lot of challenges here. And I think we've seen that some of the customer education adoption of new financial products, it takes time.
We're dealing with risk averse industries in deployment of infrastructure and they should be. So I think, you know, one of the biggest challenges is. just That pace of growth. And, you know, we think we've done it, you know, very responsibly to date. And we're building the infrastructure now to grow much faster, but we are doing that in a responsible way. We're not being reckless with the insurance capital that we're being entrusted with. And that is a delicate balance when you're growing an insurance company.
Jason Jacobs: What is the adjustable market from a geography standpoint. And which portion of it are you focused on today?
Jeff McAulay: Yeah, we say our market is where sunlight hits roofs. I would say that's where we started. And that is probably getting bigger. I mean, I mentioned, you know, two gigawatts a year is commercial. We're not selling into an existing market. We're selling to enable a bigger market. Right. So I think the way most people do that, math is they say, oh, the commercial solar market today is two gigawatts a year, how much of that are you getting? And we say four. Why we're getting the missing four. We want to get the missing four gigawatts a year. That's not getting done because of this problem. If you look to the offsite market, that's somewhere off the top of my head. I want to say like six or eight gigawatts a year.
It goes up and down, but that's been dominated by the big tech companies. So. We're not addressing the market of tech companies getting virtual PPAs. We're trying to extend that to this whole class of companies that aren't getting it at all. So I don't want to be on the record for math, but I would just say it's pretty enormous in the US and gets even bigger. If you expand to other behind the meter resources, we're looking at energy efficiency as well. And then if you expand into other markets, it's really massive.
Jason Jacobs: So, I mean, it sounds like you are going to take this kind of core focus in and try to really scale that. And then there'll be kind of a fork in the road if you're successful, where either you're acquired, you know, maybe by a reinsurer, for example, or where you go and maybe raise a bunch of capital and try to become an insurer yourselves. When do you think that fork in the road comes? Like, what do you need to look like in terms of your core business and in a world where you did want to take that bite and try to make that leap? What type of capital do you think is required in terms of the size, but also the source, like, is that equity capital, does that come from VCs or like who's the right partner for that kind of effort. If you choose to take it on?
Jeff McAulay: These are the biggest questions. Jason, do you always go this hard at startups for the, [crosstalk 00:40:37]?
Jason Jacobs: I like to know, yeah. I mean, that's, that's the point of the show is just you know, just to kind of really, really get into the guts of it.
Jeff McAulay: Oh, I welcome it,
Jason Jacobs: but don't, you know, don't talk anything you don't want to talk about. I don't, I don't want to
Jeff McAulay: No, no.
Jason Jacobs: ...bring out anything confidential, but I I am hungry. to learn.
Jeff McAulay: Bring it, no, I think it's, these are the best questions and, you know, ones that we're wrestling with. So the best thing that we can do today is really be thoughtful about the people that we bring around the table, our investors, our board members, our advisors, our employees, to help us make that decision. We're not coming in today saying we're definitely doing this or that. We're preserving that optionality. And we're trying to take advice from the best people we can about how to think about that without locking ourselves in. So I think the great thing that you've highlighted is we have those options.
There are a lot of ways. There's a lot of different entities that we could provide value to in terms of an exit or grow independently, grow one way, grow another way. And that's what we love. And so our main focus today. Is not about where that ends up at exit. It's really about how do we build a super valuable, scalable product that meets the needs of our customers, that advances the industry, and then all the other stuff will fall into place.
Jason Jacobs: So what, what are the core goals and objectives over the next, let's say 12 months, or, or say 18 or 24, if you have that. view?
Jeff McAulay: Yeah, absolutely. I mean, it's get the the series A capital in the door, hire and grow the team build and accelerate customer transaction. And that's the playbook.
Jason Jacobs: So if you could change one thing that is outside of the scope of your control, that would most accelerate your progress, what would you change and how would you change it?
Jeff McAulay: I liked your a hundred billion dollar question better. Do you still ask that one or have you switched it to the magic wand?
Jason Jacobs: We can do a Follow up with that one too, but yeah, I liked the magic wand because it kind of forces you to think about like, how could the market get catalyzed to help you and others like you doing this important work?
Jeff McAulay: Yeah. So systemically not about energetic specifically. I think about the sort of weighted average time horizon of decision-making for individuals. And I would just guess to say that most people, for most decisions in their lives, the time horizon, what we're really thinking about when we make those decisions is on the order of, you know, hours to months to maybe three years every now and then when we buy a car or a house, maybe that goes from five to 10 years, but the weighted average of that decision horizon is probably relatively short for publicly traded companies quarterly, right? I think if I had a magic wand, I would just nudge that a little bit farther out. I think there's, this is a really interesting time to be thinking about the future. We're thinking in, you know, when we're talking about building infrastructure, those are 10, 20, 50 year time horizons. And so I think it would be interesting as a society if we nudge that decision making time horizon out a little bit. I wonder how that would change a lot of the things that we're looking at.
Jason Jacobs: And, you know, just because I've known you personally for a while, I know that you're a pretty mission driven guy as it relates to climate. And so one question I've got is just, do you find that the impact and financial success of the company are directly aligned and have there been cases where they're at odds big or small? And if so, maybe give an example of one and how you address it.
Jeff McAulay: Yeah, I'd say in general, it's highly aligned and that's, that's by design. We started this company specifically to say, how do we move more renewable energy into the world? And so that's what we're doing every single day. The closest thing to a conflict is some of the credits that have deteriorated in the last year are oil and gas.
And so multiple times we've had, you know, upstream. Exploration and production oil and gas companies come to us. And we generally decline those out of mission alignment. And that's not just us. That's with our reinsurers as well. The whole point of this business is to help the re-insurance world move out of oil and gas and into renewables
Jason Jacobs: But where these oil and gas companies coming to you to help them move into renewables.
Jeff McAulay: Yes, but we don't want to back those credits. So we actually don't believe long-term that those are, you know, good credit risks. And so ultimately, yes, we're helping them with renewable energy, but in these particular cases, it's renewable energy to get oil out of the ground. And so if it's really for an extractive purpose, those are not the things that we're trying to support. We're going to spend our time on different deals.
Jason Jacobs: So, is that based on philosophy and values from an impact standpoint, or is that based on what's in the best financial interest of the company, when you say not going to credit risk, is that because on principle or is that on emotionally?
Jeff McAulay: well, they they happened to align very nicely now, but I'd say it's a combination of both. We are not excluding oil and gas categorically. So for example, there are a lot of folks now, you know, pipeline and distribution companies that are trying to figure out how to move renewable natural gas or switch to CO2 pipeline distributions for 45 Q credits. So I think there's a lot of, I use that as probably an extreme in the upstream case, but, you know, we do believe gas stations that are looking to add electric capacity, you know, in general, we're not opposed to working with folks in the oil and gas industry. We welcome it.
Jason Jacobs: Got it. So it just depends on the use case.
Jeff McAulay: Yeah.
Jason Jacobs: Okay, well, one question I didn't is just for anyone listening, that's inspired about what you're doing. Who do you want to hear from? How do you need help?
Jeff McAulay: Biggest thing is we're hiring. So I'd say right now, people who are coming from the finance industry, who are listening to your show, because they're trying to learn about, you know, how to apply those skills for a better cause we'd love to talk to those kinds of folks.
And then, you know, also people who are in any industry who are looking to you know, level up in project finance and get to really the capital market side of things, We welcome that as well. And then also just customers. We get a lot of great inquiries just from our website or LinkedIn. So if anybody's dealing with projects and we can be of help encourage people to reach out
Jason Jacobs: Jeff, anything I didn't ask that I should have, or any parting words for listener?
Jeff McAulay: No, I'm on the My climate journey, slack channel, So feel free to hit me up there. And Jason, thanks so much for the time. It's been a blast.
Jason Jacobs: Well, Awesome discussion Jeff Thanks for humoring me with, with all my questions. Hopefully it didn't feel too much like a firing squad and yeah. What you're doing is awesome.
Congrats on all the progress and best of luck to you and the team.
Jeff McAulay: Thanks Jason.
Jason Jacobs: Hey everyone, Jason here. Thanks again for joining me on my climate. Journey. If you'd like to learn more about the journey, you can visit us at myclimatejourney.co. note. That is .co not com someday. We'll get the .com, but right now, .co. you can also find me on Twitter at JJacobs22, where I would encourage you to share your feedback on the episode or suggestions for future guests. You'd like to hear. And before I let you go, if you enjoyed the show, please share an episode with a friend or consider leaving a review on iTunes. The lawyers made me say that. Thank you.
