Andy Klump, Improving Solar & Storage IRR | Clean Energy Associates | Solar Podcast Ep.93

Improving project IRR and reducing the Levelized cost of energy (LCOE) is the goal of every project developer, financier, and EPC. There are many aspects of engineering, product selection, quality assurance, 3rd party review, and other due diligence that energy companies and investors can take, and we’ll be exploring the following topics and questions: Increasing IRR, the role of 3rd party engineering services, supply chain management, quality assurance, and future trends.

Video Topics:

Explanation of IRR vs NPV vs ROI for the non-finance people What are significant factors that impact the IRR in solar projects? Where to focus to increase ROI?

Engineering Services: Benefits of 3rd party engineering services and how ES can improve IRR Case Studies (Emergency Services) Project Development / Engineering & Construction / Operations and Maintenance / Project Sale & Acquisition

Supply Chain Management (SCM): Explanation of SCM and how SCM can improve IRR Cost Reduction / Sourcing Strategies / Procurement Support

Quality Assurance: What is QA and how does it improve IRR? Factory Audits / Production Monitoring / Pre-shipment Inspection / Container loading Who is right for QA?

Just Big players + 100MW projects or anyone? How does it scale in terms of benefits?

Future Trends

Podcast Transcript

Tim Montague:

Welcome to the Solar Podcast Live. I'm Tim Montague, your host today, we have a very special guest. Our guest today is Andy Klump he is the founder and CEO of Clean Energy Associates. Andy is a 20 year veteran of the solar industry, which is hard to believe because he's such a young man. He hails from the Midwest from St. Louis originally, go Midwest. And we are going to talk about reducing increasing rate of return of your solar project, lowering the LCOE or the levelized cost of energy, which is something that all installers, EPCs, developers, and financers want. And I could go on and on about Andy, he has a very storied history, amazing entrepreneur, but I'm going to let him tell a little bit of his story and introduce the company. So welcome to the Solar Podcast Live, Andy Klump.

Andy Klump:

Tim, thanks so much for having me really excited to be here. And I've always been a big fan of your show. So very happy to be a guest today.

Tim Montague:

Really appreciate you making time for us. It is 12 hours later, there in China where you lived and worked for the last 18 years. I see a little bit of a trend and I'm not surprised, I guess that some of our thought leaders are hunkering down in China because China is such a dynamic and go getter economy in the clean tech space and like it or not, our economies are completely intertwined and interdependent. We are famous for our consumption. They are famous for their manufacturing and it is a wonderful, yin and yang that we have. So, Andy, what inspired you? I know you were a an entrepreneur at a very early age, but what inspired you to pursue clean energy?

Andy Klump:

So really my foundation came a lot from my parents. So my mom you know, grew up in Jefferson city, Missouri. My dad grew up in Perryville, Missouri, and they met in St. Louis and that's where I was was born and raised. But I always had a clear understanding the importance of the environment. I remember as a kid walking with my mom to the park and picking up aluminum cans. And my biggest excitement when I was six or seven years old, was taking up big, giant bucket of aluminum cans and getting 2 dollars and 54 cents as my first kind of informal money I'd made. So I thought that was pretty exciting and I realized, hey, you could actually make some money and help the planet at the same time. So I thought that was a win-win. So that concept was always in my heart. And then growing up as a boy scout, eventually an Eagle scout, I had an appreciation for the great outdoors. So when I came to China and had the opportunity to jump in the solar industry, it just seemed a win-win to me. So it was very easy decision to make.

Tim Montague:

Yeah, I owe my legacy to my father who was a techie, a DIY. We were doing backyard solar thermal in the 1970s in Albuquerque, New Mexico. I and my brother made a little solar powered car, you know, there were PV cells, of course at the time. Most people don't realize that PV has been around since the 1950s. So it's now 70 years that we've had commercial solar cells. And so that's lots of time for technology maturation. And so we really have asymptoted in many ways with solar PV, not that there aren't next gen technologies, there will be, there will continue to be lots of innovation and evolution of the technology and new technologies. And we're going to get into some of that, right, because it's no longer just solar, it's solar plus storage. That is the killer app, as I like to say. And we of course are hearing lots about lithium ion batteries, but we're going to also touch on longer-term storage like hydrogen or especially green hydrogen. So it sounds like Clean Energy Associates started about the same time that you moved to China, or what is the timing of the founding of Clean Energy Associates?

History of Solar Markets & Clean Energy Associates

Andy Klump:

So I actually established Clean Energy Associates in 2008. We first registered as a Hong Kong entity and then later set up a US entity in 2013. But, I was already in China at that time. I had an opportunity to come to China. I was able to talk my way to being the only foreigner in a 900 person sales force for Dell computers. So actually sold desktops, laptops and equipment to different multinational companies in Beijing back in 2003. And so when I had an opportunity to kind of shift from high-tech to clean tech in 2006, I joined the leadership team of Trina solar. So I was actually the first non-Chinese executive who the company hired. I joined pre IPO, which was part of the IPO deal team that listed the company in New York stock exchange in 2006. So it was absolutely an exciting time. I saw the company grow 10 X in those two years. So roughly from 500 workers to 5,000 in that period of time and then 10 X on every other metrics. So it was an exciting time to be in the industry. The panel pricing was that a mirror was $3 and 25 cents a watt when I started. And then when it peaked in early 2008, it was around $4 and 75 cents a watt. So we saw the supply chain grow quite massively, literally. The sector when it's about 1.6 gigawatts, and it's grown about a hundred X in the last 15 years. So it's an interesting time to see the evolution of the China solar juggernaut.

Tim Montague:

We like to ride the solar coaster, which often refers to individual States or locales that are booming and busting, but there's also these waves and ripples that go through a product life cycle and the availability of raw materials. There have been historic shortages of polycrystalline, for example, one of the core elements that go into solar panels and many people thought that was going to be an opening for other technologies, like thin film, right? And so then you see this mad rush into thin film, and then lo and behold, they really got smacked down with the exception of first solar which, correct me if I'm wrong, is there another large manufacturer of thin film panels now globally?

Andy Klump:

Knowing that it's at the scale of solar, there have been others, one or two, in Japan. Solar frontier as they were called before, had roughly a gigawatt of capacity. And there were hundreds of thin-film manufacturers that were backed at one point in time, but yes, that's absolutely the era 2006, seven, six, seven and eight, as I was talking about where the large percentage of panel pricing was all due to polysilicon, it is literally 90% of the cost stack. When we were studying and putting all of our financial models together, we knew what the costs were. We knew polysilicon would come back down to earth. And so it's rather ironic that even in the heart of pandemic, we've actually seen polysilicon pricing jump again, another 30 or 50%.

But, we're talking about single digit dollars per kilogram. Whereas at one point in time, it was over $475 per kilos. So it's dropped by over 95% in the last dozen years or so, but the industry has become much more mature from a supply chain standpoint. That's part of the work that we do at a Clean Energy Associates. We really provide supply chain transparency and comfort to different downstream IPPs, developers, EVCs that want to have transparency in their supply chain decisions and work with the technical advisors who are knowledgeable, that are based in China.

Tim Montague:

Yeah. And we're gonna get into some of those details here. Give us, the broad strokes though. Your company does many things. What is the big picture of all the services that you're providing and to whom?

Clean Energy Associates Services Overview

Andy Klump:

So just at a very high level. And I like to explain things in simple terms, I'm not an engineer, but running an engineering company. So I just try to explain it like I can to my two year old. And so I basically tell people we help people buy things. So we have a supply chain team that axes procurement functions. So really acting as the P in the EPC. We actually don't buy the product, but we actually help buyers make decisions and ensure they get the proper terms that are in line with the market and better than the market, because the relationships we have. So in addition to helping buy, we also help check the quality in the factories. So we have a team of roughly 75 folks in China, mostly engineers and inspectors, who will go to a variety of different manufacturing facilities.

They do this, not just in China, but also elsewhere in Southeast Asia, Korea, really helping our clients gain transparency into how the products are actually put together. So the second part of our business is called quality assurance. And so that's the, we help the buy. We help to check the quality on the upstream. And then on the downstream, we also have an engineering services team, and that's the team that's really helping folks do the engineering or by the system, helping to troubleshoot with their problems and really solve challenges as they come about. And then I'd say there's a fourth part of our business, which is in the business intelligence. So we basically have a lot of data that we've sat on because we've completed over 85 gigawatts worth of solar PV engagements. So we have a lot of data that is very helpful and allows folks to make better informed decisions. And I'll say, we do this, not just for solar, but we also do this for energy storage. So we have over four gigawatt hours of energy storage systems that we've helped support with our clients in over 60 countries.

Tim Montague:

Excellent. Well, this is a real treat for me and our audience. There are very few people in our industry who have such a wide purview, a wide and deep. So hold on people. I want to give a shout out to our listeners and live attendees. Thank you for being here. Feel free to put questions in the Q & A, or the chat, either one works fine. I can't promise we'll get to everything in the course of the hour that we have together. We will have a hard stop at the top of the hour, but you can always email me as well, at tmontague@csenergy.com. And I will get an answer to your question. If you have a forward-looking question that I can parlay to Andy, and we'll give the best way to contact him later on in the show as well. So Andy, let's talk about IRR. It is poorly understood, and there are various metrics that we use internal rate of return net, present value, ROI and payback period. At the end of the day, it boils down to what is the cost of energy from a renewable energy facility that has to be out there in the elements for 25, 30 really we're gunning for 50 years, lifetime on solar and wind and storage facilities. Now, how do you look at IRR and what should developers be thinking about and focusing on?

Solar & Storage Internal Rate of Return Overview

Andy Klump:

So certainly the internal rate of return is effectively looking at the potential profitability of investments. And it kind of depends on what size project and what your cost of capital is and what your options are. So I think from the perspective of how I saw the industry evolve 15 years ago, solar was seen as a very risky asset class. And so it had to be a very high rate of return, often double digits, you know, 12, 13, 15% for some utility scale projects. When the subsidies were very high in Europe, there were even cases in Spain that were highly subsidized at 20 plus percent. And so many investors jumped at that high IRR, because it was an unknown asset class. But, over time, as a lot of these projects became more, more deep risk you had more mature investors jump into the sector, and then consequently, there are a lot of ways to reduce risks and a lot of folks were comfortable with the lower your internal rate of return or hurdle rate.

And so what happened is that no longer were these projects just completed on equity capital, you had debt and bank financing that was at a much lower cost of capital. And so that allowed these systems to effectively finance in a much more efficient way. And so the IRRs really ended up coming down to single digits. And so am I answering your question, if you're a large utility scale owner of solar assets in the United States, you're certainly looking at mid single digits. Some used to be at 8 or 9% now, increasingly it's 7, 6, and some are even sub 6 or sub 5 and a half percent on the IRR. But these assets are far less risky than they once were.

And there's also a lot of competition for utility scale assets because they allow certain large investors to put a lot of money to work all at once. But for smaller systems, it is possible to have higher rates of return. And so for those who are owning the system and they are having an incentive scheme, which provides maybe that a double digit rate of return, those can be great systems, but often they're going to be much smaller. So 10, 11, 12% may be possible for some small CNI type of installations. But starting to aggregate those at large scale becomes more challenging and those demands return really come down.

Impact of Subsidies on IRR

Tim Montague:

Yeah, you mentioned the role of subsidies. And so, for example, a feed in tariff for a rack, which are very analogous here in Illinois, we have a REC driven market, many of the U S markets start by being REC driven. And what a REC does is it just increases the value of renewable energy, somewhat artificially to jumpstart the market, because you want to level the playing field. We forget that we are constantly subsidizing alternatives, traditional fuel sources, coal, nuclear, natural gas and those subsidies are largely invisible to the consumer's eye. And so it is vital that we have subsidies in the renewable space as well. Globally, the subsidies in renewables are much less than the subsidies that are provided to fossil technologies. And that's another misconception that many Americans certainly have, but there are levers that you can pull to increase IRR, external levers, so to speak, right market levers. And then there are internal levers with the quality of the build, the quality of the construction, the quality of the products, the quality of the engineering going into the product, the quality of the due diligence and the finance. There are many, many levers in a solar project, smaller, large. So what do clean energy advisors get asked to triage and look at and drill down on related to IRR, Andy?

Andy Klump:

So there are a lot of areas where we get involved with IRR calculations and it's really part of the third part of our business. I mentioned our engineering services team, which is based in the US, we actually have 40 engineers and inspectors throughout North America that work with many ITPs and developers. And so there's a variety of services that we provide. But, in our development services team, we're really working with folks to really try to eliminate risk. We do a lot of work around energy assessment and financial modeling. So we're really trying to make sure that a developer has the right assumptions going to a model. And we have to make sure to use a piece of software called PB cyst and make sure we have the right set of assumptions that go into that model and drive towards an accurate IRR calculation.

I think one of the things you may be familiar with, there've been some independent reports from companies like DNV GL who've announced under-performance by three and a half, if not up to six%. So, the initial accuracy of those initial energy models is extremely important. One wants to make sure that you're as accurate as possible because if they're too aggressive, then you're not going to perform to the level of expectation. The banks won't be happy with that or the project owner for that matter. But if you're too conservative, then you may be leaving some additional money on the table. So, the IRR calculation is definitely fed in by the person who's providing the energy model that requires a very experienced engineer to do that work. And so that's some of the work that CEA does is that energy assessment, financial modeling, you would do a lot of site selection and support. But to the overall solar resource assessment and you'll analysis and the PV Dusan phase, these are all things that really helped to calculate what the IRR is on in those early stage projects.

Tim Montague:

You know, it's interesting to think about just project scale and thinking about solar modules, for example, in CNI, we're used to thousands or tens of thousands. If it's a large CNI project, there would be tens of thousands of solar modules in a project, but at the utility scale, we're talking millions of solar panels. And so even a fraction of a percent of greater productivity from the individual panels or a lower degradation rate, right? It's a both end. You want really high quality out of the gate. You want high productivity on a per square foot basis while you also need really high longevity, because this is going to be out there getting beat up by rain, wind, hail, etc. for 30 plus years. And so those very small differences really start to make a huge difference in the financial aspects of a project.

Which frankly is why I see the industry pretty bifurcated. There's the CNI grouping in Illinois that kind of peaks at three megawatts, DC with community solar and large CNI. And then there's very little, and then there's hundred megawatt to 400 megawatt projects, a plethora of those now across the Midwest. And of course these have been happening in Texas and California for years and years, but it's really the first launch of large scale utility solar coming to the Midwest. Now we've had wind for about a decade, maybe a little longer, maybe 15 years. And so it's very heady days. So is there anything else you want to say about IRR before we get into the role of some of these other services that you offer and then we will also interject some Q & A here periodically.

Andy Klump:

Yes, I think just a couple of the terms you mentioned, your NPV, net present value, is obviously an important term to know as well. A lot of folks use NPV to calculate what is the current valid value for the future cash flows. So a lot of folks in your community may be developing projects that they're going to sell. They may go through and make an NPV calculation to determine what the values of those future cash flows. Then obviously there's a ROI, or return on investment, going back to the payback of assistance. So certainly someone who's a residential homeowner and where there are certain incentives or tax incentives that are in place, as we all know the ITCs are an important part of the U S financing structure.

But a homeowner is much more likely to make that investment if they see a four or five-year payback, as opposed to a 7, 10, or 15 year payback. So we've seen those payback periods really shrink over time. So all those terms, I think are important for folks who are involved in the financing of solar projects to know. As you said, there's a lot of areas where I think are very strong engineering and is why quality and procurement practices can really increase the IRR. And I know that's a keen interest to a lot of your listeners.

CEA’s Role in Project Development

Tim Montague:

Cool. Well, let's get into it. Thinking of a project kind of from ideation through energization, right? You're planning a project, you're starting to do some initial design work and engineering, when does CEA get involved in a project? How early in the development of a project do you get involved in and what are the services that you're providing at that early stage?

Andy Klump:

So there are a number of developers who engage us at a very early stage. So there are plenty of folks who are just in the early stage of kind of a Greenfield, one's going to be site selection, assessment of that site, understanding the geo-tech or the hair that's on that project. They quite often will engage your team to do a walk through the site. But also to look through initial design, our team does get involved with doing design work up to usually about 50, 30%. So that's very common that we would do that work upfront for a developer who is just feeling things out and getting started. And that's extremely important for us to be engaged in early stage. So there's also the solar resource work and field assessment.

Then, as I mentioned, permitting support is another area where we can work with a large master developer who has got products all over the country or the world. But there's also some folks that are just very local working on one particular area. But they want to maximize their reach on the development side. And so that's where we're working with a strong engineering firm, like CEA, has a lot of positive benefits, which allows them to scale much more quickly. And we have partnered a lot of folks on a repeat basis

Tim Montague:

And very early on in the development life cycle, you have to start zeroing in on products, right? You have to figure out what inverters you're going to use, what solar modules, excuse me. And that quickly leads to supply chain management questions. You know, it always makes us nervous when we're thinking about procurement of modules, because the price fluctuates, the availability of product fluctuates. A big project can wipe out a manufacturer's supply with the blink of an eye. A large solar factory is putting out a few gigawatts, correct me if I'm wrong. Are there other factories producing more than 10 gigawatts of solar panels?

Solar Manufacturing Market Overview

Andy Klump:

Absolutely. So if you look at the world's largest manufacturers, you are up to 45 gigawatts of capacity, and JINKO is 30 gigawatts. And if you look at the large major players, they're basically expanding at 10 gigawatts at a time. So it's really quite impressive. But in terms of actual capacity, the top 10 manufacturers account for 70% of overall capacity because a lot of small players have been expanding in one and two gigawatt increments more recently. But, over time, they are going to consolidate. And if you look at the shipment totals this last year, the top 10 manufacturers accounted for 90% of the overall industry. So yeah, completely agreed. This is an industry about supply chain. It's extremely important to understand the supply chain and the pros and cons of various approaches, but we do get involved with a lot of supply chain decisions.

And, part of our work on the supply chain management side is to helping folks, as I said, be the P and the EPC. So we see more and more developers taking on not only modules, but also inverters and amount of structures. They'll effectively sub out everything else to an EPC. But our engineering services team may be involved with the EPC, you know, bid oversight and seeing some engineering, construction, monitoring work on the site level once those procurement decisions are made. But our supply chain team is really working with folks either those with an existing procurement team or those that are actually in the process of working externally. We do almost all the work just everything usually flows through our clients but the supply chain is absolutely crucial.

And that's why we've been sitting on 13 years of a track record. We have relationships with a lot of suppliers at the headquarters in Asia. And a lot of our clients really say that those relationships are very valuable for them to get better than market pricing deals. So that's where we've taken many clients to their manufacturers in the past. But as I said during this time of COVID, it's not possible to travel easily to China. I spent about six months in the U S last year, had a hard time getting back, but you know, we expect things to open up a bit more, but, you know, definitely during COVID, we're doing a lot of work that helps our clients connect directly with manufacturers and get some insight into into the market.

Disruptive Supply and Demand Analysis and Predictions

Tim Montague:

You know, one of the things around supply chain that, that we're very aware of right now is the shortage of chips, especially for the automobile industry and explain how that works, because you would think that in an industry like the auto industry, there would be a relatively constant demand for the products going into cars. And yet now we have a pretty severe shortage where some manufacturers are stopping production lines because they can't get the products to complete the vehicles. How does that happen? And, are there things that we need to be thinking about related to the solar industry? Do you see any pain points coming in the near future?

Andy Klump:

Absolutely there are some in any high growth industry, there's always a supply and demand disruption. And when supply and demand are not perfectly matched, then you're going to see disparity. And so that does result in some supply shortages. And so this absolutely has happened on the solar side many times in my 15 plus year career. So we mentioned polysilicon pricing. It was a perfect example back in 2007 and eight and reaching exorbitant levels. It was all driven by a lot of subsidies that were overly frothy, but you know, the reality is that the industry is much more mature. Now. We don't have quite the same swing of ups and downs, but there are times where there's shortages and sometimes it's even at the basic raw materials, like glass or EVA, which are kind of key components on the solar module manufacturing side.

Polysilicon Shortages

Andy Klump:

But right now we see a bit of a shortage on polysilicon. Polysilicon prices have fluctuated as well. And if they've gone up by 30 to 40% since end of last year. So yes, as you said, do you have batteries? Another perfect example? So actually battery cell manufacturing capacity is not meeting market demand. And it's from the leading companies. Some of the major Korean players like LG or Samsung are not able to meet the overall needs of the market, several shifts to other manufacturers and other leaders in this space, such as CATL out of China were not able to meet that. So you're absolutely right. That just a massive amount of growth in the electric vehicles sector, as well as energy storage sector. And so that's really pushing some of the manufacturers to not be able to keep up with demand, but many are expanding rapidly, just not as much as demand triggers are. So it's a challenging time in the market for energy storage.

Tim Montague:

Yeah, it's kind of a double whammy that we're reaching the tipping point in EV economics. And so the demand for car batteries is going to go through the roof. We see that Tesla, which is the US leader in EV manufacturing getting into vertical integration, they're going to be making their own batteries all the while sopping up huge volumes from the major companies that you just mentioned. They're not going to stop buying from third parties. They're just adding their own line to the equation, so to speak, because they see the writing on the wall that the industry is taking off and they're really just getting started. So what else should developers and financers be thinking about and how can you help them around supply chain management?

Andy Klump:

Absolutely. So one of the things we always say is one can never have a single source, always have multiple options. And it's a function to what size, if someone's buying just a container to well cables, certainly a just single sourcing is probably the only option. But when someone is getting into, you know, multi megawatt or a multi tens of megawatts, it's good to have a couple of different parties they can go to because you're right. Some folks do come up short at a certain points of time and one just can't wait around. So we do a lot of work both with really educating our clients on what are the trends. We have data which really kind of highlights the whole overall cost stack and what the gaps are in the market.

We also have a tremendous amount of relationships with manufacturers, sometimes just introducing them to manufacturers that are not as well-known when there's a shortage of on the top tier players. So there's a lot of work we do about running RFPs, you know, it's gonna engage our clients. And in that process, really helping to devise the technical specifications understanding the bill of materials for the product components that they should be asking for. And just understanding about the different technology trends. So, keep in mind that, solar modules, just a handful of years ago, we used to be the 3.25, 3.50 watt range. And all of a sudden the its utility scale models jumped to 3.80s, 3.90s. And now you see low fours, but you know, we're not many are also selling four fifties and four sixties.

Very soon you'll see 500 watt plus modules. So, one could choose modules that are seemingly the latest and greatest one day. And then all of a sudden six months later realize that they're way off the market. And so everyone wants to be aggressive in terms of the pricing expectations they have, but doing one of the bigger decisions around supply chain is often, what technology do you choose and why, and from which manufacturer? So our supply chain team is based in the U S really answers all those questions. And so it's very exciting to engage with clients and really help educate them and see the light bulb go off in their mind because they're really often blown away by the amount of insights our team has but really helping our clients save millions of dollars and sometimes tens of millions of dollars, depending on the size of the procurement.

Low Carbon Solar Modules

Tim Montague:

You know, I had Michael Parr from the ultra low carbon solar Alliance on the show, all solar modules are not created equal. A low carbon solar module will have half the carbon footprint of a high carbon module. And by high carbon we're simply referring to the electricity that is used in the manufacturing of the products that go into the module or the module manufacturer itself. So this brings up questions of products, how they vary by region. You could have a company like Q Cells that, you know, they're a global manufacturer. They have a panel factory here in the U S but of course they have factories all over the world. And of course the sources of electricity for those panels are different. So they do have an ultra low carbon solution, and then they have a medium carbon solution.

CEA’s Quality Assurance Model

Tim Montague:

Let's talk a little bit about QA, quality assurance, and what are the aspects of QA that you guys are focused on? And, are you involved in these discussions about the carbon footprint of the materials? Because of course, we're trying to zero out our footprint. China has put a stake in the ground to be net zero by 2060. The Biden administration is talking about zeroing out our carbon footprint in the U S by 2050. And, all of us in the industry of course, need to be thinking about this on an individual project basis. Of course, we're promoting clean green energy when we're installing solar arrays, but if we could get to net zero, twice as fast, why shouldn't we? You know, so we need to be educating ourselves and thinking about these things as well.

Andy Klump:

Absolutely. So I will definitely say, we're, fully supporting decarbonization of the planet and trying to help you know, adopt as many green strategies for building the the industry out. And so there are a number of companies globally there. They care about this topic, and I want to get Chinese manufacturers who are shifting to other low cost areas. So their regions around Sichuan or Yunan where there's very large build-outs of upstream wayfaring facilities, because they're very close to hydro. So hydro is a, everyone knows, is a very low cost form of energy. And so you have these high energy content parts of the supply chain be worked with hydro facilities it's a perfect match. Many solar manufacturers in China also have solar on their own rooftops, but that's not enough to meet their core base load.

Upstream Traceability

So they have to augment that with other sources of energy. And so, when they are clean and green that obviously works well. And there've been certain incentives in place in certain markets like South Korea or France that really highlighted, incentivize those low carbon footprint products. But, our quality assurance capabilities really stemmed to the fact that we can do traceability all the way to the upstream side. So we can actually track some elements of the carbon footprint, but we can also look at the traceability of the product. So that's where we get questions where the product sourced on the further upstream side. So, as I mentioned, I have background in polysilicon procurements for Trina solar, I spent two plus years doing that in factories all around the world. I have visited polysilicon facilities in the US, Germany, and then also China.

So I've seen a variety of those facilities. But, the QA work that our team is doing is directly getting into these factories but really focused primarily around the end product. So, whether those are modules or whether those are inverters PCs on it, or energy storage systems, other power electronics, we have teams and separate capabilities on all those areas, including mountain structures. So that's where our supply chain practice has really married very closely with the project operations team on the QA side. So we're often doing the pairing of those two services, really specifying the contract. What are the bill of materials, which one to look for, and then how does one go about you know, the execution of a deal. That's when the pass off happens to our team, that's in the factories, looking at validating the quality of the work.

Another example is someone asks me, well, how do you justify those services? We'll look, there are cases where someone may go to a non mainstream manufacturer and they say, look, we can't get access to a tier one or a top tier product because they're sold out right now, help us go to a tier two facility and carry your QA team so we can help them procure more cost-effectively and make sure they get product. And then we basically overlaid more QA resources in the factory to make sure that we're taking out all this defective products and giving daily reports and insights to our clients about what kind of quality of the products that they've bought are actually happening. So the QA work is extremely valuable and that's where we we've had this breadth and depth of 85 gigawatts worth of experience, that allows us to see different patterns in different manufacturers and really help educate our clients on the importance of the supply chain decisions that they're making.

Importance of Unbiased Test Labs

Tim Montague:

How does an organization like PVEL factor into this? PVEL is famous for their module reliability report scorecard. They also do a scorecard on inverters and now storage. Is it that a developer would kind of scour that information first and then have a select manufacturer that you're then taking a deeper dive into? Or how does that work?

Andy Klump:

Well, our comments is PVEL is absolutely a partner of ourselves. There are many folks that are very fond of PVEL reports, but the value of PVEL is to do the test lab work because they have a test lab that actually takes products, whether it was inverters or in modules, and actually do test in their facilities on those specific products. So, we're agnostic in terms of who we work with. There's many of the labs in the U S, other folks like ROTC are also active in the industry. But we can do these tests, whether in China, Southeast Asia, wherever their test labs that are available. So we have folks that are experts at putting together testing protocols and overseeing the modules that are actually in testing.

But our view is that it's really I'd say, both a paired service where one wants to actually go through and do extensive lifetime testing, and certain of these facilities that can't be replicated just in a factory, along a normal manufacturing line, but it's absolutely crucial to be in the factory and really providing that ongoing oversight. So whenever someone has a tighter budget, which often happens, we say, look, if you actually engage CEA and our teams will be on site as much as you'd like us to be, whether it's just a day shift or 24 hour, seven night shift, all those scopes are very valuable to actually test and witness what's happening in the factory. That can't be replicated anywhere else. There's also a halo. We've seen many different operators who pretend to be on their toes a little more when they know CEA's looking around, performing inline production monitoring, where we're actually testing the equipment along the way and seeing how the equipment is calibrated, and then finally doing pre-shipment inspection at the end of the line.

And then prior to a container loading step, we actually see the product mounted onto a container before its shipped off to a logistics firm. That's taking it around the world. So that's where our services I think are much more comprehensive. Whereas, someone could take some modules from the ideal batch at a test lab and get some good results. We've seen some manufacturers who said, oh, we only allow certain testing in certain tests labs, but we see that as a conflict of interest because some of the tests labs are paid by manufacturers for certification, and that's a very profitable business for them. So it really is a much better model to have someone who's entirely independent of suppliers, which CEA is. And that's where I'm very proud to say that I own the firm. And, we are a hundred percent aligned with our clients and their interests. We do not take any money from manufacturers. And that's where we are independently owned and operated company. That's given that third party point of view. So the QA work is absolutely crucial. So hopefully it gives you a little bit of insight on the work that we do. Vis-a-vis someone like a PBL.

Standardization Protocols

Tim Montague:

There's a question from Fred about standardization. He's particularly curious about engineering services, but I think this applies really across the board. Are you making up these punch lists as you go, or are there organizations that are developing standard protocols for all of these procedures that you need to execute, whether it's on the quality assurance side or as a third-party engineer?

Andy Klump:

So, absolutely we definitely have standards that we've been following for many years. And if I look at our factory audit process it is a thousand point checklist. And so very comprehensive that these are all customized to different types of products, different times the industry, you know, may have to tweak the type of work we do, obviously if you're dealing with a bi-facial module, which is now 90% of the market, that's a very different test than we would have when it was a standard backsheet. So there's certain customizations we have based on what the bill of materials are. But we have clear standards in place. In terms of our downstream engineering services, we do have a very clearly documented punch list and our teams are going off and doing different checks on different sites.

We're doing this for large, big box retailers. You can guess some of the folks are involved in that industry, but I'll say the aggregate market cap of our clients is over 3 trillion US dollars. So we work with some of the largest companies that are involved in both rooftop and also offsite generating capacities. So, whether the punch list is for a rooftop system or utility scale system, our teams are on the onsite actually doing a lot of this work. And really it's in our interest both for ourselves as well as the broader industry to have many of this standardized. I couldn't answer a standardization question though, without talking about the product challenges we've seen just in the last two years is that we've seen a shift away from standardization.

So keep in mind that from 2006, till 2019, the size and the form factor of wafers was all 156 millimeter with cells. However, just from that 156 threshold in 2019, you saw an increase to 158 and then went to 161, 166. Now a lot of new lines are coming out at 182 and somebody being come out at 210. So when all of a sudden you change the wafer size, the module size itself also changes. So unfortunately we're shifting away from fewer standards, actually more standards and that's adding more complexity. And so this is one of the reasons that our business exists is we're very familiar with all those complex systems. And that's absolutely crucial for the industry to survive is that we have well-trained engineers who know the differences between the different types of standards that are out there and really trying to help de-risk the industry. So we go back to that IRR, really trying to help lower the cost of capital and allow more and more solar products that to happen.

CEA’s Scale and Range of Customers

Tim Montague:

We're going to get to more of the audience's questions here in the last 10 minutes. So get your questions in. And you know, one of the questions is about the scale of your customers. What is a typical profile of your customers in terms of the size of projects that they're working on?

Andy Klump:

So we have a whole range of clients. And so, I will say we work with some of the big, large scale guys. We work with some of the largest IPPs and developers in this space. Some are public traded companies in the fortune 50 range but there's also very, very small players. So some that are involved residential and it's somewhere in the mix and the middle in the CNI space. So it really runs the gamut. I would say, while we do have a lot of large utility scale clients, there's clients with one to five megawatts of buys that need help. So we support procurement even of that size and we can do quality assurance engagements at that size as well.

Ideally, we basically try to figure out, who's growing, what are their needs, there's a process. We go through to really understand what their objectives are, but look, someone who's buying 5 or 10 megawatts, if all of a sudden they're buying 3 or 5 cents higher than the market, it's something where we can help them quite dramatically with with cost savings. So there's a lot of ways to work with even folks that are small to midsize. So for us, any clients is an important client, we want folks to be repeat clients. And so that's where we really work with folks in a lot of a repeat basis. And as I said from the start myself being from St. Louis, my dad being a cab driver and having a lot of uncles who are electricians and plumbers and blue collar or folks that are always very keen to work with folks who are engaged in building things. So our teams are very fundable and happy to work with whoever has interest with our work.

Tim Montague:

Yeah. I mean, if ever there was a global company, you meet that definition. We have a question from Faye about QA work on suppliers. How do you meet local requirements in specific regions? She calls out Ireland and California. I would add France to that. France has been a leader in setting requirements for low carbon modules, for example, but when, especially under the pandemic, how have you and your staff dealt with the challenges of not being able to travel, perhaps as freely as you wanted to, or did historically and then meeting regional requirements?

Meeting Local Development Requirements

Andy Klump:

So during the early days of the pandemic, what's going on was in a similar condition with a lot of folks that I was actually stuck outside of China in January and February and unable to get back in March, which is why I pivoted to the U S but like a lot of our teams were either stuck in quarantine or not able to do work onsite as we'd like. So we did have certain cases where you had to do some remote checks. We had to use various digital devices that check things remotely, but there's actually really only a few cases. I would definitely say those were not ideal, but, you have to think back in March of 2020, when things really started to spread globally from a COVID-19 perspective, they actually were shaping up a lot better in China.

And a lot of factories were getting back to full legalization. So by April of 2020, China really was in this lockdown mode, but the supply chain was more or less functioning well, so our teams were able to do different inspections throughout China without a problem. We had teams that were in Vietnam and different countries. We do have one in France, a couple of engineers in Italy, Greece, Spain. So we've had folks complete work really throughout this whole pandemic and folks who go up on rooftops in the U S and it's not been ideal, but our teams have been able to around. We just brought them the PPE that they needed, and obviously very supportive of whatever safety protocols can keep them safe. So surprisingly it was not as much of an issue, but I will definitely say we had a lot of new clients who came to us because they no longer were able to travel to China. And that's where our team is very strong, but we have folks really throughout Southeast Asia. So we had many engagements. I'm doing this work right now, and I've been doing this throughout the pandemic.

Top Predicted Trends in Solar and Storage

Tim Montague:

Great. We have a question from Zap and this is my favorite. What are the top trends you expect to see in the combined solar and storage space over the next three years? And what are the biggest opportunities and risks involved in those trends?

Andy Klump:

Absolutely. So, I think increasingly we're going to see solar and storage be paired together. There's absolutely no doubt that I think by 2022, 23, we're going to see the percentage really kind of move more and more towards the upper percentage levels of joint installations. But, I think one of the trends that's very clear is that there is a bit of a supply shortage on some of the battery cells. That's been more pronounced recently and what's going to be industries growing quite rapidly, but so are other needs such as electric vehicles. So we do help folks with making good storage decisions. We do help companies who want to look out for some of the manufacturing facilities at different integrators. I will say that the integrator trend has been one that's playing off, but increasingly we're seeing more developers are becoming more sophisticated with energy storage. And so the need to have external advisers with energy storage expertise, like CEA is becoming more pronounced. And so we're really happy to work with folks who lack that expertise in house. But they want to stay in line with the best in breed market class practices. So great question to hear.

Hydrogen

Tim Montague:

Yeah, I've noticed that hydrogen is really getting in the news now on a regular basis. As I mentioned at the pre-show, we now have a green hydrogen facility being built in Champaign-Urbana and pipelines that are moving natural gas can be retrofitted to move hydrogen. So we see Europe investing a very large, some 40% of their infrastructure spending, is going into the hydrogen economy now. And so it's very heady days for long-term storage, plenty of challenges there. But we definitely see some light at the end of that tunnel. I would be remiss, Andy, if I did not mention that people can learn a lot more about your background and your legacy by listening to your two interviews on Suncast. So check Suncast Media with Nico Johnson, the Suncast podcast episodes 120 and 335 are interviews with Andy. Andy holds the distinction of having the most downloaded episode of Suncast, which is episode 120. So check that out and check out all of Nico's content. He has over 350 episodes now of that show, where he interviews CEOs and entrepreneurs from the, clean energy industries. So great resource. There was a question about getting into the solar space in your mid career. Absolutely do it. You can do it. And on that note, Andy, what business books do you recommend to other colleagues, young professionals, mid-career professionals? What stands out in your library?

Andy Klump:

So I definitely am a big reader of Pat Lencioni. He has a number of books, really talking about five dysfunctions of a team. I've really gone through and read every single one of his books, a lot really have to do with culture. And I think true leadership is really defined by what type of culture you build within your organization. So we have a very positive culture at CEA I'll also say we're actively hiring. So we're looking for over 25 spots to be filled in the US, China, and a few other countries. So always happy to hear from anyone who's interested in employment in the solar and storage industries. But I'll definitely say other books that we read, I'm really a big fan of Verne Harnish's scaling up. That's a cultural Bible. I'm also a big fan of a variety of other leadership books. Really, I couldn't say enough about scaling up. It's a key foundation built off of Johnny Rockefeller's habits. So we could really practice these throughout our time at CEA and seen a lot of success with the growth of the business over the last 13 years.

Conclusion

Tim Montague:

Cool. Well, I'm going to put your landing page on screen and you can please tell our listeners how they can reach Clean Energy Associates.

Andy Klump:

Absolutely. Well, anyone can feel free to reach out to me on LinkedIn but you know, I'm very happy to take outreach to us through our company channels. My email address is just AKlump@CEA3.com. But truth be told I don't check my emails nearly as much as I do. I will say LinkedIn is probably the best way to reach me, but the team is always very happy to engage with new folks and Tim, we really appreciate the great platform you provided. And I'm always very eager to help supportthe appointment of solar and storage within the Midwest. That has a special place near and dear to my heart. Really, we work with folks around the world and are very pleased to support the needs of our clients.

Tim Montague:

Well, thank you. I wish we had more time to spend with you, Andy. This has been a real treat. I do want to make a couple of announcements. We do these interviews a couple of times a week. There's one live event per month called the Solar Podcast Live. And our April guest is Peter Kelly Detwiler. He has a new book out called the energy switch, how companies and customers are transforming the electrical grid. These are all free events. You can register right there at cesenergy.com. And then our podcast landing page has a plethora of content. We're doing two interviews a week on what we call prerecorded events. This morning we dropped Mike Casey's interview from Tiger Con. He's a thought leader in the industry talking about reducing the soft cost of solar, which is going to unlock a huge amount of growth in the solar industry, across the board from rooftop solar, to utility scale solar interviews with Tyler Kansas, on sustainable solar.

They are an EPC at innovators here in the Midwest doing great things. And then other thought leaders like Jim Spanno and Derek Coburn, both standing on their own two legs. Jim in New Jersey, creating the market in the Atlantic coast region, really a OG in the solar and storage industry going after the virtual power plant and Derek Coburn, another colleague of yours, Andy there in China, an American living in China, going after DC lighting. And then once a week, we bring you a chase down of the latest solar storage and clean energy news. The clean power hour with myself and John Weaver, who is a journalist for PV magazine and a solar installer NAPC in Massachusetts, which is one of the hottest markets in the US, so check that out. I want to thank my guest, Andy Klump, for coming on the show today. He is the CEO of Clean Energy Associates. Thank you so much, Andy wish you well, and thanks everybody for listening.

Andy Klump:

Excellent. Thanks again, Tim. It's been a pleasure to be a part of the show and I look forward to hearing more great episodes coming out.

Tim Montague:

All right. You have a great day and thanks everybody.