CIPI: Easing the process of adopting sustainable distributed power
OTCQB:CIPI
Sustainable power generation – solar, wind, and hydroelectric - has become a fairly mature market in the United States, particularly in the utility and residential markets. In the solar market, there are now several utility-scale solar farms in the US capable of producing more than 100 megawatts (MW) and the largest of these top 500MW in generating capacity. Government incentives, lower costs for photovoltaic solar panels, and increasing demand for renewable energy solutions have fueled the expansion of solar generating capacity which now produces roughly 5% of all US electricity.1 The residential market for solar generation also continues to display healthy fundamentals with forecasts predicting growth of 15%+ per annum through the end of the decade which will further increase the proportion of all electricity generated by solar in the US.2 Lastly, some of the largest corporations in the world including Meta, Apple, Amazon, Walmart, and Microsoft have made significant investments in onsite solar facilities and commitments to purchase solar power to meet their corporate ESG goals.
However, the race to meet the needs of the largest players – grid-connected utilities and Fortune 100 companies - has left a gap in the market to service the onsite solar needs of mid-size commercial and industrial companies. This gap in the market is being targeted by a relatively new entrant - Correlate Energy Corp. (OTCQB:CIPI) - as they attempt to bring distributed, sustainable energy to customers that have been previously overlooked and enable investors to tap into the reliable cash flows that these projects generate.
The challenges of arranging financing, understanding the myriad of government incentives, and managing the construction of smaller onsite solar farms (typically under 50MW with most being 5-20MW projects) have slowed adoption and left many companies without a way to realize the benefits of distributed power generation. Many infrastructure investors and funds have been seeking reliable cash flows like those that can be derived from a power purchase agreement but struggle to find these opportunities. Correlate brings the real estate owner seeking lower energy costs and sustainable energy generation together with investors in a true win/win for both parties. The company’s operating and management teams have been responsible for many large solar deployments for utilities and corporate clients and their experience should bring scalability to customers that previously would have found these projects too difficult to build and manage.
Solar growth kicks into high gear
The average price of photovoltaic panels has fallen over 70% in the past decade which has made solar power generation much more competitive with more traditional power sources. Lower input costs coupled with the growing acceptance of solar as a reliable energy source, the desire of consumers, utilities, and corporations to adopt sustainable energy sources, and various government incentives have pushed the installed solar capacity in the US from just 0.34 gigawatts (GW) in 2008 to 153 GW in the second quarter of 2023.3 The Solar Energy Industries Association expects the installed capacity in the US to more than double to 375 GW by 2028.
According to the U.S. Energy Information Administration, up to 40% of all energy use and greenhouse gas production is related to commercial buildings in the United States. Policymakers have realized that one of the fastest ways to impact the total carbon footprint of the US is to bring sustainable energy solutions to the commercial market. While putting 8 solar panels on a residential home can have a positive impact on a homeowner’s electric bill, the overall environmental impact is limited when compared to large solar farms installing tens of thousands of panels to generate power for a large commercial building or industrial site. Large buildings (over 100,000 sq ft) account for roughly a third of all commercial space in the US and often have energy management programs in place to control costs and maintain reliable sources of power at the best possible prices. Many of the owners/operators of these buildings have become early adopters of onsite solar power solutions to meet their sustainability goals and to ensure reliable access to power. However, smaller buildings representing the other two-thirds of commercial space have typically been overlooked by large energy companies and consulting firms in this space because frankly, it has been easier and more profitable to focus on a single 100 MW project than twenty 5 MW projects. Management at Correlate identified this gap in the market for distributed solar early on and has been working to target this market with solutions that fit the needs of energy users and investors looking to fund projects of this size.
While some of the drivers of the transition to solar are tied to the political climate at the Federal and state level, all things being equal, the U.S. is poised to meet up to 30% of electricity demand via solar in 2030 up from just 5% in 2022.4 The commercial and industrial (C&I) markets targeted by Correlate have seen an uptick in onsite energy demand as companies seek to establish reliable, local energy generation and traditional grid-supplied electricity has seen steadily increasing in costs. Several high-profile service outages have caused C&I customers to reevaluate their reliance on utility-supplied power and consider the benefits of onsite power generation.
Any investment in distributed power generation by C&I customers is likely going to center on the payback period for the investment. There are many specific inputs to determine the payback period of solar projects, but in general, if we assume that a large-scale solar farm costs $0.90-$1.30/watt (at the midpoint of $1.10/watt) then a 10 MW facility consisting of 40,000 250 watt panels would cost roughly $11 million. Depending on the rate that a customer is paying their utility (which varies by utility, region, and source) if the customer’s per kWh price for grid-supplied electricity is $0.12/kWh a company could recoup its cost in less than 10 years. However, it’s important to note that many additional Federal and State tax incentives can significantly lower the costs of solar facilities and shorten this payback period.
The Inflation Reduction Act of 2022 reestablished a 30% investment tax credit for 10 years for solar energy generation. This was a significant boost to the solar industry because the tax credit was midst of a phase-out, declining from 26% in 2022 to 22% in 2023 and just 10% in 2024 and beyond. The requirements to qualify for these credits are complex but understanding the requirements and enabling customers to claim them is one of the key reasons why clients work with firms like Correlate.
Correlate is in the early stages of its growth curve
Correlate became a public entity in 2021 when an existing public entity TRICCAR acquired Correlate Inc. and Loyal Enterprises. In February 2022, the company changed its name from TRICCAR Inc. to Correlate Infrastructure Partners Inc. (subsequently changed to Correlate Energy Corp. in 2023) to better reflect the operations of the company.
At this point Correlate is principally a developer of solar projects providing clients with access to engineering solutions, financing options and project management. For anyone who has tried to navigate the complex world of solar sales, managing installations, financing a project, applying for federal/state tax credits, and understanding payback periods, a one-stop solution for commercial and industrial real estate owners should be an attractive option.
Correlate works with site hosts to engineer, design, and procure all of the physical assets needed to launch a solar plant. The company also can arrange financing and package the project for sale to infrastructure investors under long-term agreements.
Correlate engages potential customers by performing a building energy performance assessment and an energy audit to demonstrate how the prospective client could benefit from solar and other energy upgrades. Then the company simulates the performance gains after the building adopts the suggestions from Correlate and performs a risk assessment to provide ranges of projected savings. If a prospect becomes a customer, Correlate onboards the client with a 12-month audit of the client’s energy bills to analyze their power needs and reviews periods of peak demand. Correlate then offers a solution that seeks to turn a facility’s energy needs from a cost center into a potential profit center if additional electricity produced by the solar facility exceeds the company’s needs. Correlate develops the site plans, manages construction, can help connect the building owner with financing for the project, performs measuring/testing to ensure that goals are being met, and finally, monitoring and maintenance of the site as needed.
The target customers for correlate are mid-tier companies with large real estate holdings, REITs, commercial retail, commercial office, industrial sites, hotels, and multi-unit residential locations with a geographic concentration in the Southwest, California, and the Northeast.
The company has indicated that their target markets include those firms with real estate assets that have a “complex energy profile”, but do not have the knowledge, funding, or other resources to invest in sustainable power solutions. A potential client could have a complex energy profile because it has many locations spread across varying geographies (e.g., different heating, cooling, and electrical needs) or a single site with various business activities (e.g., a grocery distribution center with temperature-controlled warehouses and corporate offices all housed in one location).
Examples of announced projects:
6.8 MW for NFL Stadiums in 4 cities
12.9 MW for Arizona State University
4.5 MW for Albertsons-Safeway in California
8.2 MW for Mandalay Bay in Las Vegas
With just 1.9 MW of installed projects at the end of Q2 2023 but over 70 MW of announced projects, it is clear that Correlate’s pipeline remains robust and that should lead to consistent revenue growth as projects are completed.
In the long term, the company also anticipates developing and supporting microgrid infrastructure for customers or regions looking for an alternative to the national grid. As people have pushed further and further off the grid in recent years and populations shift from the northern states to the southern states there may be opportunities to build new microgrids for residential developments or industrial locations that are willing to think outside the box. We think this is likely a much longer-term business opportunity but if the company can demonstrate its expertise in building onsite solar generation and storage solutions there could be substantial opportunities down the road.
The company is clearly in the beginning stages of its growth strategy but we are encouraged by the early success they have had at securing projects. Initially, Correlate will stay focused on selling onsite clean energy solutions (solar) to commercial and industrial customers and securing investors for these projects. Eventually, as the company grows and becomes more financially stable, management has indicated that they may retain ownership of some of the energy systems. This comes with some risk as an operator of assets but we think that investors will recognize that the value offered by a steady stream of cash flows more than offsets this risk. Finally, the company hopes to use the financial flexibility afforded to it by being a public company to consolidate the many smaller engineering and design firms, financing firms, and installers in this industry. We believe that is a long-term growth strategy but it does hold promise given the fragmented nature of the industry.
Recent Financial Results and News:
In 2022, the company made the strategic decision to delay the launch of its services as supply chain constraints would have made it difficult to complete many of its projects on time and within budget. In Q2 2023, the company’s initial projects came online and the installed portfolio increased by 1.71 MW to 1.94 MW. The revenues tied to these installations pushed total revenue to $4.16 million (up more than 16x compared to the year-ago quarter). Importantly, the company also reported that contracted revenue (to be recognized from projects completed in the next 6 months) increased from $2.14 million in June 2022 to $34.7 million at the end of June 2023.
In July, the company’s CEO indicated that the company turned cashflow positive in May 2023 and revenues are expected to be between $25-$35 million in 2023 and $45-$60 million in 2024. Since Q1 2023 revenues were just $51 thousand, it is clear the company’s growth trajectory is steep as projects are completed. The company also indicated that it expects to realize 18-25% margins which consists of EPC (engineering, procurement, and construction) margins and a developer fee margin (fee for arranging financing of a project and the sale to investors under a power purchase agreement).
Other recent events:
- The company announced that it had secured $11.9 Million to develop and install a 5.2 MW for Enersys in Reading, Pennsylvania. This project is one of the state’s largest corporate solar projects to date.
- In July, the company announced a joint venture with eDGe Renewable Partners to raise and deploy up to $100 million of capital for distributed energy projects and microgrids.
- In September the company announced a significant microgrid project for a customer representing a large oil and gas corporation to deploy up to 40MW of solar and storage capacity across twenty sites with an initial phase projected to exceed $23 million. This will be the company’s largest project to date and will likely open up additional opportunities to work on larger projects.
Management:
While the management team of any emerging company is very important, for Correlate the experience of their management team appears to be a key differentiator. The company’s management and senior business development teams have years of experience in renewable energy, project finance, and construction. The company’s deep ties to many in the industry have allowed it to scale its operations quickly.
Todd Michaels founded Correlate and previously held leadership roles at NRG Solar and SunEdison. Mr. Michaels has a deep understanding of the industry and the key questions to ask customers to meet their needs.
Roger Baum Executive VP Operations leads the company’s construction division and has been engaged in legal structuring, financing, design, and construction. To date, Mr. Baum has successfully sourced and led the implementation of over $1 billion in projects.
Jed Freedlander serves as the Chief Development Officer and has a background working in infrastructure development and leading complex public-private partnerships.
Potential Risks
As with any company at this stage of development, there are several risks investors will need to consider. Recently, the company filed with the SEC to authorize a potential reverse stock split with a ratio of somewhere between 1-to-2 and 1-to-10. While the company has adopted this amendment to give it flexibility to pursue a listing on a larger exchange (through June 2024), it is merely a possibility at this point that investors should consider. A related issue is the lack of volume in the company’s shares with average volumes of just about 5,000 shares per day due in part to its current listing on the OTCQB (venture market). New investors may need to be patient to establish meaningful positions in the equity given the limited trading volumes.
To date, the company has been financing operations with a combination of convertible debt with above-market interest rates and equity issuance to cover some operating costs. Based on the current level of contracted revenue and margins that are anticipated on these projects, it is likely that the company is going to be cash flow positive going forward but it is worth watching for new investors.
We would also note that the company’s capital structure includes substantial options and warrants (which could increase the total share count by more than 50%) and the company has noted that it is likely that it could raise “significant debt or equity capital to fund future operations”. The potential for current investors to face dilution down the road should be taken into consideration.
Finally, the company has not yet seen projects being impacted by rising interest rates principally because the expectation is that this is a temporary issue for the markets. However, if interest rates do remain “higher for longer” it is possible that it could impact the company’s pipeline of pending projects.
Conclusion
Correlate Energy (OTCQB:CIPI) is an emerging player in a market poised for substantial growth that can leverage the experience of its management team to target an underserved market which makes this a company to watch.
Correlate’s shares currently trade at roughly 2.5 times the annual revenue run rate (based on Q2 2023 revenues) which appears to be a premium to many public solar, utility, and energy consulting stocks but given the company’s size and stage of development, it is not out of line. We believe investors will likely continue to focus on the company’s growing level of contracted revenue in the near term until profitability is achieved.
If the company hits the mid-point of its forecasted revenues for 2024 ($52.5 million) it would mean that the company grew 200%+ from the annual revenue run rate in the second quarter of 2023. Growth rates like this in a challenging economy will certainly capture the attention of small-cap investors. Many of the company’s projects will have significant lead times from initial planning through to the point where they are generating revenue so the company’s reported contracted revenue will be a key metric to monitor to determine if the company is on track to meet its targets.
The solar and distributed power generation markets in the US are poised for significant growth in the coming decade as a result of sustainability goals, government incentives, and increasing electrical demand. Over a longer timeline, Correlate’s business model should benefit from acquisition opportunities and plans to hold ownership stakes in projects that it develops. These opportunities are significant but at this stage of the company’s development, it’s too early to accurately estimate what it might mean for its valuation.
Correlate is led by a seasoned management team targeting an underserved, growing market and investors watching the sustainable energy space should have it on their radar.
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1. https://www.seia.org/research-resources/solar-data-cheat-sheet
2. https://finance.yahoo.com/news/u-residential-solar-pv-market-172900514.html
3. https://www.seia.org/us-solar-market-insight
4. https://www.seia.org/research-resources/solar-data-cheat-sheet
