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What Makes Solar Startups an Attractive Investment for Energy Companies?

Are utilities friends or foes when it comes to promoting solar energy generation?

There is, of course, no straightforward answer. As solar energy gains a foothold in the nation's electricity supply, more utilities and their parent companies are adding or revising their strategies. Some of them are fighting solar policies that could erode their profits while they (or another affiliate of their parent companies) also invest in solar.

Solar startup Clean Power Finance is benefiting from several energy companies' enthusiasm for solar, particularly the residential segment. The San Francisco-based company announced Thursday that it's received a $5 million equity investment from Duke Energy.                  

What makes the Duke investment interesting is that it's betting on the growth and successful exit of a startup, which provides software and leases to companies that in turn market the leases to homeowners and perform the installation work. In the past, most of the energy companies' investments have gone to solar energy generation projects, from big power plants in the desert to rooftop systems at homes and businesses. Those projects involve long-term power sales contracts of typically 15-20 years.

Duke is among the four energy companies who recently took a stake in the San Francisco startup. The three other energy companies were among the investors in a $37 million round that Clean Power Finance announced in April. The company only named one of the three energy companies, Edison International, which owns the utility Southern California Edison, in that announcement.

As reported previously, the investments also reflect a growing interest by investors overall, including venture capitalists, in solar software and services rather than material sciences and solar cell development. Software investments require less capital than hardware, and many venture capitalists haven't been able to show they are able to generate good returns with their investments in solar cells research and manufacturing. 

Both Duke and Edison are companies that run both power generation and distribution businesses. The power generation business sells electricity in the wholesale market while the distribution business, run by utilities, is in retail and is often heavily regulated for ratepayer protection. The retail business sometimes sets the utilities up to fight with solar installers over policies that give consumers incentives to switch to solar and in the process start to pay part of their monthly electric bills to solar companies with whom they sign the leases.

San Francisco-based Sunrun, which has a similar business model as Clean Power Finance, has described itself publicly as a strong challenger to utilities and their proposals over net metering, which requires utilities to buy solar electricity from consumers who don't use all of the electricity generated from their rooftop solar panels. Utilities are particularly not keen on net metering policies that force them to pay retail rates.

Clean Power Finance's CEO, Nat Kreamer, seems to be making a reference to Sunrun's anti-utility strategy when he said over email that there is no need to be so antagonistic. Kreamer was a co-founder of Sunrun.

"There is a narrative being told that says if (distributed solar) wins, utility companies lose (or vice versa). We say there's an opportunity to build a value chain in the electric power business where distributed generation and incumbent power both grow and profit," Kreamer wrote.  

Lead image: Coins with plants via Shutterstock

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