Author Archives: mdp5325

Decentralization offers endless opportunity

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The decentralizing of power generation is filled with both positives and potential pitfalls.  Some of the biggest positives will come from the growth of renewable generation.  Creating small scale generation facilities on a residential or even business level is a much simpler and manageable process than creating large scale generation facilities that could rival today’s fossil fuel generation facilities.  As small scale generation systems continue to evolve, ultimately it gives the individual much more choice in how they get their power.  Whether it is through PV solar, wind, or any new form of power generation that is invented.  This freedom could be great for the industry.  Very similar to how the telecommunications industry has evolved since the Telecommunications Act of 1996 by lowering the monopolistic power of existing telecom companies, decentralization and deregulation of power generation will force innovation and evolution by the existing power companies.  Flood the market with competition to the existing government regulated monopoly and the industry will begin to innovate much faster.  The biggest potential negative effect of decentralization is the effect on the grid.  The nation’s electric grid is expensive to construct and maintain.  It is also central to the stability and security of the country.  With increased customers coming off the grid, the burden of maintaining the grid falls more on the customers still using the grid and cost increases become proportional with the people leaving the grid.

The potential for new businesses is potentially endless.  New PV designers, companies that install and maintain new systems.  Companies that develop, install and maintain battery storage systems for people once the new generation systems are installed.  Efficiency consultants who can show how to make better use of your new systems and allow for smaller more compact systems that do not need to generate as much power.  As the industry evolves more and more the potentials are endless.

If I was going to start my own business within this industry, it would have to be consulting.  I am not an engineer, I do not consider myself an inventor what I do believe is a strength is in analysis and project management.  Consulting is important because business owners and individuals cannot be expected to be experts in energy generation or efficiency nor should they be expected to spend the necessary time to research the systems properly themselves.  I can also see a business that does system design, either as part of the consultative aspect or as a stand-alone business.  Not actually getting into manufacturing, or install of physical equipment but as someone who puts together all aspects of a system from power generation, to battery storage, to smart meter technology and efficiency measures that finally give residential and business customers energy independence or profit.

Understanding Cost of Capital – Michael Pittman

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Outside of starting a consulting firm, starting any sort of business within the sustainability of renewable energy field will be highly capital intensive. To start a renewable energy business you must have the working capital or credit to finance the high startup costs. Many firms will take on investors to help with startup costs. These investors will have certain needs, most specifically “Will this venture offer me a good return on my investment?” What are the chances that the risk of the investment will result in a large enough reward? If there is a positive return, will the return be greater than investing in equities or sitting on my cash for the next best opportunity?

The three most common ratio’s used to determine the returns a company generates are return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) (Khan 2014). ROA is calculated by taking net income and dividing by net assets. This can be skewed very easily by a firm that holds on to excess assets or cash. ROE is calculated by net income divided by shareholder equity. This provides the level of profitability that is achieved from money provided to the firm by investors. This number can also be skewed because it does not take into account any preferred shares that the firm may have issued. ROIC is calculated by taking net operating profit after taxes divided by invested capital. This would let investors know how well the business turned invested capital into profits.

Each one of these ratio’s is important because knowing all three will offer a much better understanding of a firm and its financial position. Investors need to know that you will be able to offer them solid performance under each metric and return on their investment.

A factor that for some reason that is always overlook and should be an important part of any investment discussion is “How good are you at sales?” You can have the best product. You can have the most efficient operations side of the business. You can have the best and brightest talent working for you. You can be a part of the newest and fasted growing market segment in business. None of these matter if you cannot sell your product. As an investor, I would need to have extreme confidence in the entrepreneur’s ability to sell or confidence that he could employ a strong sales force before I would invest.

 

 

 

 

 

 

Khan, Saliq. “ROA vs. ROE vs. ROIC .” The Johns Hopkins Carey Business School Equity Analyst Team . Johns Hopkins Carey Business School, 9 July 2011. Web. 21 Oct. 2014. <http://jhuanalystteam.blogspot.com/2011/07/roa-vs-roe-vs-roic.html>.

Lesson 3 – Pittman

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The difficulty that most energy efficiency projects encounter is the typical large upfront cost. A full home energy efficiency retrofit project would include lighting, HVAC, insulation, windows, appliances and replacement of other energy consuming devices. For a small home you would very quickly get your costs into the five figure range and large homes could potentially get into the six figures. Energy efficient retrofits of commercial locations could far exceed the numbers of residential projects. For the average consumer these costs are prohibitive and are what is holding this country back from efficiency. The easiest way that the government could help facilitate these improvements would be to incentive consumers to make these choices. It could either be through tax incentives or through the funding of rebate programs. The government could really help the efficiency movement by reducing the upfront cost for consumers. These incentives could also apply to new construction, not just retrofit of existing buildings. An additional way that government involvement could facilitate efficiency would have to take place on a local government level. Local government could implement building code that required energy efficiency in construction.

I would like to discuss my current business (without giving away any secrets) when I comes to developing a business that moves this idea forward. We are a registered participant in a utility’s lighting efficiency program. The way this program works is that the utility gives a flat rate rebate for each LED light that a customer purchases. To ramp up our sales and to make the efficiency upgrade process easier for customers we have rolled out a program that takes the paperwork out of customers hands and removes any hassle. It also significantly reduces their upfront cost for lighting upgrades. The way our program works is that we file the rebate paperwork for the customer, we have the rebate check sent directly to us and we discount the customer invoice by the amount of the rebate they were set to receive. This give the customer the benefits of not dealing with the filing of the rebate paperwork, significant cost reduction and a much shorted payback period for their upgrade. It give us the benefits of easier sales and happier customers. If there were government programs functioning the same way as these utility programs, a company that positioned itself as a subject matter expert concerning the program could really carve out a niche for itself and build a strong loyal customer following.

Searching for the Entrepreneurial Niche – Michael Pittman

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I can call on my past careers to point to a couple of potential reasons that renewable energy does not receive the same support from government and finance that nuclear does. I spent my early career in telecommunications and the last couple of years before coming back to school in banking. In the end, it all comes down to managing risk. Nuclear runs the risk of cost overruns and has extremely high fixed costs, however upon completion, offers an extremely reliable and inexpensive method of generation. When compared to newer renewable energy sources, nuclear offers a much better chance of return on investment both in private financing and in government guarantees. It was stated in the lesson video that the companies constructing pay for the risk that is associated with their construction projects. They pay for the risk in the form of increased interest rates. These increased rates make lending for these projects extremely profitable for both private and government lending. The relatively low risk as compared to renewable energy sources make it a much more calculated gamble and much better investment long term. When I worked in banking, some of our most profitable customers were those that possessed credit scores low enough to require higher rates but scores that were high enough to get through underwriting. I am sure the funding for nuclear and lack of funding for renewable is very similar to this.

I can draw on my telecommunications experience to identify a good niche and opportunity to take advantage of when it comes to renewable energy. This will probably sound terrible but some of the best opportunities will come from taking advantage of others failures. Any time there is a new industry with the opportunity for gigantic paydays, you will see a flood of new entries into the market. Unfortunately, a very high percentage of these new companies will fail. This is where the opportunity lies for the opportunistic entrepreneur who also possesses the access to a little financial capital. When I was in telecom, I worked for a CEO who told us that he would never spend a ton of money to build a network, he would let competitors build it, go bankrupt from the expenditure and he could then buy it for pennies on the dollar. While I was there, we were able to purchase a company that had over the previous 5 years invested over half a billion dollars in their network for under 70 million due to a huge downturn in their stock. We were able to take advantage of their misfortune to purchase an already built network for less than 20 percent of what it would have cost to build it. This same principal could and most likely will be employed within the renewable energy industry. Why spend 100 million dollars to build a wind farm when you can let someone else spend the money, go bankrupt and then you can purchase the facility in a liquidation for 10 million? Why spend 10 million for R&D into new solar technology when you can buy the patents for 1 million when the company goes under?

Greetings from Columbia, Illinois

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Hello Class! My name is Michael Pittman.  I am 36 years old and I live in Columbia, Illinois.  Columbia is a suburb of St. Louis located about 15 minutes southeast of downtown.  I grew up in Murphysboro, IL which is about another 90 minutes further southeast.  My wife Sara and I have been married for nine years and have two daughters.  Molly is 8 and Eve is 5.  I spent years working in finance and banking.  I was incredibly unhappy with that career choice so in 2012, I left the industry and became a 911 dispatcher for the City of Columbia with the idea of finding something I loved and going back to school to pursue a new career path.  I found the ESP program at Penn State and knew it was the reason I made this decision.  If I could pick my own career path tomorrow, I really believe that I would like to start my own energy efficiency consulting firm.  Through my ESP studies, I have come to believe that while renewable energy is important, efficiency is equally important.  I also believe it is an easier sale to your typical business owner.  I am really excited about this course because I recently took a position as VP of Business Development with a start up LED lighting and solar company.  I have high hopes that this class will have real world application to our new business and help me in my business development role.  I am very happy that this course is a requirement for the ESP degree.

In addition to the LED lighting business (which I can’t really say I started because I am not an investor) I have very little experience with starting a business. I have been a skateboarder my entire life.  Several years ago, I started a company the designs and manufactures skateboard decks.  It did turn a small profit but was really never much more than a hobby and has really taken a backburner to school, especially since I decided to go fulltime last year.

I briefly mentioned it earlier but I really think the idea of efficiency consulting could play a huge role in a sustainable energy future. Reducing energy consumption will make the complete conversion to renewable energy sources much easier.  It is also an easy sell to business owners whose main goal is profits.  If you can go into a business and show them how investment in renewable energy and more efficient buildings/lighting can have long term cost savings along with short term payback period for their initial investment it almost sells its self.

Here is a picture of me and my family from a trip to Chicago earlier this summer..

Family selfie