Diverse Perspectives In Renewable Energy Finance – In Conversation w/ Lydia Li

In Conversation w/Lydia Li

In this episode of Pivotal180 in Conversation, we interview Lydia Li, VP Investments at Arevon Energy. Lydia has deep expertise in the realm of renewable energy finance and clean tech, and has been recognized by Forbes for her achievements in its 30 under 30 – Energy list. In this conversation, we discuss Diverse Perspectives In Renewable Energy Finance – In Conversation w/ Lydia Li Of course – we also talk IRA developments and what Lydia is most excited about in this new legislation!

If you’d like to be put in touch with Lydia, please reach out to the Pivotal180 team at sales@pivotal180.com

Okay, welcome everyone. Thank you for joining us today. We have a really exciting conversation and a really fantastic guest, Lydia Li, who we’re very grateful for joining today, we are going to be talking a little bit about energy finance and investing in sustainable technologies and infrastructure and why this is so important for climate change action and the energy transition overall.  Before we really dive into the meat of our questions, I would love to introduce our guest, Lydia Li. She’s an investor at Arevon energy, and she has a really interesting background at Generate Capital – goes back many years. I’ll let her tell you that. But we’re, yeah, we’re really excited to have her here today. So thank you, Lydia for joining. And just as a little bit of introduction for our viewers, could you tell us a little bit in your own words about your professional background, but also the “why” behind transitioning into sustainable infrastructure, finance and clean tech investing?

Yeah, of course.  Thanks for inviting me and really honored to be here for, for all of you.  I’ll start with a little bit introduction of myself. I graduated from Claremont McKenna College with a degree in government. And after undergrad, I started my career at Macquarie Capital in investment banking. It’s a pretty traditional two-year investment banking program. Macquarie is particularly strong in infrastructure and energy. So pretty naturally after the two years, I joined the Commonfund Capital on their natural resources and energy team as a private equity investment associate.  This is about, you know, a 10 years ago when clean energy and sustainability, wasn’t such a big thing yet.  So at Commonfund, my main role was to invest in traditional energy. That includes oil and gas, some power and utilities and other aspects of fossil fuel traditional energy investments.

So while I was there, if, if you all can remember back in 2015, 2016, there were a lot of students started protesting against our endowments and asking for endowments to divest the fossil fuel and Commonfund’s AUM mostly came from school endowments and foundations. So our LPs came to us and asking, Hey, can you come up with some new opportunities for green investments or help us gradually transition from a traditional energy or fossil fuel into a more sustainable investing angle. At that time, my team didn’t really focus on that and there wasn’t really anybody doing it. So I raised my hand and I said, I can do some research into this aspect and see how we can help our LPs achieve their goals. The more I look into it, the more interesting I find it. And I think it’s way more aligned with my personal interest and goals than what I was doing at that time.

So I was trying to push for a new sustainability program to be implemented at Commonfund at that time, but obviously a big organization moves quite slow.  Eventually after left Commonfund, they did actually implement that in, in 2018, but that was already after I chose to go to MIT Sloan for MBA degree, along with a sustainability certificate. So with the MBA, I was able to use the two years to really think about what I want to do, what really matters to me in my career, but also build my network and professional and academic knowledge in clean energy and sustainable infrastructure. So I was really lucky that after two years of MBA, I was able to join Generate Capital as a full time investment professional. And at Generate, for those of you who are not familiar with Generate, Generate’s a company that finances, builds and owns sustainable infrastructure projects in the US, and then gradually expanded globally as well. My two and a half years at Generate was really helpful for me to look at different asset classes from more traditional renewables like solar, to new things like EV charging,  hydrogen fuel cells, and helped me understand how project finance really works and how capital flows into the clean energy or energy transition sector. So from there, I started a new role at Arevon Energy as the VP of Investments towards the end of last year. Arevon, is, we’re more like a hybrid between a fund as well as an IPP. So on the fund side, we have a pretty big balance sheet of, of capital directly from large sovereign funds and pension funds to invest into clean energy. And on the IPP side, we actually are a fully integrated company that does our own development, construction, operations, and power marketing in house.

So Arevon owns and operates our, our fleet of assets that are currently sitting on our balance sheet. So a little bit different from what Generate does, we focus more on utility scale, renewable energy projects, along with that we also deploy money into energy transition. But the, the majority of what we do is still on the very large scale side. And I find my current job pretty rewarding because on a daily basis, I can see in our portal, like how much electricity we’re generating from our projects real time.  That sense of achievement really helps me, you know, get up to work every day. And I continue to feel excited about my company and the industry we were contributing to.

Awesome. Thanks. That’s quite a, quite a career path, but you’ve obviously had some very impactful goals and although maybe we don’t have direct evidence, it sounds like you planted some important seeds at some of your past organizations. So yeah thank you for sharing, sharing that with us Lydia. So I’ve heard this from a lot of people that maybe the, the broad perception is that climate action or clean energy growth is maybe the domain of nonprofits or NGOs, or even, you know, just political activists. Could, could you share a little bit about your perspective on the importance of investors’ or finance professionals’ role in the energy transition?

Yeah, of course. So I think financial institutions and, and private investors have really always played a pretty important role in energy and infrastructure in the US, because I think without private investments, there’s probably not any large infrastructure that can actually get built in the US.  Mainly because these projects require a significant amount of capital, and sometimes they also require the people getting comfortable with higher risks and more, you know, new asset classes, new players in, in the supply chain. So I think policies and government funding are quite important. But on the private side we’re really driving where the decarbonization engine can go with private investors and, and funding. And so in clean energy today, I think we’re mobilizing investors across the capital stack. So that includes more traditional, you know, banks and lenders at quite low-cost capital, but also includes investors such as ourselves, who deploy money into large scale projects for, for project finance purposes.

That also includes tax equity investors who are crucial to the monetization of tax benefits that the government can, can give us. And on, on top of that, on the higher cost of capital side, there are also venture capital investors or growth equity investors who deploy equity into companies that help deploy or, or commercialize innovative technologies and, and new new climate products. So all of these different types of investors target different risk/return profiles and that allows us to, to see a full spectrum of cost of capital that also enables companies and projects to be funded at different stages while they face various different types of risks. And I, I find the data from Bloomberg New Energy Finance to be pretty helpful most of the time. And one of their recent research reports in 2020, they said just to put that report was 920 billion dollars invested in energy transition and climate tech in 2021, about 20% of that was equity financing for innovation,

and the other 80% of it was for deployment of energy transition infrastructure. So obviously my current day job in my company, we do more of the latter, but I also track a lot of the startups in my other roles as mentors for accelerators because eventually those newer technology technologies will be deployed into infrastructure we see.  And McKinsey has a report that also indicated that in order for us to really keep track on the net zero goals, investment into climate tech from private institutions needs to triple to 2025 and then double by 2030. Wow. Yeah. So yeah, there’s a lot more money needed to, to be mobilized in order for us to build infrastructure we’d like to see for, for this energy transition process.

Yeah. That’s a, that’s a great, great explanation.  And also, I think it’s important for us to remember, you know, maybe those outside the profession think of investors as like one, one profession, one type of investor, but that’s really not true. As you said, there’s so many different types of investors that are involved in, in the clean tech sector. And I think there’s also something quite elegant about the way that the world of finance ends up, you know, allocating risks to the, the parties that have an appetite for those risks and are best suited to to take those on not that it’s without flaws, but

Yeah, but yeah, I think it’s a great lens.

Yeah. For people who work in retail or consumers this is, I don’t know, a third degree willingness to pay or, or customer differentiation. I think it’s, it’s really like targeting who’s willing to take risks for higher cost of capital. And I would say in the US, the financing market is not fully efficient, but compared to a lot of other parts of the, of the world, I would say we, we do have a quite functional and, and relatively relatively efficient financing market. So, so all these different companies and projects are able to combine different types of financial products in order to allow them to get the best of funding possible.

Definitely, definitely. Okay. So if we zoom zoom in, in the world of energy finance or, or clean tech,  finance tends to be a male dominated profession that tends to hold true in, you know, clean tech, sustainable infrastructure, energy project finance, might vary somewhat regionally, but that’s, that’s the general demographic trends.  But you’ve been a really, you know, vocal advocate of increasing, you know, not just the presence, but also the leadership of women in the sector. Could you share a little bit with us about why it’s so important to have women involved in and, and leading in, in the sector?

Yeah, of course. So, first of all, I think it’s probably not just the women, but like just overall diversity and equity are really important for our sector.  I think just based on my prior experience, most of the places I’ve worked at are extremely male dominated and, and I was probably the only women on most of the teams that I’ve worked on. But I find that diverse perspectives and backgrounds really allow us to think about different aspects of how certain investment opportunities or projects are being financed and built. We tend to analyze the market more comprehensively when we combine people who have different backgrounds. And I think an organization with people who contribute the different views can also better envision an energy transition that ensures not the, not only the profitability of the projects or company, but also environmental and social justice that we want to see in the world, given that it is an important aspect of, of energy transition.

But that’s the bigger picture, but on the more personal or specific line of work perspective I think just having more women in what we do is, is quite important, especially at the senior levels. When I say senior, those are people who make decisions, those are people who sit on investment committees who really have control over how funding is allocated and how projects are built. So I, I see a lot of ways where women think differently from men or, or, you know, people with different backgrounds think differently. And that allows us as a team to evaluate risks more comprehensively. We see the opportunities and risks, I think in a more sustainable way compared to what was more traditionally, a male dominated industry organization.  I just personally really enjoyed working with some of the senior women in our industry who, who really are playing more of a mentor or or leadership role, and would like to see more of them continue to pivot the way for all of us, and obviously also trying to pull my own weight into it. I’m organizing some small group dinners and some networking events for women in energy finance to help, to like help people grow into the roles they’re in now, but also, you know, eventually grow into more senior decision-making roles.

Awesome. That’s yeah. It’s exciting, exciting work you’re doing, I know maybe that’s not the core of your job description, but yeah, really important and agree that the, the task of adapting to it and mitigating climate change is so complex that we really need people from all different backgrounds and perspectives involved. There’s no way to actually create viable solutions if we have a such a narrow lens on, on the problem.

Yeah.

So yeah, assuming that, you know, we do need to draw on the creativity and the different perspectives and backgrounds of different, different individuals to tackle climate change, but also these challenges within the energy finance space. What can we do, you know, as a sector and as an industry to attract and retain more people from diverse backgrounds?

Yeah, of course. I just think there are a couple things. The first of all, I often get the question that people ask me, like, Hey, I don’t come from a traditional finance background. How do I find a role or opportunity to work in, you know climate investments or, or energy finance? I always tell them like, energy finance is not solely like one thing where everybody comes from investment banking and only like, you know, crunch models just like any other industry we require people or anything that we need to do in this industry requires a lot of people from different backgrounds, whether it is, you know, engineering or more technical, operational background, or we also need very importantly legal, accounting, tax expertise. Cause none of the deals that I’ve ever worked on can be executed without really people who understand how, you know, a related policy works related like accounting and tax works.

So wherever your functional expertise is, you can always choose a company or organization that dedicates its mission to climate change and, and clean energy. So that allows you to, I guess, change the way that people typically think about it. Like if I, if I want to work at Google, I need to become a software engineer. That’s just not true. Right? Like companies like Google, companies like Arevon have all kinds of different roles. And secondly, even in a more specific finance or investment role at a company, like Arevon, we also started to looking at people from more diverse background because, first of all, like we are growing into a world where the projects, the risks and opportunities we’re analyzing are very dynamic. For example, over the past year and a half, everybody in the solar or battery industry experienced the tremendous pressure from supply chain issues from EPC, from, you know, cost increases that we’ve never seen in this sector before.

So somebody who can only crunch models and update scenarios are really not going to be super helpful because you’re just sitting here, you know, watching the models not pencil. We really rely on people who have expertise in procurement, in engineering, in power marketing, other aspects to help us resolve those issues and find where values are in these new projects that allow us to move forward and to put capital more efficiently. So from that perspective, I, I would say that whether you are in a different industry trying to transition into this sector, or if you’re already in this sector, but in more of a technical role and trying, trying to transition into a finance role, there are a lot of opportunities available today. And if you find that the skillset you have do not like completely mesh what you want to do, I would say there are a lot of opportunities to, to get training or, or, or specific workshops or guidance in terms of how you could make that transition easier.

Yeah, definitely. You can come to a, a Pivotal180 financial modeling course.

Yes. Great plugin. I have personally, and for my prior and current companies, we’ve all used Pivotal180. Yeah. The team, the team are great. Yep. The materials are awesome. They are, we didn’t, we didn’t make her say that, but they really are. Yeah. There are, there are very few this is not about Pivotal180 I promise! That just in terms of training and like, to help people think about how you can get there,we are still a nascent and quite small industry compared to a lot of other things, right? Like if you think about programming, you can go like on online coding school anywhere. That’s very easy and very accessible, but for somebody who wants to become a project finance professional, where do they even start? So I would say if you want to go back to school, there are a couple graduate school programs that specifically offer environmental finance or project finance related degrees now, which are very helpful.

And then in addition to that, if you are not planning to go back to school full time, there are some online courses. In addition to Pivotal180, like Stanford, for example, has an online course for project finance. I think MITx also has an online course that introduces various different aspects of sustainable energy. I think the class is called sustainable energy. So it covers like solar wind, um, hydro, yada, yada, a lot of these are, are free. Maybe some of our, some of of them are like a couple hundred dollars, but resources are available. If anybody wants to find more, feel free to like, ping me on LinkedIn. I’m happy to, to introduce you to, to people or, or are other resources.

Yeah. Thanks Lydia. Yeah. I think it’s, we also have to keep in mind that even those of us who work in the field, I mean, I’ve worked in renewable energy, my entire career, and I’m still overwhelmed with the pace of change and amount of knowledge to consume and keep up with so everybody’s intimidated. It’s, it’s really worth a shot getting involved. This is digressing a little bit from our theme, but I feel like I can’t leave this interview without asking you about what you are excited about now that the Inflation Reduction Act has been passed. Everybody’s buzzing. There’s so many different technologies that it’s, it’s affected. What are you personally feeling most excited about with this huge infusion of money into the sector?

Yeah. I, first of all, I would say like, obviously all of us are super excited about it. I almost actually thought maybe renaming my cat IRA instead. So cause the, the house passed that legislation on my birthday. So that was just a very big free gift. Yeah. Overall there are a couple things I want to mention. First one is we’re really happy to see the extension. And most importantly, the expansion of the tax credits available for renewable energy projects. That’s includes, but not limited to, you know, solar, wind, battery storage. And now there’s a category for tech technology I think it’s called technology agnostic.  So as long as you can prove that it’s low carbon power being generated you can enjoy certain benefits the same way as more, you know, popular types of, of renewables.

This would continue to allow us to lower the levelized cost of renewables and compete with gas and other sources that traditionally we relied on for the grid. But aso, like I mentioned over the past year and a half because of the supply chain uncertainties and, and,  and shortages, the build cost of renewable energy products actually went up quite a bit. So with the help of the IRA, I’m hoping that we’re, we can see normalization in the industry and, and finally the prices and, and the cost of building these projects coming down. So that that’s something that’s really important for us. And the second aspect building on top of that is more on the more nerdy side. The IRA actually offers a lot of structural flexibilities in addition to just on paper, the tax credits. So going into this a little bit deeper for people who are interested, there are provisions in the IRA to elect PTC for solar,

for example, you don’t have to be stuck with ITC. So for certain markets or or build costs, you actually benefit from using the PTC, if the capacity factor in the build cost are in a certain range. You can also enjoy the benefit of direct to pay instead of having to monetize tax equity for certain new asset classes and projects that meet some criteria. And then eventually there’s also the transferability aspect of it where we potentially would see tax credits will be traded for a direct, the monetary value, the same way that we see RECs are traded today. And that potentially allow us to avoid using very complicated and expensive tax equity structures to monetize tax benefits, going forward. A lot of corporates, a lot of even high net worth individuals probably would be able to trade tax credits in this way very easily.

So those are all the very like nerdy tax related stuff. But the very last one that I am personally super excited about is the IRA’s offering PTC, ITC, and other benefits for low carbon hydrogen. And I’m somebody who’s worked on hydrogen fuel cells for the past three years. And, and eventually I’m really glad to see that the sector is seeing some, some real momentum and we’re still waiting for some specifics to be worked out. For me, I’m actively talking to other investors and lawyers and bankers who all work on hydrogen and hopefully will be able to put together a template model or structure that help developers to think about how they finance and monetize these credits for their projects. And eventually come to more of a easy to digest the way of seeing like the levelized cost of carbon of low carbon hydrogen at what intensity, what carbon intensity or, you know, what price range, so that will hopefully come out in the next couple weeks, months. Once we have it, I would, I would say a lot of projects will be built for, for, for hydrogen

Yeah there’s lots to be excited about. Thanks. Thanks for sharing that.

Yeah.

Great. Well, we’ve covered a lot today. Thank you for all your insight, Lydia, we really appreciate you sharing from your very deep experience and, and expertise and perspective.  I know the viewers are really going to enjoy this conversation. So thank you again. We will be sharing the interview on the Pivotal180 website and YouTube. So you have lots of ways to stay in touch with our viewers as well.

Awesome. Yeah. If anybody has any follow up questions, feel free to reach out to me or reach out to Pivotal180 and I’m sure they’ll pass on the questions. Yeah. Thanks for inviting me. Really enjoy the conversation.

Perfect. Thank you, Lydia.

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