Justin welcomes Chris Pawlik, Founder and CEO of Energy-Producing Retail Realty (EPR^2). Chris discusses the regulatory framework in California called net energy metering (NEM), which allows residential and commercial customers to generate solar power and feed it back into the grid. He also shares insights on the impact of NEM 3.0 on the commercial real estate industry, along with the concept of energy rights development as a potential solution for solar leases and rooftop leases after NEM 3.0. He highlights how developing energy rights on behalf of property owners can help align the incentives for solar installation with the tenant’s interest in reducing their cost of electricity. This approach can also positively impact the value of the property, while addressing concerns of climate change resiliency.
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- Chris Pawlik’s background and how he connected with Justin – 2:00
- Breaking down NEM 3.0 – 4:00
- Benefits of solar for industrial properties – 9:27
- Solar can increase NOI in the first month of generating power – 14:25
- Investing in solar is becoming more attractive from an ROI perspective – 17:55
- PPAs, PACE and solar leases – 20:15
- Development of energy rights for all types of property owners – 23:29
- The movement of EV trucks and charging hubs – 28:18
- Distributed generation of solar power, can help stretch the capacity of the current transmission and distribution grid – 35:10
- Super forecasters certification – 43:11
Connect with Chris Pawlik
Connect with Justin Smith
Justin Smith: Welcome everybody to the Industrial Insights Podcast. We have Chris Pawlik today, he is a specialist in the solar space. There’s a lot of detail to solar power and when it comes to industrial property and all commercial real estate property that I think most people are missing. They have their own development rights. It’s its own separate business above and beyond powering your property. So between that and the electrification of trucks and the concept of the microgrid, combining all those three in this conversation is something I think you’ll really benefit from and I hope you enjoy.
Chris Pawlik: When the market is tough, that’s when we figure out how well we can add value and obviously, work in a tough situation, right? A lot of folks over the past decade have never seen a down market, literally for 10 years 12, 13 years. So those folks are going to learn a lot, I think. And those folks that went through it last time are finally going to be able to pull out some notes from when we first started.
Justin Smith: Yeah, it doesn’t hit everybody the same, but there’s a version of it for everybody. No doubt about it. You were a broker, you were telling me with HFF and the Cornish & Carey, that’s now a Newmark, that’s a bay area Cornish & Carey.
Chris Pawlik: Yeah, so I was doing acquisitions with a private equity firm out of college down in Santa Monica. I was in charge of Midwest acquisitions. We ended up buying like 2 billion worth of real estate over 18 months from ‘05 to ‘07 very, front-end of the financing curve, if you will. And we had a look or a view on what was happening in the capital markets sooner than most others. So we had an opportunity to figure out, okay, are we going to stay on this side of the business and then try to manage our way out and do we want to work with the same folks in doing that? At that point I was three, four years into a career. So I figured, might as well go check out the other side of the table and got on with Cornish & Carey then effectively our team got then brought onto HFF and then came up with the concept in the midst of the middle of the great financial crisis. So like 2010, 2011. Like trying to figure out different ways to add value to properties and energy rights and what I’m still working on today is something that was born out of that necessity. It’s interesting because obviously being from that brokerage side, being from the investment sales, private equity advising side, Cornish & Carry obviously went to Newmark, HFF is now JLL and so a lot of the folks that I was working with are all over the place. But you know, the end of the day it’s a business that I understand. It’s a necessity for deal flow.
Justin Smith: You feel sympathy for.
Chris Pawlik: Oh, totally. Are you kidding me? My friends have been doing leasing for decades, or who’ve been doing investment sales for decades. It’s one of those things where you get no love, right? You’re hustling and bustling. Sometimes you’re putting, 4, 5, 6, 7 decks together and you’re hoping that someone will let you read them. You know what I mean? And it’s tough. It’s tough. It’s not easy and I definitely feel for everybody who’s hustling right now.
Justin Smith: Yeah, and so the way you and I were connected was this Prologis report. You had an opinion on it. And I’ve spoken with a couple people through some of the report, because some of it resonates very well and some are very knowledgeable about and some, I don’t know much at all. And so this was one where I was so glad that you raised your hand and, that this is your area of expertise. I pulled it up. It’s prediction number seven. It’s the last one. demand for sustainable warehouses will grow rapidly installed warehouse rooftop solar capacity will double and EV truck charging capacity will exceed 10 megawatts. And then it goes on to have a couple bullet points what that means for the tenant that can help them with their operation and help them with their forecasting. And then incentives, California and trying to electrify the fleet. And then Europe and Europe having more low emission transportation options. It’s one I hear and see a little bit and that opened up a million questions. And I think, one of your comments was you’re going to do your part to make it happen, which I love. And then, a rush of applications to get in before NEM 3.0 goes into effect early April. So maybe let’s start there, NEM 3.0 in April, what is it? What’s happening? And is this rush manifesting?
Chris Pawlik: Yeah, so the rush is definitely manifesting, but I think it’s manifesting more so on the residential side than it is on the commercial side of the real estate business. And mainly it’s because of what NEM 3.0 actually does. The way that the energy industry works in California particularly, you’ve got this regulatory entity called the CPUC, the California Public Utility Commission that effectively oversees all of our utilities here. So PG&E, Southern California, Edison, SDG&E, as well as all the other smaller municipal utilities. That said, over the past 10, 20 years, we’ve had, a scheme or a regulatory framework that allows folks to generate solar or power on their property and feed it back into the grid through what’s called net energy metering. So NEM is net energy metering and we had 1.0, we had 2.0, and now 2.0 is ending April 13th and 3.0 is beginning. And so this really just helps us account where energy is being generated and where it’s being pushed into the grid. On the utility scale side, that’s pretty easy, right? Like these huge solar farms in the middle of the desert or the big natural gas plants or the nuclear plants, they sign long-term power purchase agreements with the utilities 20, 25 years minimum. They don’t do that. They really don’t get the financing to build a project. So with that said, it was a method to allow retail customer, residential and commercial to participate in the energy transition. It was great. Honestly, I think all the low hanging fruit has been picked, and if not, by April 13th, it will no longer exist. So the folks that are out there hustling and selling, and I don’t know if you’re getting phone calls every day or knocks on your door about putting solar up, but they’re very active and they’re very good at basically telling you why it do now before this date, this cutoff actually happens. And from my standpoint on the residential side, it’s tough. Residential installers are going to have to figure out how to add batteries in order to be able to use the power during the day that’s not being used onsite later in the day. And that’s really the reason why NEM 3.0 is coming into existence because a lot of folks have been watching and seeing that if you’re generating power in the middle of the day and you’re not using where you’re generating it, then you’re really using the grid as a battery. And what’s that supposed to cost? Or if you’re providing, power to the grid that’s managing it, at what price should you get a credit? NEM 2.0 was basically that you get the retail credit at the time that you put it out, which is great in terms of incentivizing folks to do it. You look at it as a conflict of interest in the sense that, why do I get a retail rate of putting energy into the grid when the nuclear power plant or the natural gas plant or the solar plant gets a wholesale rate. It’s basically doing the same thing but these folks over here are getting retail. These folks over here are getting wholesale. So now with NEM 3.0, they’re effectively making you right size the system to match the energy profile of the building. And for commercial, and this is what’s interesting on commercial is that for solar, the energy profile for commercial is pretty close, right? Like the amount of energy that you use during the day at a commercial building and the amount that you can produce, with solar is about in line, obviously off a couple of hours here and there. And then that’s where we look at storage being valuable as well.
Chris Pawlik: But in general, this has been a huge rush. Last, couple months, folks are rushing to try to get all the, engineering and design work and permitting and applications in. Great thing for us is that we came up with a concept and we’re working on this concept of energy rights development that will work after NEM 3.0. A lot of folks are a little bit worried, right? Solar leases, power purchase agreements, PACE financing, even rooftop leases. Folks are talking about. They don’t really make sense after NEM 3.0 if you have to underwrite them the same way you did before. And so from that standpoint, we see the market opening up for us over the next few months. But at the same time, it’ll be interesting to see how it actually plays out. Unfortunately, big regulations, big companies, everybody’s, focused on one day, but whether or not things shift here or there. Who knows? That’s why from a real estate owner’s perspective, we’re really, advising folks to pay attention. We can obviously move fast for you and get this done, but at the end of the day, if you don’t get it done by April 13th, it’s not game over. It’s just it’s going to adjust.
Justin Smith: And I saw you have worked on a variety of different types of commercial properties. Anything I deal with and anyone listening to us here is industrial primarily. And so I imagine you’ve worked on some industrial projects primarily in Southern California, or what would you say is the area where you usually play?
Chris Pawlik: So the industrial projects I’ve worked on personally in my career are up in Northern California when I was up with Cornish with HFF and living in the Bay Area. Most of the projects that I worked on down here were office, multi-family, or retail.
Justin Smith: We just need to introduce you to some more industrial people.
Chris Pawlik: Exactly. And to be honest with you, I feel like we’re working on an industrial deal right now with a potential client up in Northern California. And as I’m going through this project, I’m just thinking to myself, this is one of those unique situations. It might just be this property, but I think maybe industrial as a sector could, find the same types of benefits that we’re seeing there. I’ll give you a quick example of the project, and maybe it’s something where it resonates with you or the folks that you’re talking to in your day-to-day. So 50,000 square foot R&D industrial office building, right? You’re looking at probably two to 400 bucks a square foot. So a 10 to 20 million building, right? That building has a tenant in it that has a seven year term remaining. They want solar, they want to decrease their cost of electricity. The owner is not really incentivized because they’re not the ones paying for the power. The alignment’s not there. In addition to that, if the owners are going to be paying for it or if they’re going to go get third party financing for it, they’re required to do a guarantee or an obligation. So if we come in, we’re effectively able to develop the energy rights on behalf of the property. owner. Property owners going to the tenant and saying, hey, listen, we’re going to go do solar, but what we really need is you to go from seven years to 10 years. So they’re going to extend their lease out a little bit. They’re not going to, change the rents or anything like that, I don’t think. But they’re going to go seven to 10 years. They’re going to have solar installed on their property. It’s going to cost us around $1.8 to $2 million to develop this entire system. About 200 grand is going to go into building upgrades and CapEx deferment. Fixing the rooftop, fixing the HVAC fixing the EMS, fixing landscaping or anything else that’s ancillary to that project. And then the rest of the money, about 1.6 to 1.8 is to build the project. The tenant, day one, year one, is getting a 10% discount on their utility. If we fix the pricing, we can fix it at that rate for 10 years and at the end of the term, the property owner is going to get the full NOI. Basically, the tenant, rather than paying only the utility for their power, is now going to be paying for the clean energy on site and the utility power. And at the end of the term, the owner effectively owns the entire NOI, which is about $350,000. So at a five to 10 cap, we’re looking at what, three and a half, $7 million value increase on a $10 to $20 million property.
Chris Pawlik: Starts getting people’s attention especially when you’re dealing with occupancy issues, interest rate issues, operational issues, and inflation. All of these things are impacting not only your tenants, but your owners, your lenders. The entire commercial real estate industry is really more reactive or more prone to having to react to these interest rate changes than most other industries. Right now property owners obviously are focused on tenants, focused on their capital stack, focused on their operations. But with that operational component, if you can figure out a way to add this is the time to do it. And over the next 12 to 24 months when folks are trying to figure out here’s my portfolio. These projects are going to be fine. These projects we need to just get rid of before it takes down the entire organization. And then these ones are on the line, what do we do about them? Here, let’s talk about your energy rights development, right? Now you effectively go to your tenants and say, hey, we’re going to decrease your expenses. You’re not going to have to pay upfront. And at the end of the day, you’re getting something that is “sustainable, renewable, path to net zero.” Even addresses some of these ESG concerns that folks have. So you’re doing something positively impactful to the value of your property, while also addressing these other concerns of climate change, resiliency. That’s one thing that a lot of folks that we’re talking to right now on the microgrid and on the grid capability level. If you have any owners, any tenants that are going to lose millions of dollars per day, if the grid goes down, are you really okay with waiting for that to happen?
Justin Smith: Manufacturers are big ones there.
Chris Pawlik: Oh, refrigerated warehouses, manufacturers, agribusinesses, food processing, right? Any of these essential businesses that we had during Covid, if the grid had gone down, not only monetary losses, but just resources and capabilities and supply chains would be impacted. So it’s very important and it’s something that’s going to become more and more important as time goes on and we start seeing impacts to the grid. And the reason why I think that might be happening or that it’s probable, I’m not going to say for sure it’s all going to go down, chicken little or anything like that. But we’ve had a grid that’s been built a hundred years ago that we’re like 30 years behind on CapEx investment. What the regulations are telling us now in California at least, is that we’re going all electric EVs by 2035. All new buildings are going to be electric by 2035, whether it’s residential or commercial. So that’s 4x demand on electricity. Where are we going to build the power plants to address that? No one’s going to put a new nuclear power plant in California. Natural gas is not happening. Coal’s not happening. From our perspective, that’s an opportunity for commercial property owners to basically say, hey, listen. Exactly. We’re already built. It’s already there. We don’t have to worry about CEQA, EIR, we’re generating on the customer side of the meter, fixing grid resiliency issues, decreasing losses. why not generate where you’re using it?
Justin Smith: You hit a lot of topics right there, Chris. The broker in me where I got to rewind back to ask a question is adding to the NOI. Help me understand that better because I get that if you think of NOIs income stream and expenses, and for the landlord the income stream is net of expenses, but the tenants on net leases anyways, paying those and paying their own utilities. So is that if your net because you wouldn’t net generate more than the consumption and then add to the grid, and that’s the stream. Can you bust that open a little bit?
Chris Pawlik: Absolutely. depending on whether or not it’s triple net or full service gross we can obviously adjust as necessary in terms of the conversation or whatnot. But the main kind of idea is that whoever the off taker is or whoever’s paying the electric bill, it’s the owner or the tenant. There’s a cash flow going from that entity on property.
Justin Smith: Full service gross. It’s the landlord. Yeah, that’s a big change of perspective.
Chris Pawlik: And then so from that standpoint, it’s a little different there, but in either case, there is a stakeholder, owner or tenant that is paying the utility for getting power on site. Now that’s a cashflow expense going out away from the property. Would you agree that every property is allowed to generate its own power using solar or other types of technologies?
Justin Smith: We would all hope that they do, for sure. Yeah, like they’re all capable of it.
Chris Pawlik: Every property has energy rights. Every property owner has the right to generate power on their own property. In addition to that, every property has a utility easement, an electric utility easement. Now my question to you and it’s a leading question, is why aren’t property owners paid for that electric easement?
Justin Smith: Oh, why don’t they pay for it? They just haven’t paid yet.
Chris Pawlik: Utilities should be paying to be on site. Why aren’t they paying to be on site? Everybody else is paying to be on site. So from that standpoint, a property owner now has the right to generate their own power. There’s already providing them power, but not paying them for it. So what we do is we come to the property owner and say, hey, listen, we are going to provide power, complimentary to what you’re getting from the grid. That revenue stream if it’s full service gross, we’ll give you a discount or we’ll do the revenue stream and give you a percentage rent is essentially going to pay the owner, give a discount to the tenant, and then pay the investor. If it’s triple net, tenant pays, owner gets a percentage rent, the rest of the revenue goes to paying for the project itself. So what if it’s an investor that’s looking at it from an index to utility perspective or a fixed term fixed rate perspective. We can do both but at the end of the day, the idea is that you can increase NOI in the first month of generating power onsite. It’s essentially a separate cash flow, a free cash flow for a property.
Justin Smith: And then 10 years is the general payback? Or when you think of ROI figures that I’m sure that’s one of the first the back of the napkin that people look at.
Chris Pawlik: Yeah, so there’s a couple things to think about. So for one, we typically go to property owners and say, hey, listen, we’re actually bringing the capital to invest in this. So it’s not really an ROI, right? Like it’s a free cash flow. Infinite, IRR. You can get a guaranteed increase in your NOI because we’re going to run this project. Have your tenant or the operations pay for the power out of the guaranteed discount. And you don’t have to worry about anything moving forward. If prices go up, you’re still getting a guaranteed discount. If prices go down, you still get a guaranteed discount. The other option in the ROI perspective that you’re talking about is-
Justin Smith: Chris brings capital to the party. So that’s why there is no I in ROI part.
Chris Pawlik: But there are a lot of property owners out there that would prefer to know that they’re going to own the system. They would prefer to use their own money. A lot of times we’ll be going through these conversations with owners and developers, and at the end of it they’ll be like, tell me why I don’t want to do this myself. And it’s one of those situations where you’re like, you should definitely do it yourself. If you want us to come in as a trusted advisor and a partner that’s going to be taking the same occupancy risk as you, we’re happy to do it as well. But that said, from an ROI perspective, the cost to develop solar right now has been dropping for the past eight to 10 years. The price of electricity has been going up, quite a bit over the past year, especially 20, 30, 40% in some situations. And the amount of power that solar can generate is getting more and more efficient. So we created what’s called like a kilowatt unit breakdown in order for to be able to do like a cap rate analysis. So one kilowatt system is about, 60 to 80 square feet. It produces X kilowatt hours. You put that up in the numerator, multiply it by how much on average you’re going to be able to offset the electricity price. If that’s over a five to seven cap rate, let’s go sharpen our pencils and make the deal work, right?
Chris Pawlik: So from an again, ROI perspective, if you were an owner paying for it yourself, you’re going to get your money back between seven and 12 years or more depending on all of those different variables. If you’ve got a building in Northern California or in Washington or something like that, you’re probably going to be generating less. If you’re going to be producing power in Turlock Irrigation District here in California, they have the cheapest power in California. So, your rate of electricity and offset’s going to be super low. If you’re going to be developing a project somewhere that needs a new roof or new carports, right? You’re going to increase the cost of your development by 20%, 30%. All these things are moving, but they all take a real estate approach, right? We effectively created a real estate box for cleantech to fit into. We’re really excited. Obviously, technology’s getting better. Our biggest, challenge or our biggest, issue that we’re addressing for property owners is literally how do you align interests in situations where property owners and tenants are misaligned? If one of them is paying and the other one’s not, then there’s no current structure that exists that really deals with that except for ours.
Justin Smith: Yeah, cause the alternative is, what I think I was reading was the PPA lease and PACE financing. Yeah. So what’s downfall of that? Or why would you choose those?
Chris Pawlik: So I’m going to preface this with I am really excited and stoked that solar leases, PPAs and PACE existed in order to push the industry to where we are now. ” Standing on the shoulders of giants.” But I need to say that upfront.
Justin Smith: We wouldn’t be there without them.
Chris Pawlik: But that said, none of them addressed the real estate concerns of the property owner. Zero, none of them. I mean literally our solar leases are effectively equipment leases, right? So do you want to sign a 20 to 25 year equipment lease? Some property owners will, some property owners won’t. You know what happens in Covid situation when your occupancy goes to zero and nobody’s using power? In a lease situation, you are still liable. Your occupancy risk goes up. Same thing with the PPA, you’re signing a 20, 25 year agreement. And occupancy goes down, you’re not using power, you still have to pay for the power that is being generated on site. So those are partially the same thing. The difference between leases and PPAs really are just jurisdictional. Some utility areas allow you to sell electricity, some don’t. And so it’s just a little bit of a loophole if you will.
Chris Pawlik: But PACE financing, more than anything else is amazing for certain property owners. Again, it works in certain situations, unique situations where you figure out how to fill out the capital stack to do some sort of redevelopment or upgrade on a building that just doesn’t have the ability to do it without this type of financing. But that said, my biggest concern and I think what the industry’s biggest concern with PACE financing is, it’s essentially like a Mello-Roos situation or a tax on title that takes precedence over the existing debt. If you did it on one or two properties, it probably wouldn’t be a problem. The issue is that PACE financing is going after residential and going after multifamily and going after, a lot larger sections of the real estate market. That when you aggregate it up, when you’ve got your Fannies and your Freddies, and your Wells Fargo and your JP Morgans that are looking at this huge portfolio of debt that they’re trying to figure out how to maintain the value for their investors. They can’t go back to their investors and say, oh yeah, don’t worry about it, go ahead and put that in after the loan. No lender is going to be okay with it.
Justin Smith: Doesn’t work that way.
Chris Pawlik: Not at all. And the investors in that lender, the investors that are expecting those returns from that debt, they’re fiduciary. Most folks, even if they want solar, even if they want to go green, even then if they want this energy transition to happen, they can’t from a fiduciary responsibility perspective, say yes. They just can’t. It’s an insurmountable obstacle for them because it’s a fundamental aspect of their business.
Justin Smith: Yeah, what I’ve, been talking with a handful of institutions as I’ve been working on my second book that’s on industrial leasing and a couple of them are brought up their enterprise looking at a portfolio wide solar. So I would think the institutions would be crafting their own strategies of when, how do we phase in and what that means to them across 2, 10, 100 or 1000 buildings. So was that something you found, I imagine those are the conversations Chris would like to be having, right? Of how do you not just do one, but like after you have proof of concept, what’s this look like at scale?
Chris Pawlik: Yeah, so the way that we’re approaching energy rights development is dual pronged. So we’re a commercial real estate developer with energy rights as our niche. We’re developing energy rights for all types of property owners, from land to residential to commercial to non-profit governmental. Any type of property as energy rights we’re an energy rights develop; you know full stop. The other part of it is that we’re developing a platform and currently have an energy rights portal that we’ve developed for these institutional owners and clients that really want to manage the process themselves. That’s the one thing with larger institutional players, is that they actually have the teams and resources that are necessary to do this type of CapEx at the level of efficiency most of us couldn’t even dream about. Like you said, we’ve got a thousand properties. We’re going to go do a megawatt of solar on each one of them. That’s going to be a $2 billion fund to go do that. Literally, that’s a $2 million per one megawatt thousand properties. There you go. The Brookfield’s of the world, the generate capitals of the world, the large commercial institutional ownership groups, are all looking at this and saying we can do this, we can do this, and they can. We’re totally there to assist and part of our business model is that we’re here to provide this portal essentially to provide our best efficiencies, our best knowledge. Our thought leadership on what it takes to identify, design, construct, procure, operate, and manage these systems. From a data perspective, from a carbon offset perspective, from a logistical operational perspective as well. This is something completely new and you need to have your entire team and your entire institution be able to interact with it somehow. Hey, we know that we’re getting know, solar power on this building, but I have no idea what percentage or how to market it to my tenants. Or hey, I’m a property manager and I know that we’re generating power on the building, but how do I know what percentage is solar? What percentage is utility? There are a lot of questions and there’s a lot of data. And with energy it’s actually not as clearly defined and forward technologically as you would expect it to be with how we see IT. With Covid and with Zoom and Teams now and everything else, telecommunications is just next level, right? Our energy infrastructure, the next 10, 20 years, we’re going to improve that to basically catch up with our telecommunications infrastructure.
Justin Smith: Yeah, and that’s if we have PropTech, there’s got to be some version of that where the capital’s going and where the people are going with the ideas on the next evolutions of that.
Chris Pawlik: Absolutely. I love the idea of solar dealing with peak load. You got batteries to adjust for rate schedule arbitrage. You’ve got base load with mini geothermal or mini micro turbines where you know it’s natural gas now, hydrogen later or mini wind. Whatever component or whatever energy makes on site that you have. And then you can also do EV charging. You can then do in the future grid services. Every single building is effectively going to be a building as a power plant. It’ll be a generator in a node of a mesh network, which starts sounding a lot like telecom versus utility scale energy generation today. But it’s exciting. There’s a lot going on. There’s a lot of cool tech coming down. The biggest thing that I worry about with all this new innovation and tech coming down is that a lot of property owners get faced with what I call a deflationary dilemma. And that we have from a real estate owner, real estate perspective, we look down the road5, 10, 15, 20, 30 years sometimes, right? And so when somebody comes to you and says, hey, let’s go put this new technology on your building. I’m going to sell it to you. I want you to pay for it. Buy this new tech. Every property owner who is doing their job correctly is going to say, okay, show me where the value is. Great. How much does it cost? Okay, let me see what my ROI is. Great. Now can you tell me that this technology is going to be cheaper and better next year, or will it? Most likely they’re going to say, yeah, of course. So from a property owner’s perspective, they’re always in a situation where it’s if I just wait 12 months, I can get this cheaper, get a better ROI. I can, get better tech. And that always happens, like you’re always in this deflationary dilemma where tech is going one way, real estate is going the other. And as a property owner, you’re never really going to want to take a risk on a startup that may or may not be there in 18 to 24 months. Then you’re not only spending the time and energy of integrating, but you’re also spending the time and energy of disintegrating at the end as well. And that’s unfortunately not something that a lot of property owners are willing to risk. And another reason why PropTech and firms like Fifth Wall and Meta Prop and whatnot are killing it because they’re separating that risk out from a property owner’s perspective and really, drilling down on what technologies could work across multiple LPs, multiple property owners and portfolios.
Justin Smith: When we think about what this means to EV trucks, and that’s a big dream that’s out there and then to batteries. And we just think of a distribution center with EV trucks, with solar out there and with batteries, and just thinking through what that means to the operation, to the investment and what that looks like. Where are we at in that journey?
Chris Pawlik: So I saw the video you posted about being at the beach one day on a, at an iOS property with some Doberman pinchers the next, right? So a few property owners that we’re talking with, we’re actually discussing with them while you’ve got all of this vacant industrial space, if you will, near a lot of these Amazon warehouses and Walmart warehouses and distribution centers. That are now going to be partially EV. You’ve got Amazon, you’ve got UPS, you’ve got FedEx buying Last Mile, EV trucks. Where are they all going to charge? So that property that you know is an iOS property, if you upgraded just the electrical infrastructure there, now all of a sudden you can market that property as an EV charging hub for last mile delivery.
Justin Smith: Yeah, for iOS it’s like the golden goose that keeps on. That’s another, thing that people aren’t doing out.
Chris Pawlik: But that’s where I see there’s going to be the evolution. So the EV trucks, right? Like they’re going to need to charge somewhere. Where are they going to charge? All these industrial properties are at least a lot of them, and tell me if I’m wrong, you’re the expert on this, but they all have very high energy capacity most of the time. They’re typically already built out on to the top tier level of what commercial energy connection would have. So from that standpoint, adding a component of generation and charging is just again, another opportunity for value add.
Justin Smith: Yeah, I can only imagine how much. If you think of this example of offsetting 10% of the bill and then you think of plus all of the trucks and EV charging, there’s a lot of electricity that we need to offset, right? Like the bill becomes bigger, right? Exponentially as that all grows.
Chris Pawlik: Not to mention, I’m going to throw this last one out there but were you one of the ones that got the text message a few months ago here in California about, hey, we need to decrease our load, or the grid might go down. Do you remember that?
Justin Smith: That was the oxymoron. If we need you all to go electric, and then, oh, by the way, if you have an electric car don’t use it. And everyone was like, I’m going to Texas. I can’t believe this is how it’s all going to go down. Like why give your power away or why be less like a self-sufficient as a result if you’re not in control of that for yourself? Is that a transition you really want to make if it makes you less in charge of your own destiny?
Chris Pawlik: Yeah, absolutely. But the other side of that coin is that folks that had already installed batteries, like the Tesla power walls or any of these virtual power plant companies that have been going out there and developing battery systems out for large Fortune 500 companies. They got a text message in addition to that being like, do you want to make money today? Like literally the grid needs to use your batteries, they want to pay you to use your batteries. Are you interested? So now all of a sudden, you’ve got this additional revenue opportunity to provide grid services from the micro infrastructure that you’re getting your tenants to benefit from as well.
Justin Smith: That’s the other side of the hurdle. Once you’ve already gone and you’ve already made the investments, where are these opportunities that are maybe unforeseen when you’re on the front end of making these types of investments. Like what else can you do with it or how is it giving you a capability?
Chris Pawlik: Absolutely. and that’s where goes down to also the kind of argument of why most property owners don’t do their own. Cell tower leasing. It’s not a core business function, right? They understand leasing. They can put a cell tower up pretty easy. That’s not, rocket science. But at the end of the day, you have to go in and start negotiating with these huge companies that you know are not necessarily folks that you are comfortable or really want to be dealing with because again, not a core business function. You’re leasing space to tenants, not necessarily leasing space on cell towers. And that’s the same thing with energy rights development. Every property owner can go do it themselves. It just ends up becoming, something that becomes more complicated because it’s related to energy and it’s something that, again, non-core business function as we call it.
Justin Smith: Where are we in the battery game? We had got the Tesla Battery Wall in, a few high rises around here, not in so many. And that’s a big part of the equation, isn’t it?
Chris Pawlik: Yeah, everybody’s really pushing batteries right now. I’m not opposed to batteries. Why would I ever be opposed to a technology? Technology is a technology. It’s not like I’ve got really anything about it. My opinion basically is more that a lot of the push for batteries right now is subsidized. So in order to put a battery in right now, if you were just to look at the economics without any subsidies or incentives it makes it really difficult to financially underwrite as a standalone.
Justin Smith: That tells you we’re on the front end of that technology and of its feasibility.
Chris Pawlik: Oh, absolutely. but if it follows the same purpose solar in three to five years, that’ll change. We’ll be on the other side of it, right? And every single technology that has to do with energy transition has improved a magnitude of 2, 3, 4, 8x over the past 10 years, and there’s no reason to think that it’s not going to continue. So batteries are great for arbitrage in terms of your Solar’s producing at one point, but you’re not using it. So you need to push power back in at another point in time so that your demand charges don’t go up. But in general batteries are expensive. They are not accretive to returns if you add them to solar yet. If we can do that added value that I was talking about earlier in terms of grid services, they might be, they probably will be. We just don’t have the clarity on that just yet. And dealing with the utilities is a little bit of a challenging situation. It’s not impossible. They’re just huge entities that are providing five nines reliability on a grid that’s a hundred years old. The work that they’re doing to keep this thing going. It’s hard to say how amazing it is that they’re actually doing it, even though we’re on the back end being like, I’m plugging into the wall, it should work, right? But what it takes to get that to work is just, it’s an incredible feat if you really think about it.
Justin Smith: So the future of the grid, right? If we have any investments in the infrastructure coming or we’re going to continue to patch it like everyone else and their mothers.
Chris Pawlik: I don’t think that we can continue to patch it in order to achieve the goals that everybody is trying to achieve.
Chris Pawlik: We’re all going to put a lot more pressure on it and we’re going to have everybody generating their own additional stress or like additional need for a future investment. yeah, totally. So I mean we’re going to obviously have the centralized utility grid, like that’s not going anywhere. The amount of investment and infrastructure that it took to really get that going over the past a hundred years is valuable. It’s going to be worth something and it’s obviously providing power to large industrial need users. That’s not something that solar or wind or batteries can really deal with right now. But that said, over time the mix is going to change. There’s going to be a balance between solar and wind and all these fossil fuels. And hopefully the fossil fuels get cleaner, which with natural gas they will. And then if it goes hydrogen, even better, but it doesn’t have to. We have this opportunity of every building kind of having its own ability to generate its own power. So we don’t necessarily have to build out the centralized grid, we just have to layer in this mesh network of distributed generation.
Justin Smith: Way to get the mesh network in there. I like that. Yeah, that’s a great analogy.
Chris Pawlik: But it makes sense, right? Because if a property right now can generate 50 to 75% of its power with solar over the course of the year. That means the grid has to deal with 25 to 50%, so you know, basically a quarter or a half of what it was dealing with later or before. So now they can deal with 2 to 4x of the demand. If we just generate onsite, we can basically stretch the capacity of our current transmission and distribution grid, which is necessary. You’re not going to be able upgrade the entire transmission grid all at once. We’re obviously going to have to focus and prioritize where energy is necessary the most. And where energy is most expensive is usually where there’s the biggest problems with transmission and distribution. So the good thing for us is that pricing is like the ultimate compass. Where’s the most expensive pricing? Boom. All right, let’s go put solar in there. All right. they’re changing the rate schedule. Great. Let’s get batteries in there. Hey, you need to make sure that your five nines reliable if the grid goes down, all right, let’s go do micro turbines on natural gas, right? We’re doing all these things, by the way, so I’m super excited. I’ve been doing it for a decade but it’s still early days, let’s put it that way.
Justin Smith: Ahead of the curve. You see the curve’s starting to bend.
Chris Pawlik: We’ll see. And then, it’s definitely for the better. I mean, especially if we can get property owners to really realize that their properties are where the hosting of the next generation grid is going to be. It’s great the commercial real estate essentially is going to be able to address this entire global net zero push. Let me unwrap what I mean by that. In the last year, B of A said, it would take 7.6 gigatons of carbon offsets to essentially get to net zero. Net zero is you’re essentially generating the same amount of power as you’re consuming, or the carbon offsets that we have are equal to the carbon emissions that we’re making. Now if we were to just back into what we can do with solar only, right? So 7.6 gigatons, that’s the target goal. To achieve that target we need to build 7.5 million, one megawatt solar projects. 7.5 million one megawatt solar projects, $15 trillion development opportunity addresses the entire net zero goal of the world, not just of the commercial industry, not just of the United States, the entire world. And so that’s the opportunity. Hey, real estate owners, tenants, everybody, we can fix this. We have 7.5 million spaces, where we can go do 50,000 to 60,000 square feet of solar. Now I know a lot of the electrical engineering and utility folks are going to be like, but it doesn’t work that way. I get it. It doesn’t work that way. We obviously need to have other energy generation and batteries and all in the entire mix.
Justin Smith: That’s the broad brush stroke though.
Chris Pawlik: The point is that it’s an achievable goal. It’s a huge goal. 7.5 million of these projects. I don’t think you and I are going to be alive when they’re done building it, but at the same time we should start. That’s the exciting opportunity here.
Justin Smith: It’s transformational.
Chris Pawlik: Absolutely. We sometimes Blue Sky discuss these things, our generation or when we grew up reading the history books of the big things that America did or the Americans have done. You look back about the Transcontinental Railroad. You look at the highway system. You look at the electric grid. You look at us getting to space. These huge things and we kind of look around and what else is there to do for us? And the reality is oh, we have a hundred year opportunity to literally take the grid into the 21st century. Like the 21st century economy and beyond is going to be completely reliant on what we do to upgrade our electric grid today. I love that. I wake up every morning, I look in you know, the mirror and I’m like, let’s go build some solar. Let’s go do some renewable energy on existing buildings. 10, 20 years from now, I’m going to look back and say, yeah, we helped build that grid and it’ll be great and hopefully be able to pass that baton on to the next generation of Gen Zers and beyond who want to do well by doing good.
Justin Smith: That’s the massive transformational purpose. Yeah, that’s the moonshot.
Chris Pawlik: Yeah, for sure. And there are very few opportunities sometimes, you look around and it’s yeah, of course I want to add value. I want to create something new. For a purpose as big as hey, we’re going to build the new layer of the energy grid for the entire country over the next 10 to 20. That’s happening. In terms of the IRA, the infrastructure bill, private equity raising money. So much dry powder out there for infrastructure. There’s a recent McKinsey report about how the CapEx infrastructure requirements of the US are at a deficit of 800 billion a year. And with this trend transition, it’s going to have to be so much more. People are talking about $3 trillion a year to do the energy transition. You start talking about numbers that big and people’s eyes start rolling back. I don’t even know what that means. Yeah, exactly. But when you say, hey, 15 trillion over 10 to 20 years to go build 7.5 million one megawatt projects, now all of a sudden, it’s okay, we can break that down. Every state, every region, every property, whatever we need to, as detailed as we need to, or as broad as we need to using real estate precedence and real estate financing approach.
Justin Smith: Yeah, I love it. I was thinking about how in the Inland Empire we have all these moratoriums on new development and some of its tied back to our new industrial properties that are being built, creating more truck trips, diesel trucks particulates and environmental concern and degradation to everybody who lives there and that affecting everybody. The sentiment anyways was like, let’s freeze that until we get a handle on reducing that amount. You could totally see how this is example of if you want to increase that, it’s only as fast as maybe the EV trucks progress. And, like it’s the one part of the puzzle, but it’s a big part of the puzzle. And I could definitely see how those are the biggest rooftops out there. That’s also where the biggest concern is, and this is where some of the biggest progress and impact can be to help everybody get where they need to go and get what they want and have it be a win-win for everyone.
Chris Pawlik: Yeah and keep the economy going and addressing these supply chain issues and making sure that we can all go about our daily lives at the same level or better in the future rather than the same level or worse in the future. This energy transition should be value additive and accretive to everybody’s lives and not the opposite. That’s the one thing that I really hope everybody that’s listening or that we talk to understands. Like I would not be working on this, none of my team would be working on this if we weren’t doing something positive that we believed in, but also that it generated value and made money. This is like a win-win, like you said earlier.
Justin Smith: Yeah, we’ve spent our time, but I got one more question, this is a personal question, so we get to know you better. Super forecasters, forecasting, what is it? Is it something that you do for fun to use your brain cells or help me understand a little bit more about this.
Chris Pawlik: Yeah, I’ll try to make it brief, but the super forecasters certification or whatnot came about from a hobby that I’m basically a part of. A part of a study that I signed up to be a part of about a decade ago. It was put together by professors from Berkeley and Penn based off of this competition was run by IARPA. And they’re effectively the intelligence community’s DARPA which is where they invest in like new idea. One of the professors had this concept of wisdom of the crowd where the idea or example that was given at the beginning of the book that he wrote, which there’s a book on super forecasting and you can go check it out. Phil Tetlock is the author. That book gives us an example of you go to a county fair, and they have a pig, and everybody puts in what the weight of the pig is to win the pig. You get a thousand people from the five year old with a lollipop to the butcher down the street. Like expertise levels.
Justin Smith: Butcher’s going to be close.
Chris Pawlik: You would think that a subject matter expert would be the best. But what we found out and what the book and the theory was that actually all of these people, when you average it out are going to provide you a better guess than even the subject matter expert. So you’re going to get much closer to the actual answer. And so I did this mainly because I wanted to disprove the idea that you can predict the future. I was like, you can’t predict the future. That’s not possible, right? You can’t do that, but you can give a probability that’s really good, that’s very informed and you can make it better over time. And that’s what super forecasting is. It’s essentially a mindset of applying your logic to questions, doing the research, making sure that you are quantifying why you’re making a certain decision, and then also, making sure that you are being accountable to that. A lot of times you’ll see out there people are telling you, most likely this will happen. What does that even mean? Probably will happen. In my best estimation, it could happen, right? Like these things are so qualitative and so subjective. And then with super forecasting, and this is what the good judgment group does, is they basically put together 200 of the top forecasters. So it’s like the top 1%, and then they, give geopolitical, economic, social, all these types of questions.
Justin Smith: Energy.
Chris Pawlik: Energy, exactly. And it’s interesting. For me it’s an ability to interact with some really hyper-intelligent individuals that are interested in current events. And I love current events and I love debating just for fun, not necessarily for any other reason.
Justin Smith: It’s a new kind of country club. It’s a different game of golf, no doubt. I appreciate you Chris, learned a lot. And there’s a lot more to go, so I got to imagine there will be people that have, follow up questions for you. And then, I’ll have a couple of people that own property that I’ll think of who is the best fit for this. And see if I can intro you to a couple of them and see if we can explore this a little further.
Chris Pawlik: Absolutely Justin. And from that perspective, please, if anybody has any questions, feel free to email me, email@example.com or check out our website, eprsquared.com and if there are any property owners that you think might be of interest, we’ve got access to capital, we’re ready to go. So let’s do it.
Justin Smith: Thank you, Chris.
Justin Smith: I want to thank you for joining me on this episode. And if you liked what you heard, please drop me a note at firstname.lastname@example.org or text me (949)400-4786 and let me know if there’s any follow up you would like. If you have any guests or anyone, you’d like to hear interviewed or see on the show, let me know. I’m always looking for new exciting guests and look forward to connecting with you. Thank you.