Community solar, five acquisitions, and disrupting a regulated monopoly: Kate Henningsen of Arcadia

Community solar barely existed as a market in 2018. It is now the fastest growing segment of solar in the country, outpacing residential rooftop, and a meaningful part of the reason is that two people from Washington with law and policy backgrounds decided regulation was an advantage rather than an obstacle.

Kate Henningsen is co-founder and COO of Arcadia, a climate technology company running the largest community solar portfolio in the United States, with more than 1.6 gigawatts under management, alongside a business-to-business data platform called Arc. The company has raised $300 million in venture funding, most recently at a $1.5 billion valuation.

She was a corporate litigator before this, and holds a philosophy degree from Oxford. Michael has been an Arcadia customer since 2015.

Energy 101

Henningsen's opening framing explains why this industry behaves unlike any other.

Energy is the only market in the world that is still a monopoly. States agreed that a given utility gets every customer in its territory automatically, guaranteed by virtue of where you live, and further guaranteed a rate of return on what it invests to build the power lines serving you. That is the social contract.

It is also one of the largest markets in the world, running to trillions of dollars, and it operates on rules that exist nowhere else.

Her thesis for Arcadia is that the digitization that swept other industries over the last twenty years has not reached this one, and that the energy transition requires speed. If you put energy data in the hands of other companies, they will build solutions faster and more consumer friendly than any single company could.

Her joke about her own qualifications is a good one. Lawyers often feel out of place in startups, but in the regulated world of energy you arrive as the instant authority on a market that works nothing like anywhere else.

Why a regulated market was the advantage

Michael notes that taking on a heavily regulated industry has traditionally been a warning sign for early-stage investors, and asks what gave them the nerve.

Henningsen's first move is to puncture the retrospective narrative. Startup journeys look linear from eight years and hundreds of millions of dollars later. They are not linear while you are making the decisions.

But the substantive answer is about background. She was a litigator. Her co-founder Kiran Bhatraju had worked on energy policy on Capitol Hill and had already started a company in the space, American Efficient. Both understood what policy and regulation can do, and specifically that policy makes markets.

Her framing of that is the part worth keeping: in most private industries you have no channel. In a regulated one, you can knock on a door and have the regulator tell a utility to do something. Regulation gives you a mechanism to force action or open a market.

That was the wedge other founders did not have, which she thinks explains why an enormous market went so long without serious attempts to change it while people took on far smaller ones.

Community solar is the proof. It was their second product, launched in 2018, into a market that did not exist. Through lobbying, work on the ground, passing laws and talking to lawmakers, they and their partners built it into the fastest growing segment of solar in the country.

The other lever was contractual. Community solar is complicated behind the scenes, because third parties build the projects and customers have to be matched to them. Arcadia built an opt-out structure into its terms of service so customers sign up once, Arcadia optimizes in the background, and nobody has to re-sign a contract or wait for a specific project to come online. A legal construct, used to produce a seamless customer experience.

What community solar actually is

Community solar is shared solar created by state policy.

States want to decarbonize faster and to meet renewable portfolio standards they have legislated. So they pass laws incentivizing third-party developers to build solar in the state, and let ratepayers split the savings.

For the consumer it is a direct product with a guaranteed savings rate, roughly 10% off the power bill. Signing up creates local solar. Arcadia acquires the customer and then manages the billing relationship, the credit allocation, and the rest of the back end for as long as they stay.

Her summary: shared solar savings that are a guaranteed win for the customer, and local.

How does community solar work if the electrons do not move?

Michael asks the question everyone actually has. He is in Michigan on DTE, which has no community solar program, but suppose it did. His power provider does not change. So how does the solar reach him?

Henningsen's answer is refreshingly blunt. It does not, and it cannot. Unless the panels are on your roof, you take whatever electron the grid gives you. There is no mechanism to route a specific electron from a field two miles away to your house, and there never will be.

What you are doing is displacing dirty electrons with clean ones.

The math is at the grid level. Arcadia has helped build nearly two gigawatts of solar. Community solar overall was on track to be roughly a ten gigawatt market that year. All of that capacity displaces fossil generation and forces coal plants off. So when you plug in, the grid you are drawing from might be 52% fossil rather than 60%.

For scale, a gigawatt is roughly the power for 300,000 homes, which happened to be about Arcadia's customer count at the time.

Why the economics work without a green premium

Michael raises the green premium, the idea that clean alternatives cost more.

Henningsen's answer is that community solar is a guaranteed savings product, so the customer's bill gets cheaper. And the underlying reason is a property of renewables that she thinks makes this a market movement rather than purely a subsidy movement.

Once the panel is installed and the sun shines, the marginal cost is close to zero. There is some operating and cleaning, and she notes that people now put goats out to eat the grass around the panels. But unlike a coal plant, you are not continuously harvesting fuel. The marginal cost of renewables tends toward zero.

The regulated part is the state telling the utility it will take that power.

She is honest about the ceiling. Community solar will be at most around 2% of a state's load. It does not solve the climate crisis. What it does is prove that consumers can participate, that different business models are possible, and that billions of dollars of value can be created in the process, with millions of people on these products within five years.

On subsidies generally, her position is that the costs of solar and wind have fallen roughly 90%, that government support in the 2000s was instrumental in getting there, and that the Inflation Reduction Act incentives are worth it. Her aside, recorded during a heat wave in Washington, is that at 102 degrees she is comfortable with the government subsidizing some market-making.

Electrify first, then decarbonize

Michael cites Bill Gates's How to Avoid a Climate Disaster for the numbers: roughly 51 billion tons of greenhouse gases emitted annually, with electricity accounting for around 27% of that.

Henningsen thinks of it as roughly thirds: agriculture, transportation, and buildings and electrification. Electricity may be the easiest of the three.

Step one is electrifying. She points to Rewiring America, which has quantified the task down to the county level: around four billion devices in the United States need to be electrified to hit targets. Those are household decisions, made when you replace an HVAC system, a car, a stove. Incentivizing that at scale is what the IRA was designed for.

She addresses the common objection directly. Yes, if you plug an EV into a fully coal-powered grid you are causing more harm. But if everyone electrifies, decarbonizing the grid then makes all of it clean. Electrify first, because you cannot do the second thing without the first.

Her prediction is the memorable one: HVAC technicians may turn out to be the heroes of the climate transition, because they are the people standing in the house recommending a heat pump. Those micro decisions, and how fast they happen, are the critical variable. Twenty years is too long. Five and we are in a good position.

The encouraging half is that over 90% of new electricity generation in the United States is now renewable. Nobody is building coal plants. Natural gas persists, but the vast majority of new capacity going into service is clean.

From operating necessity to product

Arc, the data platform, exists because of what running the consumer business required.

Managing 300,000 customers across 600 developer relationships and a couple of thousand solar projects meant building substantial technology just to move people around. Then, around 2020, the market started pulling. EV manufacturers and solar developers came asking whether they could get access to the utility data and tariff rate data Arcadia clearly had.

So they built it into a horizontal data platform, now spanning roughly eleven verticals across what she calls the decarbonization life cycle.

The use cases are concrete. An EV manufacturer building an app that tells owners the cheapest time to charge, and whether they should switch to a different rate plan now that they own an EV. A solar developer generating an accurate rooftop proposal. Corporate energy measurement, where the sustainability reporting vocabulary ultimately reduces to accuracy about how much energy is used. And an HVAC contractor who wants to tell a homeowner exactly how much a heat pump would save, which requires knowing their usage and their rate.

Michael's observation is that this is the best kind of product spin-out, because the use case was already proven internally. Henningsen agrees, and returns to her theme that nothing is linear. They were content building community solar, a couple of EV manufacturers called, and the dots connected into something potentially larger.

Selling a platform to a mission-driven team

Michael asks the operator's question about what happens to culture when a consumer company with an easy-to-love mission starts selling to enterprises.

Henningsen's answer starts by admitting it is ongoing, and that culture is a garden you tend rather than a thing you finish.

The difficulty is measurability. Telling employees the company put 1.6 gigawatts of panels in the ground is unambiguous. Telling them the company helped another company is real but more attenuated.

The story that works is about scale. A million things have to happen to avert climate change. Before, Arcadia chose its products and had to pick right. Now it does not have to pick right, because a thousand other companies can build on the platform. Everybody should be playing this game.

The harder cultural work was integration. They acquired five companies in three years, two of them large, one of them global, all of it after COVID.

Her description of what remote cost her is unusually specific. Her leadership style had been built on physical proximity, and she took some pride in having the office next to the bathroom, because it meant 85 to 100 touch points a day, constantly reading culture and engagement. Remote requires far more intentionality and deliberately making space for people.

Her mitigations are a mix of the substantive and the mundane: everyone at the company is an energy nerd, which gives you a shared starting point, and you still have to send people t-shirts and water bottles.

How they think about acquisitions

The starting question is always whether it accelerates the road map, which requires having a clear view of where the road map goes over three to five years.

Each of the five was a different shape. One was a sales channel, among the best-producing in the community solar market. Two were essentially products. Oregon Shines was a market expansion.

The risk she names is the one that kills acquisitions. You want the acquisition to accelerate you, not slow you down. Her image for it is fitting a peg into a car so the car goes faster, rather than having to rebuild the peg and change every other part of the car to accommodate it. So the real debate is whether a new capability arrives without three years of bringing cultures and people together first.

And she is candid that this is hard, because nothing on paper tells you. It comes down to business fundamentals plus judgment about whether these are the right people, the right business model and the right talent for the direction you are going.

The counter deck

The best practical idea in the episode is what Arcadia does during diligence.

Her premise is that you think you know a company when you buy it, but you do not know it until you are inside, and not really until you have been there a year. So the best laid acquisition plans are about 70% right, and there is always something that was less rosy than the pitch.

The counter deck is the corrective. They deliberately build the opposing case: scrub out all the puffery, as the legal world calls it, take down the models, question the technology, and see what is actually left. Then look at that scenario, honestly, and check whether you are still excited.

On product integration afterward, her advice is to find customers you can test the cross-sell with quickly, so you learn how much you actually want to invest in combining the two products. She also notes the option people forget. One of her board members had been acquired by a company that chose never to integrate and simply ran the business separately. A parallel entity or a sidecar is a legitimate answer, and worth putting on the table explicitly.

Building the board

Arcadia's board was entirely investors until about two years before the recording, spanning the A, B, C and E rounds, with the D round not taking a seat.

Two things changed it. Maturity, in the sense of preparing for public company readiness, which brings independent directors. And the nature of the problems, because investors are strong on economics and have pushed the company hard there, but as an operator you want independent voices too. The board was roughly half and half by the time of the conversation, and she describes the mix of perspectives as a positive change.

Her advice on early board members is about durability: you are going to have a lot of ups and downs together, so being genuinely aligned matters more than the logo.

The mechanics are where operators can steal directly. Early board meetings had loose agendas. Now they plan the year: five board meetings, each with a standard agenda and a defined purpose. A strategy meeting. A budget meeting. An employee review meeting. Each with the decisions it is meant to produce, and all scheduled well in advance so preparation is possible.

The tip she calls ticky-tacky is the most useful one. Tell the board what kind of conversation each item is. Is this informational? Is this a decision? Is this a request for advice? Board members at every stage want to know what you want from them, whether you are asking them to weigh in and vote, or coming to them as a confidant to think out loud with.

Risk, cash, and the upside of being regulated

Arcadia was founded in 2014 and has been through cycles, though Henningsen agrees this one produced a more universal instinct to conserve cash.

Her own relationship with risk comes from law. Lawyers trade in risk, and most become conservative as a result. She went the other way, becoming comfortable assessing risk objectively and accepting that it exists.

Then she makes the argument that inverts conventional wisdom. Most people see a regulated revenue line as a risk. She sees it as a floor. When a state legislature in Illinois decides to do something for its residents, it is not reacting to a macroeconomic event. It is trying to deliver savings and local power. So a business generating millions of dollars off a real policy does not evaporate because of a budget decision somewhere else. The regulated line diversified them and protected them on the downside.

The second protection is market size. Consultants project on the order of $100 trillion spent over the next ten to fifteen years retrofitting the economy for decarbonization. In a market that large and that untouched, she argues, being too conservative is its own risk.

That said, they did cut expenses, take things off the board, and prioritize in a way they had not two years earlier, aiming for 18 months to two years of cash.

Michael's line is that tight times create renewed focus, and Henningsen agrees with something like relief. It has felt good to have people listen about priorities. Her rhetorical question is one every operator will recognize: what COO does not want a focused, prioritized plan to execute?

Litigator to COO

Henningsen had never worked at a tech company, a startup, or even a private company before this role. Michael asks how she learned it.

Her answer is that she is a learner, with a college degree, a master's and a law degree behind her, and a natural instinct toward beginner's mind. Enter a problem, admit you know nothing, ask to be taught, and consume it.

Then the practical version: read the newsletters, go to the conferences, ask people about energy. Her observation about the industry is charming and probably true of more industries than people assume. The energy market likes people who like it back. Show genuine interest and you get more conversations. She is especially warm about the climate tech community, where everyone is trying to solve the same problem, and encourages listeners to apply for climate jobs. With the caveat that you pay it back once you reach your own station.

On saying yes: it works in the early years because nobody else is there to do it, and it keeps working later. Being a growth mindset person means occasionally being over your skis, because growing requires doing things you have not done. Her framing is that learning means discomfort and growing means discomfort, and the useful internal move is accepting that rather than letting it become a voice telling you that you are not good enough.

Leader head, manager head

The lesson she says she is still learning is the difference between leading and managing.

What she is naturally good at is motivating and energizing people, explaining the why, getting everyone on the train. That is a real contribution. It also means she can be too optimistic and can avoid the hard conversations, which is precisely the managing half.

So she pushes herself toward the management work: treating people as individuals, communicating clearly, making sure each person understands the road they are on and how they grow on it. Knowing which head to wear at which stage of the company is the balance, and she thinks it is particularly hard for a co-founder.

Her reduction of management is the cleanest formulation I have heard: it is 90% communication, and it comes down to two questions. Does my direct report know what they are supposed to do? And do they know what I think of how they are doing it?

Her addition is that you should ask for feedback on whether they actually know those two things, rather than assuming.

The operational win

Asked what she is proud of, Henningsen points to global operations.

They bought a company that included 400 people in India on its operations team. Over the following year they brought the global operations organization together so it works as one unit, with a continuous improvement process, and drove the combined cost to serve down by 50%.

She frames the satisfaction in two parts, which tracks the leader and manager distinction she had just described. The leader part is getting people to see a shared vision and work on a problem collectively. The operator part is that they are simply working better and more efficiently.

Her line about startups generally, which prefaces this: the days can be miserable, and the years are remarkable. You look back at a year and realize you moved a mountain.

Five cease and desist letters

Her crazy story is from the earliest days of the direct-to-consumer business.

They were doing what you do: mailers, digital channels, standard acquisition. And within the first 18 months they received about five cease and desist letters from utilities.

This is the regulated monopoly asserting itself. Utilities are not accustomed to anyone else addressing what they consider their customer, because by design nobody else ever serves that person. The letters arrived as official-looking multi-page state documents landing on her desk, asking who Arcadia was and why it was talking to their customers.

What made it survivable was her background. A different founder might have concluded the company was finished. She was a litigator and knew how long these things actually take before there is real trouble.

Michael raises the diligence angle, which is that explaining five cease and desist letters to prospective investors takes a certain kind of investor. Henningsen's answer is that once you start explaining regulated monopolies and how you are changing the power market, people rather enjoy it.

Arcadia now has a dedicated utility relations team.

The detail she adds at the end, almost in passing, is worth its own note: she met her co-founder through a cold email.

The 5 things I took away from this conversation

1. Regulation is a channel, not just a barrier. This reframed the whole category for me. In an unregulated market you have no way to compel a competitor to do anything. In a regulated one, you can go to the regulator and have them require it. Kate and Kiran built a market that did not exist because they understood that mechanism and most founders avoid the industries where it exists.

2. Build the counter deck. The single most portable idea here. Before you close an acquisition, deliberately construct the case against it: strip the puffery, take down the models, question the technology, and look at what is left. Then ask whether you are still excited. Every diligence process I have been in optimizes for confirming the thesis.

3. Tell your board what kind of conversation this is. Informational, decision, or advice. It costs one sentence at the top of an agenda item and it prevents the most common board meeting failure, where directors give opinions when you needed a vote, or debate when you needed a sounding board.

4. Assign each board meeting a job. Five meetings a year, each with a fixed purpose, standard agenda and defined decisions, all scheduled well ahead. This is simple enough to implement this quarter and it is the difference between a board that prepares and a board that reacts.

5. Two questions cover most of management. Does this person know what they are supposed to do, and do they know what I think of how they are doing it? Kate's addition is what makes it real: ask them whether they know, rather than assuming you have communicated it.

FAQ

What is community solar? Shared solar created by state policy. States incentivize third-party developers to build solar locally so the state can decarbonize faster and meet its renewable portfolio standards, and legislation allows ratepayers to share the savings. Customers subscribe and receive a guaranteed discount, typically around 10% off their power bill.

How does community solar work if my utility does not change? It works at the grid level rather than the household level. As Henningsen explains, you cannot route a specific electron from a solar field to a specific house. What subscribing does is add clean generation that displaces fossil generation on the grid you are already drawing from, which shifts the whole grid's fuel mix over time.

Does community solar save money? Yes, by design. It is structured as a guaranteed savings product, so the subscriber's bill is lower rather than higher. Henningsen argues this is possible because the marginal cost of solar generation is close to zero once the panels are installed, unlike fossil generation where fuel must be continuously purchased.

Who can join a community solar program? Anyone in a state with an active program, including renters and people whose roofs are unsuitable for panels, which is much of the point. Availability is entirely determined by state legislation, which is why programs exist in some states and not others.

How should a startup structure its board meetings? Arcadia runs five board meetings a year, each with a defined purpose and a standard agenda, scheduled well in advance. Henningsen's additional practice is to label each discussion as informational, decision-making or advice-seeking, so directors know what is being asked of them.

Also mentioned

• Arcadia, its community solar business and the Arc data platform
• Oregon Shines, the community solar acquisition that expanded Arcadia into a new state
• Rewiring America, and its county-level quantification of the electrification task
• The Inflation Reduction Act and its clean energy incentives
• How to Avoid a Climate Disaster, source of the emissions figures Michael cites
• Renewable portfolio standards, the state mandates that create community solar markets
• American Efficient, Kiran Bhatraju's earlier energy company

Listen to the full episode

Kate Henningsen on Between Two COO's

Between Two COO's is hosted by Michael Koenig. Subscribe on Apple Podcasts, Spotify, or wherever you listen.