The Importance of Getting First-Time Project Financing Right
By: Kristin Barbato, Founder & CEO, Build Edison
January 5, 2020
In my 25 years in the energy industry, I have been on both the buy- and sell-side of energy solutions. Countless times I saw companies and innovators with great ideas come through my doors, earnest and excited about what their new technology solution could do. Yet their product had not been proven in the field with sufficient validity for operators. Demonstration projects have become critical to the growth and success of new energy technologies and making sure they are done intelligently and efficiently is more important than ever. Build Edison was founded to de-risk demonstration projects for startups and investors, and to push more technologies to commercialization to achieve a cleaner and smarter energy future.
Environmental, technological, and regulatory trends are continuously reshaping the energy landscape, and many organizations are under tremendous pressure to innovate their strategies and assets to adapt. On a massive scale, energy needs to be generated more cleanly, the grid needs to be made more resilient, and buildings need to become substantially more efficient, and these are just a few of the challenges we face. To top it off, many of the technologies necessary to accomplish these goals do not currently exist. This new market environment necessitates that new companies and technologies scale more efficiently than ever, and consistently grow to commercialization. Successfully presenting these technologies through demonstration projects is a key step towards their ultimate commercialization.
Demonstration projects showcase the potential of lab tested technologies in real world environments. They are particularly critical for capex heavy solutions, or solutions which need to be deployed at scale, as they diminish the risk of investing in untested projects. On the purchasing side, clients in the energy sector are often massive entities with long time horizons, such as utilities, who need to be confident in the profitability and scalability of these technologies. Demonstration projects allow clients to see these solutions operating in the field and can expedite the adoption of innovation. On the operations side, new companies get the chance to test their product in the field, collect data, and refine their solution, their execution, and their management.
Demonstration projects can work to diminish risk for buyers and sellers, but they are not without their own challenges.
There are several operational and financial challenges around demonstrations, but we are going to focus on project finance, and the importance of getting first project financing right. While these demonstrations have the potential to showcase the success of energy innovation, getting them wrong can be disastrous for a startup. On the financial side, failing to intelligently and efficiently finance an energy solution can tarnish its reputation. These technologies need to be commercially viable, and doubt surrounding their returns can kill an otherwise revolutionary energy solution.
The most immediate difficulty in project financing lies in the ever-growing complexity of the financial side of the energy industry. For instance, a renewable generation demonstration project might involve drafting an innovative Power Purchase Agreement (PPA), accounting for state and federal incentives, potential tax equity agreements, benefits from the utility, and so on. This is especially challenging for startups who often have relatively little exposure to the financial side of the industry. The continuing standardization of these financing tools will certainly help more startups and investors, but as things stand this is a tremendous challenge and presents a real opportunity for investors who have the experience to navigate these financial structures.
Another key financing challenge is the risk profile of demonstration projects. These are financed in the highest risk period for startups: between prototype and revenue. This fact alone leads most investors to avoid demonstration projects, but these projects are also relatively capital light, they are typically financed in the range of $250k to $1m for the entire project. This makes investment difficult even for the earliest stage venture capital funds. For these reasons there are very few private investment institutions funding demonstration projects, and most demonstration project funding is sourced from government programs or through utilities.
All that being said, demonstration project finance presents a clear investment opportunity moving forward for investors with the experience and operational insight to finance the right projects.
The demand for scalable energy technologies is greater than it has ever been, there are billions in incentives to capitalize on, and there is a huge diversity of new technological innovations to invest in. Efficiently growing these technologies into commercially viable companies is crucial not only in meeting our climate and energy goals, but in maintaining the flow of opportunity to later stage energy investment firms. The short-term risk of these projects is matched by strong returns, in a sector where there is huge demand for demonstrated technologies. Demonstration project finance will become a necessary instrument in de-risking the growth of these new technologies, and in maintaining the pipeline of asset and startup investments to the larger funds.
At Build Edison, we have decades of experience in developing, managing, and financing demonstration projects across various clean energy technologies. We offer a number of solutions for startups, large companies, governments and investors to grow quickly and consistently, and to capitalize on one of the most exciting areas of the energy market.
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