Cleantech Finance Insider

Is There Too Much Renewable Energy?

Some of you may have seen an article in the NY Times last week addressing the speculation that the growing integration of renewables in general, and wind power in particular may be creating big problems for the utilities that run the electric power network in the future.

This is not the first time the issue has come up.  In fact, it was a particular area of interest and study back in my days as a researcher at Pacific Gas and Electric during the 1990's.

In recent years I've seen many technical articles and whitepapers addressing the concern.  To grossly oversimplify, there are circumstances whereby the generators on the wind turbines (if you have enough of them) are thought to be able to adversely interact with the grid to drive voltages and or frequency out of allowed tolerances, causing a big outage.

One analogy might be watching a new driver learning to handle the clutch pedal.  In the fits and starts of applying and removing gas to the engine and torque to the wheels, it is possible to kill the motor. "Killing the motor" of the grid should be avoided!

Some Canadian utilities have put a temporary upper limit on how much wind power they'll accept. Others around the world are considering the same. I recently had a chance to speak to an old colleague, a transmission system engineer from my PG&E R&D days.  He currently works for the the State of California and spends a lot of time studying these problems.  With California's aggressive plans for renewable energy integration, it is clearly a question that needs to be answered.  "What WILL happen when we put all of this renewable energy into the grid?"

His reply surprised me. It seems that integrating big wind farms into the transmission grid is not a big concern in California.  The ability to predict output from wind farms is pretty good on an hour by hour basis with relatively little minute-by-minute changes. The system operators have good telemetry on those sites. The types of problems that might be caused by adverse interactions between the generators and the grid are well understood.  There are readily available devices that can be put at the interconnection point to mitigate for any such interactions.  In short, it is an engineering problem with engineering solutions.

What startled me was he went on to say "I'm more concerned about is what happens when all of Gov. Schwarzenegger's million solar roofs come on line."  He added, "no one at the utility knows where they are.  The distribution system has very little telemetry. Solar power output can quickly and dramatically change with cloud cover. The distribution system has always been hard to model with its inherent  complexity of customers, branches and interconnections.  Now with the introduction of thousands of "hidden" generators, we don't have a good handle on if or how it may cause problems.  I don't THINK that there is a problem with distributed PV, but we know that we need to keep an eye on this issue."

Somewhere, out there, a PV developer-entrepreneur is reading this, shaking his fist in the air and yelling "FEAR ME, utilities!"

Crossing the Cleantech Chasm pt. 2

Over the last few months, with the precipitous rise in petroleum prices, we've seen the call from many politicians and thought-leaders for an "alternative energy Manhattan Project" or "the renewable energy equivalent to the Apollo program."

At the risk of sounding ungrateful for the attention to the industry that I work and personally invest in, I think that this is misguided.

These two historically significant exercises in national will had a key point in common that is critically missing from the requirements of the next energy solution. Both of these efforts were based on MNO budgets. Money No Object. They were about the demonstration of our political will and technical capabilities, not about cost effectiveness or affordability.

If it was determined to be in our national interest to build a 100MW photovoltaic power-plant in orbit above the earth and to microwave the power down to a receiver station in the Mojave desert, we could do it.  The question is would it be easier and cheaper than two frame 7F, 50MW GE gas turbines?  Probably not so much.

The unique challenge is that we need to develop not only novel solutions to our energy supply problems but to do so in a way that is either directly cost competitive or close enough that relatively modest public policy efforts can make them so (e.g. tax credits, feed in tariffs, etc.).

The problems we face with petroleum is two-fold. First, is the high and growing demand for a product whose price is controlled by a cartel. From a pure Michael Porter competitive forces viewpoint, if you can't find an alternate supplier you had better find a substitute product.

The second problem is the more talked about issues of climate change. The high and getting higher levels of CO2 in our atmosphere are at best, worrisome and at worst, disastrous. Compounding this problem for us is that, on a statistical basis, most people in the world don't care.  

They care about getting out of poverty. They care about food, clean water and better transportation - immediate needs for family and self that overwhelm what might be in so many years. In short, the renewable energy solution that they need is the one that is cheaper than fossil fuels.

In each case, as painful as price increases around crude oil are, they make us that much closer to a cheaper  solution to both problems around the world as well as at home.

Now that we have admired these world-class problems, what might the US government (or other capitalism-based government do to solve them?

In part 1 of this story, I identified a chasm of funding for new technologies. They can best be characterized as projects too expensive to attract venture capital and too new to attract debt.

If I may criticize my own industry, others in it tend to call for government intervention (subsidies, credits, etc.) all too often to help our cause. Since I have been relatively quiet on this topic, I now feel that it is my turn to ask.

There has been a program in the US Federal Government's Small Business Administration to invest in venture capital. I know because Fluke Venture Partners, where I am a limited partner has the SBA as a special limited partner. The SBA takes a special position whereby they get a limited but preferred return on their investment. FVP gets to nearly triple the size of their pool of investable funds. The other limited partners get the prospects of the lion's share of the returns after (and only after) the SBA takes their cut.

While this SBA program is now being curtailed, I think that it or a similarly structured debt fund is an excellent approach for solving our new technology funding chasm-the chasm that impedes the commercial scale deployment of new, innovative energy technologies.

Now some will say "aren't there government loan guarantee programs that would accomplish that?" Actually, no. While there must be exceptions, every loan gaurantee program that I've come in contact with was either administrated directly by a government agency (=very risk adverse) or by a commercial bank that lacked depth of industry or technology experience.  In both cases, guarantees seemed to go to the firms that did the best job of schmoozing the administrator rather than advancing the state of the industry.

The creation of such a project finance fund would allow the government to direct where the money goes generally - project finance for first commercial scale (call it 50MW) use renewable energy technologies while allowing talented fund managers with real track records to pick those projects that have the right mix of talent, technology and risk mitigation.  

But this is a presidential election year, small chance of that happening.  Oh well.

Crossing the Cleantech Chasm pt. 1

Working in the field of clean technologies and renewable energy with all of the popular press coverage I often get asked "wow, things must be really looking up for you!" While I do stay busy enough to keep out of trouble there is a structural issue with the larger industry that concerns me.

In the '90s there was a fabulous book called "Crossing the Chasm" devoted to an analysis of how new technologies (especially software) get started and either thrive, stagnate or altogether die. It is a must read for entrepreneurs and technology marketers of nearly every stripe. The author, Geoffrey Moore, describes the first to buy as "innovators" and those that soon follow are "early adopters." The next stage of buying is by the "early majority" and this is where many products fail. The few who have a high degree of pain have already bought the product. Where the innovators and early adopters are separated by "cracks" in the bell curve of adoption, the early adopters and early majority are separated by a "chasm." 

While the structural reasons for the chasm are different for cleantech, ours is no less deep or wide. Sharp entrepreneurs with good ideas can raise funds to prove them out (usually from venture capitalists). Innovative technologies on the benchtop can also usually find the funds to build a small pilot plant to begin to examine the commercial promise therein.

When the firms begins to look for money to build that first fully commercial plant, that is when they fall into the chasm. Consider how long have we all read about the promise of cellulosic ethanol yet how few commercial plants have been built.  In this case the chasm isn't a challenge of product marketing, but one of finance.

I often (all too often) find myself telling a client that his technology looks great and that banks will line up to loan him money to build the 2nd, 3rd or 4th plant in the series. "But why not the first?' they ask. "If the banks won't give us the money, can't we just go to the venture capitalists and get it?"

These questions form the crux of our dilemma.

A cursory examination of renewable energy news will quickly reveal word of big banks both domestic and especially European who are lending hundreds of millions of dollars to build wind or solar power projects. The difference between the deals you read about and that of our erstwhile entrepreneur boils down to confidence and familiarity.

The manufacturers of the panels or turbines in the deals we read about are large companies. They can and do offer performance or availability guarantees. Those companies are big enough to make good on their guarantees if needed.  Just as important, these deals are not novel. Banks don't have to ask themselves "Is this going to work?"  Instead the questions are much more in the vein of comparison. "Does this deal look enough like the others that we've seen that we should feel OK making the loan?"

The reason that banks look at the problem this way is that their upside is their interest payments. Their downside risk is default. If the project is in default, they must try to sell it to recoup their principal. If the plant went into default due to some unforeseen technical problem, who would want to buy it?  In short, for new technologies the banks have the risk exposure of a venture capitalist with much more limited prospects for reward.

Well what about building the plant with all equity from venture capitalists? While VCs are much more familiar with taking on the higher risks, very few cleantech projects offer the "home run" big return possibilities that are the mainstay of the VC industry.

For an energy project to have such returns (depending on capital costs), you might have to make power at $.02-.03/kWh and sell it at $.10/kWh. There just aren't very many opportunities like that out there (but if you've got one, please contact me ASAP!).

That leaves us with the cleantech financing chasm-projects that are too novel to attract debt financing but don't offer the stupendous returns that attract venture capital.  What's a developer to do?  Next time I'll weigh in on some ideas to solve this problem. 

Curb Your Enthusiasm

No this post isn't devoted to a sitcom about comedy writers but is instead directed at entrepreneurs who are pitching their ideas to prospective investors, especially the professional kind.

As I've posted on before, the cleantech entrepreneurial team (or any team for that matter) will need to exemplify a balance of passion and pragmatism. One of the ways this can manifest itself early in the fund raising process is investor meetings.

Earlier this year I was talking to a group of executives from a company that had a small pilot plant for turning a waste stream into potentially profitable recycled products. Their pitch to me went something like this (10 minutes compressed into one paragraph):

"We've got this secret process that takes waste XXX and turns it into AAA, BBB, and CCC valuable products. We can show you our pilot plant. We know where there are acres and acres of XXX that people will be ecstatic to pay us handsomely to get rid of. We figure we can get $aaa, $bbb and $ccc for the output. It's a license to print money. Are you going to invest in us or not?"

This was so wrong in so many different ways, but let me try to break it down. First, the executives were confused about the role of the meeting. I was there as a prospective placement agent, to help them find investors, not acting an angel. Secondly, they were confused about the role of the investor meeting had this even been one.

When you are meeting with prospective investors it is important to be cognizant of the realistically achievable goals. Investment in a project or venture is not an impulse purchase. What is an achievable goal of an investor meeting? Curiosity.

Different investors will want to drill down on different parts of your plan. You will not and cannot know what all of those are in advance to cover in your PowerPoint. The only reasonable goal will be to tell a compelling story about your opportunity and ASK for questions. If you aren't getting any questions, you aren't getting any interest.

One of the main criteria I use in vetting prospective clients for fund raising is how will they perform in front of investors that I connect them with. I not only have an responsibility not to waste investors' time with bozos, but spending time on deals that will never get funded is just a waste of my time too.

The main way that I vet such deals is to put on my VC hat and ask the questions that I would ask if I WAS investing my own money in the deal. In the case above, I drilled down on the scalability of the pilot plant and the threat of competitors.

When I asked about the engineering challenges of scaling the pilot plant by 5x, the CEO replied, "there's absolutely no problem." That is pretty much always the wrong answer and investors will generally feel lied to when told that. Either the company doesn't know what the problems might be or they are afraid to tell me. 

Eventually I did learn what their engineers were most concerned about. It turned out to be some mechanical engineering issues with the XXX handling system. Fairly simple mechanical engineering problems at that. OK, now I can begin to believe that you have thought about the problems and they are solvable.

"We have no competition." Oh man, those are the ultimate non-starter words with investors. If you have no competition then there must not be any need for your product. You either have competitors or substitutes or both and you need to be honest and well versed on how you are differentiated from them.

In many cases, the investor will already have an idea of who else is playing in the space because he's already taken meetings with such companies. Further, saying that you have no competition can sound like you aren't even looking very hard. If you don't know of other competitors, you need to cite the substitutes and tell the investor "We haven't seen anyone else with an approach like ours to the problem. Have you heard of any?"

I guess that the best way to frame the process is that you should present yourselves as informed optimists with a winning idea. Encourage good questions and take them seriously. Use the questions and your answers to engage the investor in substantiative dialog about the opportunity. It will take more than one meeting, but when the flow of questions begins to subside, then you may approach the funding questions, if the investor hasn't raised them already.

Where Do Things Go Wrong, Part 2?

The top ten list (in no particular order) of reasons seemingly good cleantech projects die continues. We pick up where we left off last time at number 6.

6.  The technology is unproven at commercial scale.  This is real challenge in the cleantech space.  Promising developments in the lab just are not going to normally get funded on a large scale.  The best example lately is cellulosic ethanol.  There have been news articles about breakthroughs at the small scale for over a decade but no one has built or is even contemplating constructing 100 million gallons/year plants that dominate the corn ethanol production space.  What pilot scale or small commercial plants that are being built are almost all taking advantage of big government grants or loan guarantees.  The bottom line it that it will be nearly impossible to build the first big plant of any given technology.

7.  How else can I say this, the investors just aren't that into YOU.  I've blogged before about "bankable" entrepreneurs and how certain qualities seem to attract money.  Ultimately, investors are investing as much in you, the developer, as in the project itself.  This doesn't mean that all hope is lost.  Development can be a team sport and a good developer won't be afraid to go out to recruit the talent that the investment community perceives to be missing.  Much of the time, the unspoken question from investors is "Can this guy manage and complete the project?"  If you can find someone who has just successfully managed the construction of a project like yours, then your team can become very bankable even if you, alone, are not.

8.  The project just has too many moving parts.  Consider a plan to develop one parcel of land to have both wind and geothermal power production.  One piece of land.  One transmission upgrade.  Greater efficiencies in O&M.  What's not to like?  Well investors are not very comfortable with such deals.  Most renewable energy projects will use a combination of debt and equity to reach financial attractiveness.  There also is a tendency for investment analysts to specialize in one technology over another.  So both the equity guys and the debt guys will have multiple people judging the project.  There may not be any one who feels comfortable endorsing the entire project.  Anyone of them saying "no" kills the deal. This is especially true for the debt investors who are looking at default risk.  For them, two technologies looks like twice the risk.  There is no credit given to a project that only goes a little broke.

9.  Officials who ought to cooperate, don't.  This is an easy one to get caught on.  Working on cleantech project development tends to make the entrepreneur very popular at cocktail parties.  You are admired in the community.  It doesn't mean that everyone is willing to help.  One of the biggest projects that I have ever worked on (a high voltage transmission line) was counting on an agency of the Federal government to make a bid on use of the line to fix some serious reliability problems and enable the importation of significant new supplies of renewable energy.  How could a governmental agency not support the idea?  The question that every developer needs to ask is "whose bonus is increased or promotion insured by helping me?'  In this case, there was no one.  Four years and $15 million in preliminary work later, there is still no deal.

10.  I know that I said that these are in no particular order but I did save this for last because I'm running into it more often than ever.  The project won't get done because it is politically out of favor.  I've had more than one biomass project lately that is getting the cold shoulder because some investors don't want to get caught up in the food vs. biofuels debates.  These projects are using wood waste or other energy crops grown on land unsuited for food crops.  It doesn't matter.  Perception IS reality. More and more, if the feedstock was grown in soil it is being blamed for increasing costs at the grocery store.  Investors don't want that kind of PR black eye.  Developers of biomass based energy projects will have to be very careful to stay in front of the perception wars on this one.

In part one, I mentioned that every successful cleantech project seems to die ten times before it finally lives.  While I haven't covered all of the possible causes of death, I hope that I've illuminated enough of them that you will be able to anticipate some, understand the others and bounce back from them all.  I wish you success.

Where Do Things Go Wrong, Part 1?

One of the ways that I try to help overly optimistic entrepreneurs to get their arms around the business risks their energy projects face is to ask them to imagine that its two years from now and they are being interviewed about the tragic failure of such an impressive firm.  What are you telling the reporter about where things went wrong?

I've heard successful project developers say that every good project "dies" 10 times before it truly lives. 

Most of us have heard the stories about Fred Smith, founder of Federal Express getting a C from his Business School professor for the idea of FedEx.  He also is famous for having flown to Las Vegas and played blackjack until he had won enough to make the next payroll for his company. Clearly, even great ideas may not be immediately recognized and certainly are not guaranteed a smooth ride to long term profitability.

Let me then try to summarize the "top ten" (with apologies to David Letterman) reasons that good projects die.

1)  Can't get the product to market economically.  For electric power projects, this is most often a transmission access problem.  Either the transmission line that is "right there" is already fully loaded or the costs of extending the lines to the project are just too onerous for the project to afford.  For biofuels projects the problem is more along the lines of transportation of the ethanol/biodiesel to a blender where the composite fuel is mixed and made ready for retail sales.

2)  "No problem" permits become insurmountable problem permits.  I've seen projects with significant environmental benefits get caught up in local politics that resulted in previously issued air quality permits being revoked over some very dubious reasoning but undeniably heavy politicking.  

3)  Window of time to raise funding isn't long enough.  This may sound self-serving as someone who does project finance fund raising but it is important to realize that there are several forces that are at odds here.  Developers naturally want to show their project to be as complete as possible.  Landowners, once they are made aware of the prospective value of their property, don't want to give long options to develop.  Prospective investors HATE feeling rushed.  The net-net of this is that developers need to begin their search for investors while they have at least six months of "runway" left.  Better to show them a deal that isn't yet fully cooked than one that's about to spoil.

4)  Off-takers are not "credit worthy."  It isn't enough to make your energy at a market competitive price.  Investors will want to see that the parties that you are selling to have deep enough pockets that they will make good their promise to buy at the agreed price even if the prevailing market price goes lower.  In the electric generation sector, this means that there is a strong preference by investors to see power purchase agreements with utilities rather than re-marketers.  On the biofuels side, it means a preference for deals with big oil rather than small, local retailers of B100 or E85.

5)  Investors just aren't that into your project.  As nice as the project looks on paper, the returns promised just don't seem to get investors to bring out their checkbooks.  Often times that means that you will need to look at bringing in a strategic investor who stands to gain a big supply contract, market stature or other value in addition to the basic IRR of your project.  Warning to developers, this usually means that you will need another six months of runway time to find, woo and close such investors.

Next time, I'll finish off this top ten list.  Until that time, I wish you good luck.

When Silence is Golden

I had a friend ask me "why would a company ever want to be in 'stealth mode'? Isn't it important for the company and their products to get known ASAP?"

  

While it is only natural for an entrepreneur to want to tout the value and promise of his idea, sometimes that can be counterproductive to his long term success and even make raising money more difficult. Take the case of the wind farm developer. He has to lock down his options on use of the land before he can get any financing. The louder and longer he talks in the community around the site, the harder and more expensive those rights will be.

A similar case can be made on the technology venture front as well. I was at a major trade show some while back and a bootstrapped new company (which I'll cleverly call NewCo) had made a big commitment to exhibiting at the show.  It was touting a very innovative product for sale to utilities to help them meet some vexing environmental requirements at a very reasonable price.  As a cleantech investor, I was interested in learning more about the company behind the product.

If you are old enough to remember Tom Peters's book "In Search of Excellence" you'll also recall his advice to practice "Ready, Fire, Aim" execution of ideas.  The underlying premise of which was that companies tend to over-analyze their moves rather than making an educated guess, get it in the market and adjust from there.

This start-up was more following the execution plan of "Fire, Fire, Fire."  The show floor had every alpha and beta product they could box up.  Getting samples to the handful of utilities who showed real interest was taxing production capabilities. They did however, generate a lot of booth traffic with the product including inquiries from prospective competitors.  

Some of those prospective competitors even came back to the booth multiple times to talk to the young engineers who were flattered to have such attention and intelligent questions asked about their creation.

While I'm pretty sure there were some utilities who signed up to test the product, I haven't seen any word of purchase commitments and it's probably too early to expect them.  Also with development times as they are I still don't know if new, competing products are being feverishly engineered by more well-established companies in the field.  Nonetheless I was struck by this idea.  What if NewCo had taken a different approach?

Dream with me, for a moment if you will.  What if NewCo were able to quietly identify the types of utilities that would have a natural inclination to try their product?  They might also quietly strike up product evaluation arrangements. By taking on the prospects in a more controlled fashion, they could allocate scarce production units to the most promising utilities all the while keeping their financial "burn rate" under tight control.

When the Pacific Gas and Electric or other marquee utility is ready to put up the big purchase order, it is time to prepare the PR blitz. It's also a great time to get get serious with the venture capital community.  

On that well-planned day, NewCo announces its product, a big name launch customer and a war chest of money to build out production capabilities and its sales force.  The prospective competitors are saying to themselves "where the hell did these guys come from?" and berating their R&D staff for not having developed it first.

As long as NewCo can build on this early momentum and continue to land customers, the existing players can only try to play catch up until one of them finally says "we can't continue to let this growth opportunity elude us.  We have to buy NewCo out."

And that, ladies and gentlemen, is how entrepreneurs make money in the cleantech game.

The PowerPoint Pitch

Between talking to energy project developers approaching my investment bank (EverGreen Pacific Capital) and energy technology entrepreneurs pitching me at the Northwest Energy Angels group, I see a lot of PowerPoint presentations. Most of them bad.

This is not to say that the presenters aren't smart or committed or are in some way lacking in intellectual or physical capacity needed to succeed. It's just that "the pitch" (as VCs and other investors want to see them) tends to run contrary to the way that good entrepreneurs think. It is like asking a new parent to tell you about their baby - but don't take more than 30 seconds!

I was recently reminded of an excellent rule of thumb from the VC Guy Kawasaki. He calls it the 10/20/30 rule. Your pitch should be no more that 10 slides, take no more than 20 minutes and have no text smaller than 30 points. I'll post the link for you to read.

There are many good reasons for following these rules as Guy discusses. I'd also add the old show business adage, "always leave the audience wanting more." You need to make me curious about the further details. Don't try to guess where I want to drill down. Every investor gets curious and subsequently comfortable about opportunities in different ways. The pitch must only serve as the appetizer to the information banquet we wish to dine at, not the prix fixe meal.

I promise that distilling your story down to fit the 10/20/30 rule will be difficult but it will show the investor that you respect his time and that you are able to identify and focus on what's really important. If you do it right, it will also generate real interest and curiosity about your idea. For entrepreneurs at a first meeting in search of risk capital, that's as good as it gets.

Foundations of Project Energy Finance pt. 2

We continue the topic started last time on the key components in raising money for an energy project (as opposed to an energy technology company.)

A business plan that describes the opportunity, the need and the prospective financial performance

Control of the land for the project by ownership, right of way or most likely, option

All necessary permits

Knowldege and cost control of the inputs (feedstock, fuel, process chemicals)

A well-established, proven energy conversion technology

Credit-worthy, long term buyer for the output

Established, deep-pocketed EPC contractor

Experienced project operator and maintenance contractor

I described the rational for business plans in a recent post, but suffice it to say here that investors who are being asked to put in millions of dollars have every right to expect to see a thoughful document that explains what you have in mind, why it costs what it does and how it will make money.

The need to have control of the land is important because once word gets out that a developer has something in mind for the property, the price and availability become much less agreeable to the developer. The investors use this as a gating function, asking about land control early in the process to see if they want to spend any more time looking at it. Land control is a must-have.

Permits are important, not only because the project will have to have them but because they are sometimes not available for hard to fathom reasons. The permitting process can be subject to changes in the political winds and local opposition. If you have them, you have them. That will be comforting to investors.

Having an understanding and ideally some control over your input costs is the greatest hurdle to getting good projects financed. It is also a big reason for the surge in wind and solar power. The fuel is free and relatively predictable over a yearly basis. Consider, by contrast, corn for ethanol production.

The need for a proven conversion technology is another area that trips up would-be renewable energy developers. So often I see or read about inventors who have developed and sometimes patented a new energy conversion technology. Sometimes it's a new type of wind turbine. Sometimes it is wave power. Unfortunately, every time it is unsuitable for being deployed as part of a commercial energy project.

The reason for this is that the most common way that these projects can offer the returns that investors expect is to borrow money from big banks in addition to the private equity that the investors put in. Banks are more risk adverse than project equity investors (who, in turn are more risk adverse than venture capitalists). If the project intends to use new technologies then, in general, the banks won't loan against it.

Consider this; if a windfarm is built with a new type of turbine using a ten year loan. The turbines work great for seven years but then start failing. Soon, the project can't pay its debts. In theory the bank can repossess the wind farm but without reliably functioning turbines, there isn't much to repossess. Hence, banks stay away from first or second commercial use of new technologies. How does a new technology get into commercial use? That is a topic for a whole separate post at a later date.

The next box to check off for project finance is the sale of your energy (power or fuel) to a credit-worthy buyer for a time period that matches the length of bank loan you seek. Here the independent power industry has a big advantage over biofuels as many utilities are readily buying renewable power and most of those are considered "credit worthy" i.e. they have enough financial strength to weather any foreseable economic storms.

Given that for many projects, the biggest risk in the early days is going to be "completion risk." Completion risk is simply the chance that a given project will not be able to enter commercial operation or will not pass some completion test or commissioning. The reasons can be varied but most often come down to blown budgets for manpower and or material. This is why the financiers like to see a big name as the EPC contractor (Engineer, Procure, Construct). If Bechtel underbids a contract that they have promised to fulfill, you can be pretty sure that they can and will make good on it out of their own pockets. One can't say the same about very small firms. It may not seem fair, but again, it's about fairness as much as it's about wringing out risk.

After the project is in service the remaining risk to investors is that it may be operated poorly or poorly maintained. Depending upon the technologies involved the relative importance of these can vary. The "operator" of a windfarm has more of an accounting role than engineering. Maintenance is where the focus will be and often equipment manufacturers can and will be strong contenders for maintenance contracts. In the case of biofuels plants, the operator and maintainer are often one in the same and the combined role is much more technical than administrative.

I close with a reminder to entrepreneur developers not to be discouraged if you don't have all of these factors covered. You should however, have all of these factors considered and to cover as many as possible. I'd like to see all of them well covered, but then again, I'd like to see a ten pound butterfly! It doesn't mean that I can reasonably expect to.

Foundations of Energy Project Finance pt. 1

Anyone who writes a blog has to make some assumptions about their audience. I assume that readers are interested in the cleantech/renewable energy/sustainability arena in general. I also assume that there is a specific interest in the inner workings of the money raising process needed to get new firms financed and projects built.

I encounter some confusion about what types of entities put up money for energy projects. Often people think that all risk capital is venture capital. That is not really true. There are funds of monies that are under the large umbrella of "Private Equity" that do not take on technology risk (like VCs do) but will assume project completion risk (among others) that are associated with building energy producing facilities. They can be wind farms, ethanol plants, anaerobic digesters or even merchant transmission lines.

What these investors are looking for are entrepreneurs, sometimes referred to as developers, who can put together all of he necessary pieces to create an energy (and more importantly) profit producing project.

So what do these Private Equity project finance funds look for when they are evaluating an opportunity? There really aren't many hard and fast rules on this but the more of these the developer has lined up, the better his project looks:

A business plan that describes the opportunity, the need and the prospective financial performance

Control of the land for the project by ownership, right of way or most likely, option

All necessary permits

Knowldege and cost control of the inputs (feedstock, fuel, process chemicals)

A well-established, proven energy conversion technology

Credit-worthy, long term buyer for the output

Established, deep-pocketed EPC contractor

Experienced project operator and maintenance contractor

It's as simple as that! While I can hear my readers groan over the above list let me remind you all that few projects have all of these lined up when first approaching capital sources. They constitute what I have referred to in an earlier post, "the ten pound butterfly." It is something everyone would LIKE to see but no one really expects to. Nonetheless, over the course of putting together the project and lining up the money to build it, developers will have to address all of these issues.

In my next post, I'll drill down on each of the items in the punch list. In the meanwhile, I invite the readers to post comments on any additional factors that they think may have been overlooked or that don't belong.