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.

Comments

[Bill Lemon]

Quite right. Sometimes the tax incentives can absolutely be an A-list item. This is most often seen on photovoltaic installations but some jurisdictions such as Oregon have a broad spectrum incentive program that can pay for up to 50% of the capital costs via state tax credits.

Also, in some cases, individual municipalities can offer bond allocation (also seen in sports stadium finance) or property tax exclusions that can go a long way toward turning an OK project deal into a real winner. As the anvil salesman said in "The Music Man," "You got to know the territory."

[Dave Hardwick]

This one might not be an A-list requirement, but could be a B-list: List of Federal, State, County, and Municipal Tax breaks.