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.
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