Financial Challenges in Scaling First of a Kind Technologies

Douglas Morris, who is part of Emerson’s alternative energy industry team, discusses some of the financial challenges alternative energy producers face when scaling up first of a kind technology:

Advanced biofuels are a strategic part of the 21st century’s strategy to diversify the world’s fuel supplies to include renewable sources. The industry shows promise and includes entrepreneurs and innovative processing technologies that are well proven at bench and pilot scale. There are many young companies that are ready to take their technologies to the next stage, commercial operation, and that is where the real challenge begins.

The OpenEI web site notes the financing complexity:

Renewable energy project financing is complex. Successful financing for new facilities requires knowledge of federal tax credits, state-level incentives, renewable attribute markets, renewable technology installation and operation costs and many other site-specific considerations.

Most firms in the advanced biofuels are backed by venture companies, which can provide all the necessary resources for developing smaller scale production facilities. The problem is that venture capital alone cannot support the construction costs of the typical advanced biofuels facility, nominally about $300M USD. So where does the industry turn to get these projects built?

Let’s start with commercial banks. The answer here is pretty cut and dried. Most, if not all commercial lending facilities are not willing to take on the risk of financing these projects because they are serial number 1 of 1. There’s a much better chance that once a technology is successful at scale, the commercial lending market will be a go-to source for funding. Unfortunately, though, most companies are still trying to build their first plant.

Option 2: Although the molecules produced by this industry are commercially viable, whether it’s ethanol, renewable diesel, or another drop-in fuel, they just can’t yet be produced at a cost comparable to traditional fuels. Except for the few large players that can self-finance, most companies must rely on a combination of government loan guarantees and specialized debt/bond market issues from investment banks. To date, these have had some success, but government loan guarantees often resemble commercial loan processes so many promising companies do not meet the application requirements. Most recently, the primary programs from the DOE and USDA that have helped provide some guarantees were pulled or put on hold because of the current fiscal situation at a federal level in the United States.

So what is the future? At best it’s unclear. As far as loan guarantees are concerned, the prospects for new programs are lukewarm over the next year or two. If and when any programs are developed, any guarantee needs to be more accessible for a broader group of applicants. Regardless, if history is a guide, my hunch is that the spirit of the entrepreneur will win and those companies with business models and cost positions that are less reliant on subsidies succeed, much like the wildcatters who ushered in the oil and gas industry several generations ago.

Posted Thursday, June 30th, 2011 under Energy.

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