Financing small size energy assets is a pain in the butt!

But it does not need to be so difficult...

Author

Tarja Teppo
November 19, 2023

Financing of small size energy assets has a packaging problem.

After I left the cleantech venture capital company I co-founded, I joined an energy utility in Germany.

I often got pulled into meetings where a project finance firm wanted to meet us to discuss the financing of future energy projects.

And how will we finance this project that you guys have come up with?


In the end of every meeting, the fund manager would pour a 2nd cup of coffee and pop "The Question". Would we happen to have any readily packaged (clean) energy assets that we would be interested to sell to their fund TODAY?
 
This question came up literally in every_single_meeting. Sometimes I wondered if they took the meeting with us more because of wanting to explore the possibility of acquiring existing assets than discuss the investment in the future projects.

The common wisdom in the energy venture space goes that you need "get your technology bankable" and then the project financing heaven gates open.

The "bankability" term itself is a very slippery slope. Nobody can really tell how many projects and other milestones it requires to reach "bankability". But everybody still talks about reaching bankability.

But I have started to think that it's not the "bankability" alone that will solve the asset financing issue.
 
The core problem is that the great majority of the existing project funds are not geared for the type of asset financing that the great majority of the energy ventures are looking for.

Clean energy project that SERIOUSLY needs money

Here's my list of roadblocks:

  1. Each investment case is handled as a separate case by the fund. With this model, the transaction cost gets too high for small sized assets. In the sailing speak, you need to become a boat factory instead of one-off yacht builder.

  2. Building an investment pipeline from smaller assets organically is perceived to take too long. As a fund manager, you rather do one 50MEUR investment than 10x 5MEUR.

  3. The packaging requires hands-on expertise (and team size) that is typically not available in the fund.

  4. If your AUM is in the hundreds of millions of euros (or over a billion), your minimum ticket size is 50 MEUR (see point 2). Without smart packaging, the square block does not fit the round hole.

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