Podcast Summary
Addressing the valley of death in climate tech financing: Generate aims to bridge the funding gap for sustainable infrastructure projects by providing long-term capital and technical expertise, aligning stakeholder interests.
Climate tech is an infrastructure game that requires trillions of dollars of investment for the deployment of new and mature technologies. However, accessing the necessary capital, especially for less proven or less mainstream solutions, has been a challenge due to the "valley of death" in the capital markets. Generate, a company founded in 2014, aimed to address this issue by providing long-term capital and technical capabilities to deploy sustainable infrastructure solutions, aligning the interests of all stakeholders involved. The capital markets have evolved since then, but the need for infrastructure finance in climate tech remains significant.
Challenges in financing new infrastructure projects: Building customer demand and creating supportive policies and incentives are crucial for financing new infrastructure projects in underdeveloped markets, such as anaerobic digestion.
Financing new, innovative infrastructure projects in areas outside of large-scale solar and wind, such as distributed technologies like microgrids, battery storage, hydrogen vehicles, electric vehicle infrastructure, waste, and agriculture, faces two significant challenges: the information gap and incentive misalignment. In the case of anaerobic digestion, an underdeveloped market in the US, compared to Europe, led to struggles for project developers to secure capital and other necessary elements for project success. This underdevelopment was due to a lack of regulatory support, price signals, and human capacity. To address these challenges, it's crucial to build customer demand first and foremost, and create policies and incentives that support the development of these markets. Ultimately, large-scale capital market players need to be willing to invest time and resources in understanding new technologies and markets, even if the initial checks they can write are smaller.
Aligning stakeholders and building capacity in underdeveloped markets: Generate takes on the risks and does the necessary work for profitable projects in underdeveloped markets, recognizing it's a systems problem requiring finance, technical capability, operator mindset, and customer centricity
Profitable projects in underdeveloped markets, such as anaerobic digestion and microgrids in the US, require extensive alignment of stakeholders, human capacity building, good customer demand, community engagement, and long-term capital solutions. Traditional capital markets often require a clear project financial projection and risk mitigation before investing, but the complexity and uniqueness of these projects make them challenging and time-consuming to underwrite. Generate, as a company, takes on these risks and does the necessary work others can't, recognizing that it's a systems problem and requiring a combination of finance, technical capability, operator mindset, and customer centricity.
Focusing on the customer experience and long-term project success: Generate thrives in a challenging market by prioritizing the best partnering experience for tech solution providers and project developers, and ensuring the long-term success of their projects for customers and communities.
Despite the challenges posed by a potential recession and rising interest rates in the sustainability infrastructure market, Generate continues to thrive by focusing on delivering the best partnering experience for technology solution providers and project developers, and prioritizing the long-term success of their projects for customers and communities. While capital may become more scarce in this new environment, Generate believes that good projects with capable teams will still attract investment. The company's expansion over the years has been driven by its commitment to serving customers and ensuring the long-term success of their infrastructure solutions. This focus on the customer experience and long-term success sets Generate apart from others in the capital markets community and positions them well to navigate the challenges of a changing market.
Impact of interest rates on sustainable infrastructure financing: Generate focuses on equity financing and works with developers to optimize capital structures. Rising interest rates increase cost of capital, potentially shifting focus to more equity financing. As market matures, debt financing becomes more accessible and cost effective, expanding addressable market for sustainable infrastructure.
While interest rates are a significant consideration for debt financing in sustainable infrastructure projects, they are less of a direct impact for equity financing like what Generate focuses on. Generate typically takes on project equity and works closely with project developers to determine the optimal capital structure for both parties. The current macro environment with rising interest rates and inflationary concerns increases the cost of capital for all involved, making equity more expensive and potentially pushing developers towards more equity and less debt financing. However, as the market for sustainable infrastructure matures, debt financing becomes more available and the cost of capital decreases, increasing the adoptability and total addressable market for these solutions. Generate aims to facilitate this transition to mainstream status for sustainable infrastructure.
Fluctuating cost of capital vs challenges in supply chain and rising costs pose greater risks for project developers in energy storage sector: Generate mitigates risks by collaborating with partners and using scale and reputation to negotiate better terms, while actively pursuing emerging markets in sustainability infrastructure sector such as electric bus leasing
While the cost of capital may have fluctuated, the volatility in the supply chain and rising costs of supplies have posed greater challenges for project developers in various sectors, including energy storage. This issue has led to renegotiated project prices and extended timelines. To mitigate this risk, Generate has collaborated with partners by making forward commitments on supply and using its scale and reputation to negotiate better terms. Looking beyond the macro environment, there are several emerging markets in the sustainability infrastructure sector that Generate is actively pursuing, despite the lack of full mobilization from the industry. These include electric bus leasing.
Opportunities in EV Leasing and Infrastructure Market: The EV market presents significant opportunities in leasing buses and implementing transportation as a service, while the infrastructure market offers potential in charging depots and stations, as well as recycling solutions. Despite challenges, the demand for sustainable transportation solutions is strong and growth is expected.
There is a significant opportunity in the electric vehicle (EV) market, particularly in the leasing of EV buses and the implementation of mobility or transportation as a service. The high upfront cost of EVs, especially for fleet vehicles like buses, makes leasing an attractive option for customers due to the long-term cost savings. However, the adoption of EV leasing has been slow due to the traditional purchasing habits of municipalities and the need for education and behavior change in the customer market. Furthermore, there is a larger opportunity in the EV infrastructure market, including charging depots and stations, as well as in areas like organic waste and plastics recycling, which require system change and simpler solutions to bring down complexity and make them financially viable. Overall, the demand for sustainable transportation solutions is there, and while there are challenges to overcome, the market is expected to take off in the coming years.
Challenges in implementing pay per mile model for EVs: Customer demand for total cost of ownership model exists, but financing and internal challenges hinder adoption of pay per mile model for EVs
The pay per mile idea for electric vehicles (EVs) faces challenges in gaining customer demand and conviction due to the different way it proposes to pay for transportation. This model is similar to power purchase agreements for solar energy, but it hasn't taken off in the EV market. Customers express interest in paying per mile, but struggle to access the vehicles and secure financing. The internal challenges for companies to adopt this model stem from CFOs being pressured to focus on quick returns on investment and analysts prioritizing same store sales growth. The financing of first-of-a-kind technology projects, which inherently come with tech risk, is also a significant challenge. Despite these hurdles, there is demand from customers for a total cost of ownership model for transportation infrastructure. Companies outside Generate's focus may have gaps in this area, and addressing these gaps could lead to new opportunities.
Securing Capital for First-of-a-Kind Projects: Despite challenges, strong projects with customer value and investor returns will get funded through alternative financing solutions like blended finance and partnerships with technology firms.
Securing capital for first-of-a-kind technology infrastructure projects remains a challenge due to higher transaction costs and risks. However, good projects with strong propositions to customers and investors will eventually get funded. Companies like Generate, which focus on partnering with technology firms to build first projects, represent alternative financing solutions outside traditional capital markets. These solutions include blended finance with concessionary or philanthropic capital. Ultimately, the success of first-of-a-kind projects depends on their ability to deliver value to customers and return capital to investors. While proven technologies and solutions exist, there is also value in investing in unproven, novel ideas. The key is to have the right team and financing structure in place to navigate the risks and bring these projects to fruition.
Demonstrating viability for sustainable tech investment: To invest in sustainable technology, financiers need proof of customer demand, profitable production, technical resilience, and a successful track record from the company and team. Considering the current market climate, each investment should be evaluated individually based on the technology, project, regulatory environment, and people involved.
Proving the viability of a sustainable technology for investment requires demonstrating customer demand, the ability to produce at a profitable cost, technical resilience, and a proven track record from the company and its team. These elements must be present for a financier to consider the investment as derisked and worthwhile. The current volatile climate in both the capital markets and the sustainable infrastructure sector adds complexity to this decision-making process. The G7 summit highlights the need to increase production and imports of fossil fuels while maintaining a long-term decarbonization focus. Therefore, it's crucial to evaluate each technology investment case by case, considering the specific technology, project, regulatory environment, and people involved. Ultimately, a financier wants to see a customer willing to pay for the output, consistent performance, multiple suppliers for resilience, and a proven team to ensure the project's success.
Human capacity building is crucial for the net zero transition: The net zero transition requires $9.2 trillion per year, but we lack sufficient human resources to mobilize these funds. Prioritizing human capacity building in the climate tech community can help address this issue and move towards a sustainable future.
While there is significant progress being made in decarbonization, particularly in terms of technology readiness and adoption, we are still far from mitigating the climate change problem. The lack of human capacity, especially in non-OECD countries, is a major concern as $9.2 trillion per year is necessary for the net zero transition, and we have insufficient human resources to mobilize these funds. The focus on technology, capital, and policy must shift to include a greater emphasis on human capacity building to effectively address the climate crisis. The climate tech community, including discussions at the G7 and COP26, should prioritize this issue to move the needle towards a sustainable future.
