Development Capital – the Lifeblood of Every New Initiative Is Much Too Hard to Obtain

September 12, 2023

Print This Article Share it With Friends

by CJ Evans (American Diversified Enterprises/ Alternative Fuels & Chemicals coalition/Biofuels Digest) ... First, every project being developed – every one that is needed to mitigate the climate crisis – only can advance with infusions, sometimes large infusions, of development capital.

For example, a typical $1 billion biomass-to-Sustainable-Aviation-Fuel (SAF) project may require $50 million or more in development capital to move the project through permitting and Front-End Engineering and Design (FEED) to a final investment decision (FID).

Without this development capital, it can’t move forward … and delays in securing development capital result in day-for-day, month-for-month, and year-for-year delays in a project’s timeline.

Second, this is the hardest money to raise, which recently has been made even harder because of increasingly tightened credit.

Even under the best economic conditions, it is hard to raise this money because new, first-of-their-kind innovations, no matter how promising they seem, and even existing technologies used in new applications, are viewed by the credit markets as untried and unproven and, therefore, carry considerable risk. They may not work. Money may run out before they can be completed. The payoff which, with high risk, may generate a high return – that is, if ever there is a return – typically is years away.

There are many other investments – certificates of deposit, mutual funds, bonds, even artwork – which are much more secure and reliable in providing returns and do so without years of waiting.

This is why it typically takes 8-10 years, or more, for an innovation to progress through each technology readiness level (TRL) to where it can be commercialized and deployed.

Third, some projects will never reach the point where they can address the climate crisis – or provide their other benefits to society, which we will never know about or be able to enjoy – because they end up being unrealized dreams due to the lack of the money that was necessary for them to continue.

...

Federal government grants offer one approach. They are available for every technology readiness level (TRL), except for the gap between a pilot plant or prototype and the final TRL, first-time commercialization.

But government grants only lend a hand, provide a leg up. They usually require a 50 percent match, which often only can come from development capital.

Even when a technology is ready to move to its final step – its development is complete, it has been tested, retested, validated, and pronounced ready for commercialization and deployment, there is one last obstacle – a valley of death for many innovations – that must be spanned.

To qualify for a commercial loan or government loan guarantee to build a project, the project must be ready for construction, meaning that it has completed its FEED along with each pre-construction step (which include site acquisition, permitting, feedstock and offtake contracts, and the like) so that a FID can be made, which is where a project either is approved – or not – to secure the financing necessary to proceed to construction.

To reach FID, after everything that has gone before, requires additional money to fill the gap, a bridge to cross over the final valley of death. There are no grants and no loans available to do this. It only can come from development capital.

...

AFCC’s Development Capital Advocacy

AFCC is a Washington-DC based advocacy group with 150+ member companies that employ more than 600,000 people and generate in excess for $350 billion per year in revenues. As part of its fiscal year (FY) 2024 appropriations requests, AFCC drafted legislative language that was incorporated into its FY2024 appropriation request for the Department of Energy’s (DOE’s) Title 17 loan guarantee program (see link, pages 4-9).

AFCC’s language would have established a $500 million grant program – the first of its kind – financed by the annual interest payments made to the U.S. Treasury from the Title 17 loan guarantee obligation payments, which now exceed $500 million per year, to establish a grant program to provide development capital.

Despite AFCC’s advocacy, the grant program is not included in either the Energy and Water Appropriations bill passed by the U.S. House of Representatives on June 22 nor the corresponding appropriations bill that was voted out of the Senate Committee on Appropriations on July 20, 2023.

AFCC, therefore, will attempt again next year – when the annual appropriations process begins in mid- to late-February – to convince the members of the House and Senate Energy and Water Appropriations Subcommittees and House and Senate Appropriations Committees of the critical need for this grant program and to push for its enactment.

Although the appropriations process will not begin until next February, there are several steps that can be taken now to lay the groundwork for the next session of Congress. Please see the sidebar – What Can You Do to Expand Access to Development Capital? – that accompanies this article. The steps outlined in the sidebar build on the following suggestions.

Development Capital Suggestions from Two Project Financing Experts

...

Here are Some Solutions

Development capital: many new funds are bringing money to the U.S. from the United Kingdom and European Union for renewable fuels projects, which will place early-stage, pre-FID money in these projects for engineering and working capital.
Project Financing:

...

Tax Incentives: The IRA has provided the most comprehensive renewable energy tax incentives in U.S. history, on a long-term basis, with many incentives running for 10-12 years.
Regulatory incentives are becoming clearer:

...

What’s Next?

There is a growing recognition of the need to both expedite and increase the resources and means in which development capital can be made available to first-of-a-kind, game-changing, climate-crisis-mitigating projects.

There is a current, concerted action to step up efforts on the part of commercial lenders; U.S. state and federal grant, loan, loan guarantee, technical assistance, and incentive program leaders; project finance specialists; and providers of risk and other insurance products to accelerate the transition to a low-carbon economy and facilitate climate solutions.

For the first time, several U.S. investment firms are providing development capital by contributing a portion of their funds and bringing together groups of individual investors through coordinated investment programs, so project developers no longer have to rely solely on wooing “angel” and individual investors to obtain their initial seed funding (with the hope of securing infusions of additional cash afterwards) followed by Series A, B, and C funding rounds.

By providing development capital to multiple projects that fit the firm’s criteria, and creating programs in which scores of investors can participate, these firms are spreading their risk across multiple projects and, in a very real sense, creating development capital “mutual funds” for their investors.

Each one of these efforts is encouraging.

Each adds to what is needed for projects to secure their much-needed development capital.

Each will help projects advance much more quickly.

There is just one more thing that is needed: They have to be expanded many times over. Not just in the U.S., but globally.

You can help do this: See the accompanying sidebar: What Can You Do to Expand Access to Development Capital? READ MORE