Solar and wind were emerging technologies just 15 years ago, yet their costs have plummeted dramatically - with solar prices falling by 90% and wind by 70% in the last decade alone. How can we replicate their cost downs for emerging climate technologies like heat batteries? It turns out, through innovative financing.
If you’re in climatetech, it’s not enough to only understand early-stage VC funding anymore. When I joined Antora Energy, a startup building large-scale heat batteries, I had very little knowledge of project finance. I had worked in early stage climate VC and startups. However, it will take a lot more than VC to scale the decarb solutions we desperately need. I’d soon learn this as we worked to put projects in front of new financiers. This is the energy project finance and climate capital stack briefer I wish I had in 2023 when I joined Antora’s commercialization team.
Whether you’re an investor, founder, or operator, if you want to learn how to scale the very real, new technologies we have at our fingertips, I this guide serves as a helpful trailhead.
We have the technologies we need to solve climate change. It's time to deploy and scale them. However, climate infrastructure can be incredibly capital intensive.
Diverse funding sources are required to advance technologies from the lab to the market, bridging the "valley of death" and addressing a range of technology and adoption readiness levels. The crux of the challenge lies in how capital is deployed across today's energy transition market. The contrast in risk tolerance between venture capital and infrastructure investors is stark.
While venture capital may have jumpstarted tech development, infrastructure equity and project finance debt is what will scale them. These capital sources not only provide larger check sizes, but are cheaper in that they require lower returns on investment. The price to pay for capital is lower.
There's a powerful financial tool that makes these projects possible: project finance. This specialized financing approach has been the backbone of infrastructure development for decades, pushing projects forward even when traditional corporate financing isn't feasible. To get to gigaton scale emission reductions, these pools of capital are needed.
The venture capital that kick-started development of new climatetech like batteries are not going to get us to net zero. We’ll need to increasingly rely on infrastructure equity and project finance debt. (Source: Breakthrough Energy Catalyst)
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Cheaper capital = Cheaper clean energy = Faster decarbonization.
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Source: Nat Bullard
At an 8% cost of capital (ie. investor require min returns of 8%) financing makes up half of the all-in cost of renewable power. Financing is a huge portion of the renewable levelized cost of electricity. There is also a big opportunity here: cheaper cost of capital can catalyze cheaper Levelized Cost of Electricity (LCOE), or all-in cost per unit of electricity. The difference in cost of capital directly affects whether a project can attract financing and remain economically viable. Clean energy projects often operate in tight-margin markets, and a higher cost of capital can make an impactful project infeasible, hindering progress in renewable energy adoption.
By scaling innovative financing models, we can bring climate tech solutions to market faster and help the world transition to a sustainable future. But what does project finance actually involve? What are financial asset classes? Here is a beginner’s roadmap for our past and future capital stack to accelerate the decarbonization of our economy.
If you’re like me and need a bit of a finance 101, let’s start with asset classes. Finance asset classes are categorized by their levels of risk and return. Project finance sits much lower on the risk-turn curve than does risk-tolerant venture capital. This maps to the “required return hurdle” on the right of the graph. More on the full climate capital stack later.
Energy project finance is a specialized method of financing for large-scale energy infrastructure projects. This approach involves funding a specific project rather than an entire company, using a combination of equity, debt, and sometimes tax credits. Project finance is a way to raise long-term debt and equity financing for large projects, lending against cash flow generated by the projects. Here are some key concepts: