Project Financing Emerging Energy Technologies

1
Project Financing Emerging Energy Technologies

• Presentation to University of Houston-GEMI
  Conference on Emerging Energy Technologies
• Stephen V. Arbogast
• November 18, 2004

2
Why Project Financing for Emerging Energy
Technologies?

• Technology risk generally more appropriate for
  Venture Capital
• However, project financing enters the picture
  when
• Technology developed by capital poor sponsors
• And threatens established franchises
• Full exploitation of technology requires scale
  and is capital intensive
• Could strain finances of even investment-grade
  sponsors
• Technologys development involves multiple risks
  to be shared among multiple parties
• Project Finance is excellent at deconstructing
  distributing risk
• Project Finance will play more of a role as
  technologies advance from prospective to proven
• Geothermal and Tar-Sands provide case studies

3
First Principle PF Lenders wont accept
Technology Risk

• Seen as equity risk, not bankable in its pure
  form
• Jeopardizes the project, without which project
  financing cant be repaid
• Technology risk is one component of completion
  risk
• Normally handled by strong sponsor completion
  guarantees
• Venture capital normally doesnt meet strong
  sponsor test
• Second technology-related risk is end-market
• Is technology also changing the ultimate offering
  in the marketplace?
• CNG vehicles, fuel cell/hybrid cars no
  assurance consumers will respond
• Market Risk must be assumed by off-take contract
  or government support
• New technologies that produce established
  products from new inputs allow financing to
  concentrate on completion risk
• Geothermal electricity, Tar sands synthetic crude
  oil, NG to Liquids

4
How can PF handle Technology Completion Risk?

• Traditional approach is to have strong sponsor
  guarantee completion absorbs overruns and
  delays
• sponsor repays debt if technology never works at
  all killer variable
• Possible PF approaches for weak sponsor with
  technology making conventional end-product
• JV or license technology for first project to
  demonstrate technical viability at full-scale
• Once technology proven, risk becomes more
  conventional completion
• Completion risk deconstructed and distributed
  among stake-holders
• Technology provider
• Construction contractor
• Insurance
• Product off-takers
• Sponsors

5
An Example Imagine Clean Coal Technology for
Electricity/Chemicals

• RD Company develops technology whereby
• Coal is transformed into syngas, which then
  feeds steam generators for electricity and a
  chemical plant co-producing methanol
• Technology works at pilot plant scale
• Using Project Financing to Commercialize
  Technology
• Approach A RD company contributes technology
  into JV with utility chemical company, in
  return for equity and rights to license to others
• Utility and Chemical firms provide completion
  support and carry for RD firm
• Approach B RD company forms SPE, raises venture
  equity
• Completed contracts for construction,
  electricity/chemical off-take
• Technology risk layered and distributed
• First layer of funds needed to get it working
  from equity fund set-aside
• Second layer from insurance
• Third layer from Utility/Chemical firms, with
  right of step-in and assumption of SPEs stake
• Contractor provides liquidated damages for
  construction overrun/delays

6
Conclusion PF can support Emerging Energy
Technologies

• Can support rapid scale-up of new technologies
  demonstrated to be technically and commercially
  viable
• Effective means to foster competition with
  established technologies employed by
  well-capitalized energy firms
• Project Financing also an effective tool to
  segregate and distribute new technologys risks
  among stakeholders
• An economic tool for pricing risk/reward of
  commercializing technology
• Will off-takers take technology risk in return
  for
• Equity
• Avoided license fees
• Rights to use technology in 100 ventures
• Will technology developers surrender rights in
  return for
• Opportunity to prove technology, technically
  and commercially
• Mitigation or avoidance of bankruptcy risk if
  technology fails