Tuesday, December 6, 2011

Evening Wrap-Up: Technology and Funding - Embrace the Risk

One thing everyone at the conference can agree on is that risky technology is a key barrier to project financing. Developers and entrepreneurs can be in denial about the risk they are assuming, technologically, as they embark on their new project. The morning panel suggested that we “don’t avoid the risk, isolate it.”

There are several different components of risk and the panel recommends that folks in the industry isolate each part and deal with it separately. They are: 

Soundness Risk: Developers working with a new technology will need to clear this first hurdle by having a well-respected, independent engineering firm evaluate the technology. The engineering firm will do an energy balance, look at the metallurgy and perform a number of tests and calculations to determine if the design is sound.

Engineering firms put their reputation on the line when they evaluate a design so you can expect it to be a thorough process. If they deem the design sound, the firm will issue a letter to that effect. A project developer won’t be able to get debt financing to fund the technology if it hasn’t first cleared the ‘soundness test hurdle.’

Scale Up Risk: Most emerging technologies work on a prototype level and there is risk whenever you attempt to take something from the lab and scale it to the size of a commercial plant. Funding for this stage of development can come in two forms. A project developer can get debt financing even if the target technology must be “scaled up” to reach a commercial level – but the engineering report must identify the scale up risk as low. The second approach is to adopt a modular strategy and fund the initial module through traditional equity sources.

Integration Risk: Defined as the risk of putting proven components together in a new configuration, this is the final of the risk components. Assuming a project developer has all the other requirements for funding lined up (feedstock agreements, buyer for the energy, etc.), he can get debt financing if integration risk is still present.

Better BTU Take: Project developers and entrepreneurs are frequently embracing three types of technology risk without understanding the impact it has on financing. In addition to following tips on financing from the previous blog entry, the industry needs to work on funding each component of the risk in a separate manner.  

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