Project Finance Template: How to master your climate capital stack
Early-stage founders building ‘infrastructure startups’ need to think about other forms of funding to decrease their cost capital. Project Finance is a possible solution to the funding gap. Our team put together a simple tool for founders who have never heard about project finance before.
The climate capital stack is fundamentally different compared to traditional venture-backed startups. Climate impact often means large-scale infrastructure projects with tangible assets and CAPEX investments. These assets are difficult to finance, as the capital requirements are usually substantial compared to a startup’s balance sheet and the associated risk/return profile is not the traditional playing field of venture capital.
Therefore, early-stage founders building asset-heavy businesses need to be aware of other forms of capital early on and try to get down the cost of capital curve as early as possible. Navigating this journey is not easy, particularly for early-stage startups that are just proving their technology. One possible financing mechanism that could help: Project Finance.
What is Project Finance?
Project finance is an established financing technique for large infrastructure and industrial projects. By separating specific projects (e.g. Biogas Plants) from the holding company, funding is based on the anticipated cash flows of the project rather than the balance sheets of the project sponsor. The value of the project therefore lies in its cash flows. This means that lenders want to mitigate risks as much as possible as they consider the revenue generated by a specific project as the primary source of loan reimbursement, rather than the overall assets and creditworthiness of the project owners. Debt is generally cheaper.
While VC funding is great for developing technology, project finance is great for developing assets. This financial structure allows for investments on a project-level while clearly allocating risks to suitable parties able to take on that risk. A typical project structure is tailored, complex and involves many different players such as EPC firms (handle engineering), tech providers (supply equipment), equity sponsors, debt providers and the project developers.
What are the Challenges?
Lenders want to reduce risks as much as possible and cannot take equity-like risks. Those risks can be new technologies, operational unknowns, new markets, etc. They thus will only finance ‘bankable’ projects which are de-risked and can return stable, predictable cash flows. This means that the technology is at TRL (technology readiness level) 9 and proven at industrial scale, supply chains are in place and offtake is secured to guarantee that the project can generate revenues over its whole lifetime.
However, while hardware projects are vital to reach our climate goals they are usually not proven at scale (e.g. SAF plants) or need to reduce costs before entering mass markets. Getting there is hard for founders with no track record and an unproven technology. On top of that, the project finance complex. These complexities of developing projects range from site selection, permits and hiring engineering firms to setting up legal structures, financing mechanisms and establishing supply chains. This means that infra founders should have their bankability criteria in mind early-on and build towards bankability from day one.
What to keep in mind?
With the world working towards net-zero goals, the importance of scaling green operations can’t be overstated. For many businesses, unlocking project finance will be critical to scale, avoid dilution and finance potential future assets. But it is a very different world with an entirely different language and different requirements. As a founder, you should keep this in mind early on:
- Know where you stand: Project finance suits cash-flow generating technologies that are proven at an industrial scale. You need to be able to show operational KPIs and will have to explore other ways of financing e.g. technology risk or your FOAK plant.
- Start conversations early: If you know that you likely go down the project finance route, start conversations early on to understand the requirements, risk profiles and timelines associated with different structured finance offerings.
- Lock-in Offtake: While bankability has many dimensions (e.g. operational experience, feedstock, contracts), customer demand is key. Fixed long-term contracts (price and volume) de-risk a project significantly. Getting those market signals from reputable counterparties early on ensures financial predictability.
- Work with established partners: Don’t underestimate the complexity of contractual agreements and project development. The skills needed are very different and if you don’t have in-house expertise, get external help for structuring deals, and navigating regulatory hurdles, and legal complexities.
- Build key relationships: Engaging EPC and OEM partners, potential suppliers and local stakeholders as well as policy makers not only helps with bankability and credibility but also speeds up things.
- Understand your needs: Project finance is not the right vehicle if you are trying to finance technology risk or small projects. Be aware of the requirements and limitations of different structured finance offerings.
Project Finance Template
To help you navigate project finance, we’ve put together a basic, non-technical template. There are plenty of insightful readings out there and the pre-work (agreements etc.) are far more important than financial modelling. Yet getting a sense of the financial aspects will hopefully help you understand the key terms better.
You can use the tool to play around with some numbers and simulate basic projects. It allows you to insert high-level inputs such as Capex, Opex and financing constraints and simulate e.g. how much equity you need, typical loan conditions, financial viability and get familiar with basic project finance terms such as CFADS or DSCR. Most importantly the tool allows you to simulate different scenarios and test sensitivities to assess the viability of your project.
To get access to the tool please drop us an email at florian@planet-a.com Disclaimer: Project finance modelling is a sophisticated matter and this template is simple on purpose. For more complex and actual modelling, please consult experts.
💡 Some further resources:
👉 Moody’s Project Finance Methodology
👉 Mazars Project Finance Resources
👉 Project Finance in Renewable Energy: Sensitivity Analysis and Valuation
Author: Florian Schabus
