Frontier Forum: Fixing distributed energy's finance gap

And that was a smaller check to them, right? That was them being innovative and leaning in and doing something a little bit smaller. And we're here in in redistributed infrastructure trying to write like a million dollar check or a half a million dollar check.

Off-take agreements, this is all quite a novel kind of experience for those folks that are leading the charge of development. And so I think at the core of why Death by a Thousand Cuts is. Apt is because you have to get buy-in for so many different parcels of land that are really managed by smaller scale owners. I definitely encourage thinking about this as a bigger applied problem to community scale infrastructure projects writ large.

a level of scale and demand, uh, the level of effort to coordinate could be a little bit difficult, right? So in the very early days, right, this was people were still trying to figure out what was going on and get to a level of volume that would beget movement of capital, right? Um, and so that's the very early days where we were just trying to figure out, well, you know, we don't have a PPA even yet, right? And so now we have volume. Uh I think similar we now have coordination, right?

uh where it's like, hey, are we incentivized to coordinate and do we see the benefits of that the very end of the day? And what's always really funny is I think everyone intellectually understands and believes in the benefits of coordination and standardization. But to actually lean in, right, every w you know most companies are are for profit and there needs to be something for them and to really lean in early is difficult. Uh and so the two things really missing, right?

um is first and foremost the build of the coordinators, right? Sometimes it's the government, sometimes it's an industry group, other times it's a financial institution or organizations like ours that are really leaning in trying to bring everyone to the same place. to to get to critical mass to say we're all moving in a direction. And the second one, and that's sort of the goal of the the coordinator, is that critical mass of people who are all saying, yes, we're going to go do it now, right?

Uh and it becomes a negative chicken and egg sometimes for the prior experiences where this happened. Where hey, if you you don't have a coordinator, you get sort of people coming together in like a conference or industry group, everyone agrees it's a great idea conceptually.

And then you sort of like leave and you're like, great, I've got like a business to run. I need to make some money. And and so and then everyone else who was interested looks at the leaders who sort of like abandon the project and they're like, okay, I don't want to do that.

and the negative cycle. Also, I think it also aligns with some of our business model against it too, which is like, hey, we don't we aren't currently being like, hey, we're gonna make a lot of money by doing these transactions, right? Otherwise you become a broker and then for you need to hide hide all your data, right?

And similarly, uh Rachel is a nonprofit, right? Um and so we were incentivized, right? Well we just want to collect data and we we make our our business model off of software so we can think about these problems in a way that doesn't penalize the customer.

can be super overwhelming. And I've heard we can't standardize project finance. Every project is bespoke. And I think that attitude uh has been long held as kind of truth. And I I think that we're shifting away from that, but it took a really long time for folks to start to drill it and say, I've got this product over here, I've got this product over here. How might we get our products to work together?

Instead of framing this as a one size fits all or even I've gotta dominate this market and it has to look like this. So I also think there's a reframe of what a standard is. It doesn't mean everybody has to use the same exact risk profile or the same exact product.

But rather that we're just coordinated on what you do have and what your profile is. So I think that we're inching closer to a recognition that we've got to coordinate. But I'd offer that up as why I think it is challenging relative to some of the other asset classes.

And for a lot of these projects, somebody's coming in with working capital, whether it's the developer or the business owner or the nonprofit that has that asset and they're saying, okay, I'm gonna cover this amount of with my own. uh cash and I'm gonna I'm gonna cover my pre-development costs, which is super And then people think, oh okay, well I've got direct pay, which is a tax credit.

Well, someone's gotta pay up front against that tax credit. So already we're looking at a bridge to that tax credit. So two things have to be true already. The third piece is you've got a mini-perm uh debt portion of this, that's a five year repayment.

if you're able to line up the bridge financing. And so all of a sudden three things have to be true at the same time. So it's not a one-to-one, it's not one product. It's that all three things have to be in coordination in order for that deal to pencil. And insert the blank, a credit enhancement, a tax incentive, a rebate program, uh subordinate debt, all of these things are variable and everybody brings to the table something slightly different and or different combinations.

And so I think that's what's traditionally made this pretty tricky, particularly at the small size. And I know I well, I hope we talk a little bit about getting to the secondary markets, but first we have to get that first five, 10, 15 projects done. And that takes

a world of orchestration to make sure nobody moves a muscle, stay right there while we go line up this portion of Capital.

who are doing the structuring and coordinating at the small scale. It's like the local developer who has ten people, right? And one of them's been tapped to do capital coordination. Um, and meanwhile the local bank as well, right, is, you know, trying to help out everyone's leaning in.

Um, and yet you don't have giant project finance bank um in the middle there, you know, trying to make it all work and m modeling the differences, et cetera, right? And so th that that piece is now being done a little bit more ad hoc, right, by people who have other day jobs.

It was going to go through this program. This program is um of ri at risk, right? And so now we we lack financing. Can we go and get uh is there anyone else who might be interested, right? Uh and that was an interesting way of starting to approach that. Hey, we actually have a lot of insights on what that could be, right? Uh I'm now having a conversation, not dissimilar to the conversations I had back when I was at Generate, which is okay, tell me about your deal.

But in the back of my mind, I have all the insights for the lenders we work with and what their criteria are and what they're looking for. And now, right, you know, this is off tech platform, right? You turn into this human version of what we can automate, which is, hey, we could play a little bit of the matchmaker.

And so we start brokering a little bit of that and then you immediately start running into the blended capital solution, which is okay, I found one capital provider who can do like this section. Now there's some other sections here and actually immediately uh called upon Rachel and said, Hey, you might have some other uh investors who can take on the other section because that wasn't a a match for some of our investors here. So now we have this

three-way conversation here that is getting to uh the developer um to to the next step and and you know we're now approaching term sheet for that, right? For a facility that otherwise would have maybe been abandoned due to a program fallout.

And a couple months ago, we started this thing called the deal room, where we brought in developers and we spotlighted their projects. And we were doing this all on platform, but to Amanda's point, we were like, Okay, let's show you the human behavior that we want you to actually be be playing forward. And so

What we do is we bring a developer in and we bring in the capital and we say, okay, what is your financing need? And be honest, please. It's not a zero percent forgivable loan, but it might be something, you know, below market rate. That's okay. And then to the capital in the room, we say, tell us what you can do. What are your rates generally? What types of products do you have? So we had a gentleman come in and present his community solar project.

And after that, we had three capital providers say, oh, we could do this, this, and this, right? And what we do at that point is we say, okay, here uh is the relationship, go forth, make make of this what you will. Uh and what ended up happening was a really interesting phenomenon where you had a green bank that said, hey, look, we can do this much in a bridge. And this bank will come in and do the actual hardware and install cost per facility.

But we're not totally confident yet. We're gonna need to go back to our investment committee and and we're gonna sit on this. So it was really promising, but it wasn't really going forward, which you'll see a lot, especially with some of the smaller lenders. They're they have a different, you know, the it they're not churning this out. But in the same week that we had connected them with another capital provider, somebody who's a little bit more market rate, so above that rate of the green bank.

said, look, we could do this tomorrow, but it's gonna be market rate. And and our our friend said, oh gee, you know, that's not gonna work. We're gonna have to go back to this green bank and make make do with what whatever uncertainty we've got. And the market rate provider said, Oh, well, if they just put up a guarantee, we'd come down to this and and we could do that transaction.

And what you had was the threat of not being coordinated around who's willing to do a credit enhancement versus who's willing to write the check. And I think that's a good example of where if you don't know to ask for that, or you don't know how to structure the deal, or you don't have a broker.

That's really hard to suss out who's got what and who's willing to blend what. And so that's an example of an avoided mishap where the capital is there. It just needed to be organized slightly differently. to get the deal moving through.

profiles, but we need to understand how to speak in a standardized manner and understand that like certain products will ha will meet a certain credit box, right? And so the one that always drives me the most crazy are when people are saying things that are Very, you know, qualitative, right? Like I need a bankable

you know, off taker and I need experienced EPC, right? Like those are meaningless words in many ways, right? And so what does it mean, right? If you need an experienced EPC? Is it one year? Is it five years? Is it with the exact technology? Um, how can you be specific enough so that you have guid give guidance as a lender when you give out your program so the developers can understand whether they're wasting your time or not, right?

And we start to understand what it is we need to be clear about, right? Standardizing what needs to be said, right? Not standardizing saying it all the same way, right? What do we need to be clear about? What are the exact same ways we talk about good versus bad? So we're not using the words good and bad or efficient and inefficient or bankable and unbankable, and instead being specific around it. Uh and then we can start to understand credit boxes in a in a more uh qualitative manner, right?

And then the credit boxes, I don't think, you know, to the point of people saying project finance is art. Yeah, I'm a little bit there where I don't think everyone's credit boxes gonna look identical in the distant future or even with all the automation in the world.

Uh but we can talk about the credit box in a much more similar manner. The same way that, you know, in a consumer lending say, for example, right? You'll have banks that lend to lower or higher FICO scores, but we've determined to rely on the FICO score as a way of assessing people, right?

Technology in itself, right, like software, right? Data platforms. are are very binary in nature, right? You can't code a subjective thing particularly well. It has to be like, well I gotta put this in this box, right? Your screen is gonna show you a check mark where it's gonna be green versus yellow and there needs to be rules on whether it's green versus yellow, right? It's gonna say something in a field.

And so it forces sort of guidelines and guidance around it. And where we feel really excited about is uh for a lot of both what Rachel and I are doing, our technologies first Go go to market is not to deal with brokering that deal, right? Building double side marketplaces very hard, right? The land the brokers.

And our end, it's a data platform to help an owner, operator, or a bank or financier manage their own data, right? Uh we have people paying us to manage their pipeline, manage their risk, manage their reporting. Well, guess what? If we're doing that, And we have reason to and insights to be like, hey, maybe you want to report, you know, you're you're lagging DSCR this way because we find that everyone else is doing it this way. This is more consistent, it's easier to have that conversation.

It's easier to like create templated reports when somebody joins in and say, Hey, here some baked ways that we know a lot of other people are using it and you start to like naturally edge people along. rather than coming top down and just like informing somebody like in a lecture to say, please do it this way, right? It's embedded in how they do their day-to-day.

Last week, who were many of them had rooftop solar and storage projects, and many of them were resilience centers. And I was saying, you are presenting your project. To three different audiences because you haven't bifurcated yet between the different types of capital. One type of capital cares about risk.

And the other type of capital that many of these organizations that I'm talking to are philanthropic or below market rate or has to align with community impact. And that that set of capital cares about leverage and impact. And so we're already looking at two different types of incentives. One wants to mitigate risk and one wants to optimize for leverage or outcomes.

And so part of this is just knowing what are those incentive structures that you have to at least respond to to get the time of day of that capital provider to look at your project. So cash is king. What's your offtake? Everyone's gonna wanna know that, right? What's the viability of whether or not that project is going to hap actually take place?

What what's the profile of when it's going to take place? These are questions that everybody wants to know. I don't know that we have to model out the perfect algorithmic. And maybe Banyan can, but we certainly can't. But what we have to do is ask. Because if we don't ask and get that intake, you'll have capital providers that are just so underwater, particularly some of these smaller banks.

That are like, oh, it doesn't look right because I didn't get enough information. And so we don't have the capacity to go and teach them how to get the right cost analysis in front of us. So part of what I am focused on when you say what's risk standardization look like is just asking the questions and can we figure out what the different incentives are for all the types of capital that tend to come in on these projects.

And that is one of the most powerful carrots, right? Which is like I I can get money if I do my deals this way. Um, as opposed to anything else, right? And so we want to get to that. To get to that, though, right, you need a certain level of loans. I would say that more so than standards, you need volume of things similar enough, right? Uh, we've seen the market be able to bear.

you know, if you you uncover certain types of commercial back securities, both on the solar and non-solar side, yeah, you see a lot of nonsense something w within them, right? Not nonsense, but it's poor word, but you know, variability. Um and and so the market can bear that.

Uh and it bears it better when there is scale, right? So it's like again, yes, if you've gathered half a billion dollars of assets in commercial solar, you can afford more fees to diligence the fact that a bunch of them are a little bit different, right?

Um, and even when you get to scale, you can deal with a lot of unstandardization if you then blend it effectively, right? And so if somebody comes in and says, I'll take all the first loss, or you have, you know, one of these magical credit enhancement, uh

facilities out there, you can bear a lot of noise within the facility, right? Now that's not scalable, right? There's not an infinite amount of caloric capsule or philanthropy out there to make that going concern, but it can jump start things, right? Uh where we say, hey, let's get a facility done. We might need some philanthropic capital or Calic capital to jumpstart it. But now Wall Street has seen that there can be volumes. Volumes exist at the distributed scale and money is there to be made.

And we sort of understand where the cramp box was. And maybe it looks like this because it was noisy this time, but we see where the middle was. We say, hey, if we get closer to this middle, we will not need the blended capital next time. Right? We won't need to go through the effort to find somebody else to come in because it looked enough. Or it doesn't have to be as big, it doesn't have to be half billion dollars. It can be fifty.

So half uh it can be fifty million dollars if it looks like this. And so the most important things we see are get a deal done, right? Like we just got to get going. And there's more than enough, like in certain asset classes, right? The community solar, commercial solar asset.

Multifamily energy efficiency, the volume of deals has been done, but can we bundle them together, find somebody who's willing to warehouse and be in the middle, and then and go to Wall Street, right? And then once we do it, can we take those learnings to flywheel this effect, right?

And certainly, you know, and again biased a little bit, but we've seen this in other markets, you will need to to have a technology aspect to keep the rails on. Otherwise, again, we we act as the you know, investment bankers that and that's not sustainable or scalable.

But for portions of the communities that we're supporting, community ownership is very important. So their offtake doesn't look like a power purchase agreement. It doesn't look the same as somebody who's got a PPA in hand and it's the same agreement for 50 facilities. Ten of those might just say, look.

We know that we're not gonna hit your credit box, but it's important to us to own the asset because that's part of our wealth creation strategy or that's part of our independence strategy, or that's insert the blank. And so I don't think that they're at odds with each other because I don't think people are going to have to be forced to well, hopefully that they have to have to have to meet this this model, but

I think it it is good to flag that not all these projects are going to fit into that, especially if we're talking about community scale projects. Um so I would just flag, you know, I I'm would love to hear Amanda's thought on this, but I I think about this a lot on those that want to retain ownership and might not look as lucrative. that as a small business that's just like, yeah, come in here, I'll sign it. I'll sign whatever you want. Just bring my costs down.

Which is step one of like, hey, you know, if I know what the market wants and the market can be clear about what it wants, we can best understand what trade-off we're making. At the moment it feels like it feels like the trade-offs are bigger than not because we don't even know what's being traded off, right?

And we don't even know if there was something in the middle that that could have satisfied everyone, right? It feels like, okay, it's either a grant program and it's free or it's like, you know, the most aggressive Wall Street terms, right? And there's a lot in that middle there. And we can't make a nuanced response to that unless we know what everyone is doing and everyone can sort of s again speak the same language. And and so what that would look like.

is that you as a local community lender or developer coming in and understanding, hey, here is what the credit box could be, right? If we were to have the most liquid and best rates and maximize returns. I'm going to intentionally not do that because I'm valuing something else. And I understand the trade-offs it is to my own financial viability as a bank or as community fund. I understand the tr and and the impact that I can't do because I'm not making as much profit.

Uh I understand the the liquidity concerns that that would drive. And I am happy to make that trade-off because I'm I'm not just here to seek seek profits, right? Uh, I think anything short of making that trade-offs purposely is haphazard and not doing justice to the communities that we're serving.

It's about communicating. These are the set of options. And here's what you're getting, and here's what you're giving up with each of these options. Part of the challenge is we don't have language right now to communicate that because we've got a lot of capital and a lot of developers and a lot of community organizations that are holding their cards really close to their chests.

Um rather than sharing them and saying, like, oh, what are you doing over here? What are you doing over here? How are you actually making that happen? So I think optionality is. so essential. If we get this right, standards don't mean following something entirely prescriptive. It means opening up the aperture to keep doing cooler and more creative things, but starting with kind of the fundamental basic choice point.

a lack of clarity is really utilizing emerging technologies like AI. And so part of what we're doing and how we're thinking about this is we've been partnered with a really great group of students out of Stanford that are in incredibly intelligent and thinking a lot about how to use their data science background. applied to both the product level data that we've been collecting and the project level insights. So

The closer we can get the fields, the easier. But in a lack of perfect data, they are using modeling for predictive activities for the the capital. So option one, you could utilize this amount for bridge, this amount for mini-perm, and it might be this, this or this capital provider based on their availability. When you start to get really regional.

Accurate data is very important, but it doesn't have to be perfect data. So not everybody has to say exactly what their rates are if we know what their risk profile is and what their traditional track record of transactions look like. So I think that increasingly we'll see AI being applied to some of the more sophisticated capital assembly. I'd flag as with all things.

Uh, you know, this is to be used with great, great, great, great, great caution, uh, just given some of the historic challenges around underwriting with AI. So uh heavy dose of caution, but I'm incredibly excited to see how we are using the next. generation of technology to get around our very um people-specific challenge that Amanda and I have kind of sketched out here.

And that's something that's a little bit less risky to use AI on, right? The AI is not making an underwriting criteria, but it'd be great if you put in, you know, a hundred-page loan document. We can extract in like 10 seconds, here are the key covenants are out of it. You take in another key

documents in your giant data room full of thousands of documents, you can start to understand what are those key terms within it into our standard taxonomy, right? And and start to do a bit of that iterative learning and extraction. And then that data can then be get more understanding of where the market's at to drive standards, right? So AI being used as a way to understand what's going on.

uh being able to then sort it properly and then for us to be able to then move a little bit faster as we're trying to get towards that market making, right? A lot of the conversation you saw um Rachel and I having, right, around the deals that we were doing and the deal facilitation and the blending of capital. It probably sounded very manual, right? Because yes, it it was and that was totally not scalable, right? Like through

Bloodswin Tears, we're gonna get this deal. It needed plenty of capital across the line, right? Um and boom, yeah, we got like a you know tens of millions of dollars finance, but that's just one. We need to do this. The title of the the the session was trillions of dollars.

And that will need to be done with an order of magnitude more automation, right? In the safe areas where we're not adding bias into the system somewhere, but instead doing the parts where we just don't have enough human capital to act as eye bankers everywhere, right? And in order to get there, to tie the banning area, is you need the information first. AI is useless if you first don't have good sets of large pieces of information.

Right. And that's why all is our strategy was first BD platform. Help people originate and underwrite and manage the portfolio for their own benefit so that you have your own data at your fingertips to make decisions. And then step two is. getting consensus for people to share that information in order to understand the market and drive broader insights, right? And so I didn't I I got it first through a a methodology that was natural and now we can then be able to move to the next step.

for years because I am so stubborn. Never have I seen so many capital providers join a Zoom call and try to articulate their products, their rates, their risk profile and open up to others and say, Hey, I don't know how to do this. Would you wanna come in to this deal with me? That to me is a huge signal of how folks are rolling up their sleeves and and they're ready to get these deals done. So um I think

Everybody has been circling around it and now they're really digging in. If we get this right. I I mean uh c cost savings, long term uh green lending models for small banks. I think long term asset maturation. Uh and then selfishly I would love to see this apply across the board to other asset classes like broadband, wastewater, stormwater. That's where a lot of my excitement lies. And I think this this market is ready and prime to show the the kind of path forward toward that.

willing to share and do this exercise to say, let's figure out where the market's at and where the baseline for the demand of pipeline. Where the where are we gonna go to benchmark wise? What does the market need, right? You know, what does Wall Street really need if for commercial uh solar term loan, right, versus an E V Charger construction loan, et cetera.

And then do that exercise and share with each other and then use that information to see whether we can get a deal done or many deals done as a step one towards then starting to say, Hey, we can get this deal done. Can we keep on doing that?

In a scalable manner and then the end of that, five years down the line is we look back and we're like, Well, the beginning of like, you know, how commercial pay started or commercial mortgage backed securities. That is what we we hope to see because it means

We never really need to rely on a government entity to really say, Hey, with these big programs, Wall Street is just flooding money in because it's willing to facilitate it's because it we understand where to make money and how to make money. And so the call to action bit is that this study is going on right now. If you'd like to participate

Uh and sh if you share data, we will give you data, right? Uh and understand where there those credit boxes, where the median and uh averages of those key products. Uh and we that is the step that's needed, right? We need to all lean in together and if we do share, that has always been the first step towards successful product creation in other financial markets.

Click watch recording. Banyan Infrastructure also has a white paper on the state of project finance and standardization. To read it, click the link in the show notes or visit the resource page at latitudemedia.com, and thanks for listening.