Catalyst with Shayle Kann - FOAK tales

Episode Date: January 16, 2025

First-of-a-kind projects need infrastructure investment, the kind of money that costs less than venture capital and usually comes in the form of deals worth tens or hundreds of millions of dollars. But infrastructure investors are notoriously conservative and convincing them to bite can be challenging.  So what do infrastructure investors really want? In this episode, Shayle talks to Mario Fernandez, head of Breakthrough Energy’s FOAK finance program. It has worked with companies like Rondo, Form Energy, and Lanzajet to overcome challenges on the path to infrastructure investment. Coincidentally, the program is also called Catalyst (no relation to our show). Mario and Shayle talk about the journey from lab-proven technology to a fully de-risked infrastructure investment, covering topics like: Why investors want to see a path to multiple, repeatable projects Mario’s prescription for a scale-up path: pilot, demo, and FOAK project The difficulty of following that path on a limited financial runway The commercial construct and the tension between negotiating a flexible offtake and securing a customer Developing the right capital stack and accurately estimating capital needs Recommended resources The Green Blueprint: Rondo Energy’s complicated path to building heat batteries CTVC: Venture to Project Finance Duolingo Catalyst: Financing first-of-a-kind climate assets Catalyst is brought to you by EnergyHub. EnergyHub helps utilities build next-generation virtual power plants that unlock reliable flexibility at every level of the grid. See how EnergyHub helps unlock the power of flexibility at scale, and deliver more value through cross-DER dispatch with their leading Edge DERMS platform, by visiting energyhub.com. Catalyst is brought to you by Antenna Group, the public relations and strategic marketing agency of choice for climate and energy leaders. If you're a startup, investor, or global corporation that's looking to tell your climate story, demonstrate your impact, or accelerate your growth, Antenna Group's team of industry insiders is ready to help. Learn more at antennagroup.com.

Latitude Media, podcast at the frontier of climate technology. I'm Shayle Khan, and this is Catalyst. We've seen demos that I call half-ass demos, which is just proving a particular piece of the technology, but how that component integrates with the rest of the system is super important and it's so hard to get right the first time because it's never been done before. Well, there's no way around it.

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Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital,

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I'm Shail Khan. I invest in revolutionary climate technologies at energy impact partners. Welcome. All right. So we have talked about the challenge of building first of a kind or folk projects before on this podcast. We will again, by the way, after this. It is a huge issue for so many companies. And there is no one-size-fits-all solution, as we know. but there are a bunch of things that are common amongst many companies and challenges the companies face when they're trying to build their first-of-a-kind thing. And I do think that we are starting to collectively, as an industry, as a market in climate tech, we're starting to get smarter a little bit about what are those key characteristics that projects need to have, how should companies be thinking about constructing their teams and the timing around first-of-a-kind?

And then, of course, what's the nature of the commercial contracts that they should have in place? How should they be thinking about financing, et cetera? These things are still pretty bespoke, but are starting to come a little bit more into focus than they have in the past. And that is in part thanks to folks like Mario Fernandez, who's our guest today. Mario leads Breakthrough Energy catalyst. So I'm sure many of you know Breakthrough Energy. It's a broader platform that includes Breakthrough Energy Ventures, which is a venture firm. It includes policy advocacy and a variety.

other things. But Catalyst is specifically their first-of-a-kind financing program. And they've done a bunch now of first-of-a-kind financings for a variety of different things. We talk about some of them in the conversation with Mario here. But what he started to see is common patterns amongst the companies that they're looking at, the ones that are successful, the ones that are not. And listen, I think this remains today the real value. of death. There aren't really any other values of death at this point in my mind that capital stack for climate tech companies is actually pretty strong, even in light of the market having shifted a fair bit. The hardest part is still first of a kind. And there are good reasons for that.

But lots of companies are figuring it out. And so it is worthwhile to figure out what's working, what should the next generation of companies be thinking about. And how can we figure out a playbook to standardize processes, financing structures, and so on, so that it's less of a murky question mark when you're heading into the abyss and you're starting to go into your pilot and prove out your technology and so on. You know you're going to have a first or kind in the future. How do you do it? So it's worthwhile to walk through some of that. Mario published a piece recently through Breakthrough Energy Catalyst, laying out what he views as 12 keys to first of a kind projects.

We talked through a bunch of those keys sort of in the context of the individual components of a first of a kind project here. It's really, this is a tactical conversation. Like, what are the things that you should do here? But it's so cross-cutting, and it is such an issue for so many companies that I think it is worth a listen,

whether you are building a first-of-a-kind or not. Anyway, here's Mario. Mario, welcome. Thanks for having, Michelle. Well, Breakthrough Energy Catalyst on the Catalyst podcast. So I never thought, I'll see you the day, but I'm very excited. I will say I'm a big friend of Breakthrough Energy Catalyst, and we've done a lot of things together. But I did come up with the Catalyst named first.

And when you guys launched it, I was like, ah, of course, I don't own the word. I'm excited to be here with you in person and talk first-of-a-kind financing for projects, which is the thing I think you know better than basically anybody at this point in this space. And it remains, you know, the sort of like quintessential challenge, I think, in the development of new technologies in the climate world. And there's like so much to unpack around it. But I want to start with this, which is how would you describe why it's hard? Of course it's hard. Why is it hard, though, to figure out how to finance a first-of-a-kind thing?

Yeah. No, look, really good question. And I do think this is the main challenge of climate tech. How are we going to get this technologies where people have spent, you know, hundreds of millions of dollars, years, decades developing? How do we get them scaled up, right? How do we get them to the place where solar and wind and offshore wind are? And it's exactly why, you know, catalyst was created. And it's not just me, by the way, it's a whole team of people that are trying to tackle this.

The challenge is the fact that this company's reached a point where, the technology has been proven, but it has not been de-risk in the eyes of large-scale infrastructure or capital, right, whether that is infra funds or project finance banks, right? So you need to find a way to get these technologies over that, from the proven stage to the de-risk stage. And that's where the expertise that Catalyst has, the infrastructure, energy infrastructure, investing, development, and construction expertise coupled with the flexible capital. That's where, you know, we can play a role in this. That's really interesting phrasing. I don't think I've heard anybody describe it exactly that way, but it's useful.

So you're saying technologies that have been proven, we should talk about what proven means, but not derives. in the eyes of infrastructure investors. So what does that look like? I mean, give me, you know, representative imaginary technology. Like, how much do you have to do to be at the point where you are, quote, unquote, proven? And then where is the, like, how does an infrastructure look at that same thing and see it as unfinanceable at that point? Yeah.

Let's start with the end part, which is how do infrastructure funds work? How does a project finance bank work? And the reality is that infrastructure funds just do not want to. and lose money, right? There is 60, 70 billion dollar infrastructure funds that have 15-year track record that have never lost money on any project they've invested in, right? It's a huge contrast, obviously, with the VC world, where you can lose online and make it up in the one, the 10th one. So the biggest thing here is the fact that there is such a rigid criteria for infrastructure investors to invest in, right? You have to have a long-term

term track record for the technology. You have to have hours of operation. You have to have a really solid EPC scheme to build it. You have to have it long-term contracted. And you have to be able to not only invest in a small one-off project, but you have to be able to invest hundreds of millions of dollars from that fund into that technology. And I think that's where, you know, a lot of these new technologies don't make the cut, right? So what we try to do in our work is how do we shepherd these technologies from the point where, again, they came out of a lab and they've done a pilot. And out of that pilot comes a lot of data and comes the fact that the original scientific thesis has been proven. XYZ reaction happened and you could make it, you know, viable.

But it still has a long way to go to de-riskin. The way we propose to do this is, you know, that company has to follow a path towards that they're risking. And that path in our experience is you go from a pilot to a 5 to 20x demonstration project, and then you go to another 10, 20 times first-of-kind project. Because along the way you learned how to design it, how to engineer it, how to build it, how operated, how to get the cost down, in a way that when you go to build your first of a kind project, you're able to show the investor that with through that journey that you went through and with the right commercial construct run, which is super important too, we should dive into that. The risk of the project actually not working is very low. and the probability that the project would work,

but that that team, that company, can actually build the second, third, fourth, fifth project, and therefore that investor can invest the hundreds of millions of dollars that they want to invest is significantly higher. Yeah, so you got to, the way that I've been thinking about this, there's like multiple dimensions of things you need to figure out.

And you put this very well in the 12 keys document that you put together on sort of what are the things that are necessary, but the way that I think about a category, There's the technology. What needs to be proven or de-risk on the technology? There's the commercial construct. What is your off-take? What does your customer look like? How is that contracted? And so on. They're the economics. What do the returns look like? And what are the margins need to be and so on? And then there's the financing, structure, sources, et cetera. So I kind of want to talk through each of those. You talked about one thing that I think is important.

And I often see companies not fully understanding, which is what the scale-up steps should look like. So I want to spend another minute on that because this is the question of what is the tech derisking need to look like at the point that you're going to go try to raise any kind of off-balance sheet financing for a project. So you said pilot, demo first of a kind. The distinction between the pilot and the demo, as I understand it, is there's a scale difference. The demo is bigger, but it's mostly that the demo is end-to-end representative, right? So like you're running the full system, you're producing the product you're ultimately going to produce. Whereas the pilot, maybe you are demonstrating. demonstrating the reactor performance or something like that,

but you're not running the full end-to-end system. Is that right? And also on the demo, I mean, you mentioned another thing that people want to see, which is runtime, like how much runtime? Yeah. No, it's exactly, that's exactly right, which is you have to be able to create,

have your whole team understand how you're going to design a demo, how you build it most of the time. The team has to build it themselves. No EPC. contractor really wants to get into the smallish projects, high-risk projects, right? You have to be able to understand how to operate it, you know, what is the product that's going to come out of it? And is that product to spec? So a lot of the demos, what they go to do is to prove out

the specs inside the, you know, factory or the production processes in the end customers, right? and then when you look at it where a lot of companies, you know, don't necessarily follow these steps. What happens is they don't have an intuant system. And I think that's super important, right? What we know is at the end of the day, the investors that come in at the Series C, Series D, you know, most of the time funding or partially funding first-of-a-kind projects, they really want to see six months or performance. Because things degrade, if you continuously operate something in a way that you didn't do it on the pilot, things degrade in a way that you really have to learn from that and figure out how you're going to engineer your first of a kind to make sure the performance is there.

And that's why that six-month track record is so important and the end-to-end. We've seen demos that I call half-as demos, which is just proving a particular piece. of the technology, but how that technology, that piece of technology, that component integrates with the rest of the system and how you go from the feedstock all the way to the end customer product is super important and it's so hard to get right the first time because it's never been done before. So that's what I would say that, that, you know, six months or more end to end is fundamental and the scale is also important, right?

Because sometimes the pilot, people do a pilot and when you do a demo, the demo is not large enough. And then when to jump off to first of a kind is such a large job that investors get very scared that that jump has too many risks associated with it. On that point, I think the general rule of thumb in like engineering world is everything is a single order of magnitude scale up. So every next scale is 10x, the previous scale. Is that sort of how you think about it from demo to folk?

It should be plus or minus a 10x scale up? That is how we think about it. I think from pilot to demo, you can extend that range. You can go smaller on 5x. You can extend the range to 20x. Yes. Basically, what you're trying to do there, as I understand it, is you're saying, look, what we need to go do is convince somebody who is notorious is risk-averse by profession.

It's their job to be risk-averse. And convince them that despite the fact that we're doing a thing for the first time, it is investable. And one of the tricks, so to speak, to do that is to say, actually, we already built the thing we're going to build. What we're going to build is basically 12 or 20 of these things lined up in parallel. But if the unit thing is the same size as the ultimate unit thing, what you're building is a modular version of the thing,

it's viewed as less risk. And I guess my question for you is, do you see that as being, is that an optical thing or is it a real thing? Is there actually lower risk if it's modular? Or is it just what will convince infrastructure investors? It is real. And for us, it's about the execution risk, right? It's about the engineering, design, the procurement and logistics of it, right? Large-scale construction has so much more risk associated with it. And then construction operations, and as you said, the capital race, right? The way we think about it is numbering up require you to approve your unit, and now you're adding numbers to it. Integration is not an easy thing.

So it's not a panacea for all your problems. But it does require, it does alleviate a lot of this execution risk around just large-scale projects. I've been involved in my lifetime on putting together co-generation projects where you're using a G-E turbine that has been deployed thousands of time.

And still, a lot of things weren't wrong in building this mega-projects. So, again, building a billion-dollar project versus a $100 million project does have real risks associated with it that we need to think about. Now, many people in your audience are going to say, well, modularity doesn't work for everything. And it's true. There are things such as reactors where bigger is better and bigger does get you down the cross curve a lot faster. So where you cannot design for modularity on everything, you should at least try to design for modularity on components around your tech

that can make it easier for you to be able to deploy machines. Okay, so on the technology side, I guess that's the first piece of it. What we're saying is what you want to have is full end-to-end demo operating, ideally designed modularly such that the unit scale of the things, the reactor, whatever it is going to be, is going to be numbered up, not scaled up from there, if possible, if not possible, then so be it. And you want, ideally six months of operating data on that thing. I will say one thing that I find to be, this is the challenge with these companies, right, which you'll appreciate. They're living off of successive venture

capital rounds, right? That's where their, that's where their funding's coming in from to date at the point when they're doing their first of a kind. Every time they raise a venture capital round, you know, it buys them, let's call it two years of runway. They have to start fundraising six months before they run out of capital or more. So it really buys them 12 to 15 months to make enough progress that they can hit key milestones and go raise this excessive round at a higher price. And so they have this dynamic where, okay, we need to build this demo, but we need to, we have long lead items, we have design, we have all the things that you have for bigger projects that take time, permitting, and all that in construction. And then you're

telling me I need six months of operation before I can go finance the next thing. And actually, I just don't have that kind of runway. And so you're operating these parallel tracks where you have to, and I think actually you pointed this out in the 12 keys, these are not sequential activities. You need to be developing your first-of-a-kind project well before your demo is operating and certainly before your demo has six months of operational data

because you don't have time basically to wait around. In ideal world, you probably would wait around, right? But you just can't live off of that version of a sequential capital formation. That's correct. And one of the things we point out that our experience shows that the companies that do it, you know, in a sequential way could take, you know, somewhere between three or five years to get to a first of a kind versus, you know, doing it in a lot less time. But taking a step back, the decision to go on that pilot demo first of a kind journey,

I think is the first fundamental decision that companies make. And this is where we've seen a lot of companies fail because, They take way too long to get into that conviction that they need to deploy their own technology, right? Two years ago, one of the things we heard a lot was, you know, from CEOs, my board is asking me to go license this technology. They don't want to spend the CAPEX. They feel that someone else should spend the CAPEX if I could just sell the license. What we found looking at over 300 projects, 350 projects in the past couple years, is the fact that the companies that actually deployed their own technology and follow that path are the ones that get to success. There are companies that have spent two or three years in the licensing route where at the end, the majority of times, nobody really wants to take a risk on building something that has ever been built before.

So your question on capital is how fast you convince yourself, you're bored, and you build a team to drive towards that path and to say, look, it's on us to be able to build this. It's a bit of a every venture capital back company is living a high wire act at all times. But one part of that high wire act is you kind of have to, you have to bet on success in the demo before you know whether you'll be successful in the demo. There's kind of no alternative to it because it's exactly what you do. described, otherwise three or four years. So what you have to do is say, like, look, I got a plan for this to work. Assuming it's going to work, then I want to be in a position that the second I know it works, I can pull the trigger on my next thing rather than starting to plan my next thing. But you actually gave a good segue to the next topic beyond tech, which is the

commercial construct. So obviously, there's various different versions of like the customer structure and so on. Talk me through how you, as an infrastructure investor, how you think about the differences between, okay, you have a customer who's going to buy your product versus going to buy your system and own and operate it versus the other ways that you can engage with customers. And are there, you already described one thing, which is don't license before you build, build first if you're going to license a license later. But beyond that, what are you looking for in the commercial construct?

Sure. There's been a little bit of time talking about the demo because I feel you have it exactly right. Let's just get on with the demo and prove it. many times though people think they're going to make money off the demo right in that in our experience we found that's not the case the case is that most in most cases the demo is a very large r&D exercise so money losing unprofitable r&D exercise on every aspect including the commercial aspect of how are you really going to market this so most of the time demos don't really get off that

long-term off-tay contracts because no customer really wants to take that risk and the company doesn't really feel comfortable signing up to something to delivering something that they don't really know they've never really built or produced before. I would add to that, by the way, I agree with you. And I would add that the other thing is typically with the demo, there's a lot of learnings. And you want to be able to implement those learnings, which means you may want to shut down the demo for a month to retool something and start it back up again. You could do that if you have no customer sitting on the other side who is expecting the product. But the second, you have a customer who's expecting the product, your incentives are misaligned a little bit because what you really need

from an existential company perspective from the demo is to prove the technology and optimize it. What the customer needs is to get their products as they expected to get it, and you create that misalignment in a way that actually makes the demo less productive for you.

Yeah, that's exactly right. Now, the demo does serve of the purpose to you should send it to your customers. You should understand whether if you're producing, you know, where you're producing an input into textiles, where you're producing, you know, steel, staff, etc. You should understand that there are customers that want to buy their product,

exactly as your demo is producing it, right? So the specs need to be there. And I think that's a great demonstration of that. Now, when you go to first of a kind, there is always that balance of companies want to be able to show commercial progress, right? And they want to be able to announce that, you know, somebody's buying, you know, a lot of volume of their product off of them. Where you run into issues is how you contract, how do you contract that off-tech, right?

And to your question, let's talk a little bit more about structure. So one is we find that many times off-takes are priced in a way before engineering, you know, one, failed to engineering have been done. And it's based on optimistic Cappex assumptions. Now, when the companies go through the engineering process and they actually get to a feed, they find out that CAPEX is twice as much. Unfortunately, they've already signed an off-take agreement based on half the CAP-AX, and that's when they get into trouble,

because there's no way they can go back to the customer and say, hey, can we double the price, right? So we have seen that a lot, and what we encourage is you have to price and structure your off-take very flexibly. Otherwise, you're going to get into trouble, because by design, the process of engineering the plant, is just not as mature as you're off-dake process. Isn't the challenge, though,

this is I think the fundamental issue with folk, is that in the absence of a significant folk premium, which can manifest as a green premium, or in the absence of capital from a source that is not entirely return-seeking, you're up against the fact that it's inherently going to be the most expensive one you ever build, right, hopefully, but in all likelihood that's true.

And so what I feel like a lot, I agree with you that I've seen this play out, but I don't exactly know how to avoid it because I feel like a lot of companies where they're pricing at that front end is there like maximum willingness to pay from the customer, you know? And so they could go to the customer and say, hey, like, this is a first of a kind. You have to appreciate. It could be more expensive. So let's do this price, but we'll build in flexibility. It might be 2x that price if my cap X comes in at 2X. And I just don't know if they're going to succeed at getting the off take. So I guess how do you think about building in that flexibility, which seems incredibly valuable to the company building a first of a kind, but still actually getting the customer on board?

Sure. So one is, obviously, there's a limit to it, right? There's a limit to the green premium that companies will pay. So, you know, that flexibility only goes so far, right? But there is a flexibility. We've seen projects pricing this either of the final KAPX number or of a margin or. of a return for the project. So we have seen customers be willing to use those structures, right?

You say, hey, we're going to make X, let's agree that this project will make X return for the company and we'll price the off take base on that return based on the final feed number. So we have seen, or we've seen color structures where the company says to the customer, let's create a base price that we can agree on. And after that, we'll share the upside on where the company says, the price actually is based on, you know, some kind of market index and let's share the upside in certain ways that incentivizes you still buy the product, right? And obviously, that

base price has to be, you know, for a minimum return of the capital. So there are, we have, you know, implemented various commercial structures that, you know, again, this is commercial innovation that you can use to be able to do that. But as you say, there is a limit. And I think where you can safeguard yourself against blowing the CAPEX in a way that the customer walks away from that contract where you're not able to deliver the plan is by making sure that you learned a lot during the demo in a way you can put parameters around the CAPEX.

So the CAPEX is not necessarily fully unknown. There is a track record of you having built it and you can put parameters around what the final CAPEX numbers, capex and OPEX numbers, are going to come up. Virtual power plants are becoming a reliable way for utilities to manage capacity, but enrolling devices is just the start.

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We're living through a profound economic shift, and energy sits at the center of all of it. Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify.

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fish tank can help. Check out fish tankpr.com. That's f-i-s-c-h-fishtankpr.com. Let's talk about off-take term, which is another often a big question. Do you think that the going an assumption, if you're a company who wants to build the first-of-kind project, is that no one will give you any credit for any merchant risk, any merchant tail risk. Basically, you need your offtake. If your system is supposed to work for 20 years, then you need 20-year off-take. Or can you get away with the shorter off-take? Because the other thing I've seen a lot is the off-take or the customer.

They know they're signing up for a first-of-a-kind thing. Maybe they're willing to do it because they want to spur development of this technology. It's good for their goals, et cetera, or they want access to the next bunch of projects. But they know that this is more expensive. and higher risk and so on. And so in their mind, ideally, they want to send the shortest term contract that they can to allow you to build the project.

You want the longest term contract you can get from them for certainty. And so there's some middle ground there. I don't know where it sits. So how do you think about how long the offtake needs to last? So two things. It does depend on the product, right? So we've seen there are some products

that we were involved in structuring the first 10-year ESAF off-take, you know, fully bankable. off take, and we were able to get it 10 years because, you know, the airline, American Airlines, was very motivated to have access to future product, right? They see that demand supply imbalance, and they want access to future products. So that's the reason why many people sign those long-term agreements. In a space like cement, where cement is such a spot-based commodity, by the way, so is jet fuel, but again,

Jet fuel, aerialized, can take a longer term view. But in cement, where it's so short term, it'd be really hard to get anybody to sign more than a five-year agreement, right? However, again, with the right pricing and the right motivated customer, you are able to show that, hey, without this, I'm not going to be able to raise the capital that I'm going to need for the plant, right? And I think that, you know, you don't necessarily have to go 20 years. and yes, I would argue that, you know, investors will give some credit to the merchant piece, but you also can't do one or two year off-takes. It's just not helpful. How do you think about – we've been talking mostly about the version of the construct

where company builds project sells product, right? That's the SAF version, cement one that you're describing. The alternative is company sells product or sells plant, I should say, whatever the product is. whatever the product is, that's a balance sheet purchased by a customer rather than off take. That's attractive, obviously, in the context of like,

you don't need a 20-year off-take. You have a customer who's just going to take it off your hands. How do you think about the trade-offs there and how much of that do you see in first of a kind? We've seen some of that. The issue with that is you have to finance the construction, right? And if the customer never buy, one is you have to make sure the customer

buys the plant when starts operating at a certain performance level. So that you have to be making sure you're very, you know, tight on the agreement on that. Two, how are you going to get that construction financing, which is the biggest thing, right? There's different ways of doing it. Again, you're, you know, you can base that on the fact that you have 100% certainty that if you perform the plan will, you can put the plant onto the customer. However, where there is great lines or where that is in question, that's when you what's the backup. What we've seen a couple of cases is people actually signed a long-term off-take agreement,

and that off-take agreement has the buyout option, right? So you still cover as a company building the plant, you're still cover from the perspective that if the customer doesn't buy it, you know, you could still have some sort of off-take, but at the same time, they have a buy-out right, which at so point, if it's going to be an economical decision for the customer to say, look, I can just buy the plan and rip up the off-take agreement. Yeah, I mean, you mentioned the challenge of the construction financing in that paradigm. I've seen that too. And one of the ways it manifests.

So it sounds great to be like, okay, I'm just going to sell this thing to a customer. But as you said, the customer's not typically on a first-of-a-kind customer is not going to bear that construction risk or cost. And so what you end up having to do is you build it on balance sheet. And then it passes some acceptance test. the customer takes over. Again, that sounds great, but now you, you're bearing all that construction cost, and that on a first of a kind that's a meaningful size, that creates a cash hole for you. And that's also a difficult cash hole to fill. There's no construction finance is a thing if you're building a utility scale solar project, but if you're building a first of a kind

thing, there's also not really, we've been talking about like financing the long term operation. There's also not really construction financing solution. So you end up having to do that on balance sheet, and that's a lot of cash. You have to do all the procurement, you know, 18 months in advance or whatever it is. And so, you know, if you have the capital on your balance sheet to do that, it's attractive, again, because you know, you get to just transfer it. But if you don't, which most folks don't, it ends up being harder than you think it's going to be to just sell the first thing rather than trying to finance it. Yeah, that's correct. And I think a lot of it, again, we talk about pricing of the offtake, but the terms are just as important.

because when you think about exactly what you said, which is you have to spend all this money building it, you have no idea how long commissioning is going to take, right? Because you've never done it at that scale before. You have some data from your demo, and hopefully that data will help solve a lot of the commissioning issues. But as you scale up, commissioning becomes really hard. As I said, it's really hard in conventional technologies. You know, first of a kind, it's a big unknown.

And what we've seen, unfortunately, in some of these off-take agreements, is very, you know, I would say stringent parameters around the volumes that the off-take needs to deliver and the dates under which they have to deliver, right? And that creates a huge problem where, you know, if you spend all this money on balance sheet building the plant and you get to that drop the date and you're not commissioned or you're not hitting the performance target and the customer. can just walk away, it creates a huge issue. It puts your company under, right? So one of the things we really try to do is how do we create flexibility around the terms around, you know, when you're going to deliver the plan, what performance you're going to get, what type of commissioning runway are you going to get during that time for you to allow to work out the kinks of your first of a kind planned?

So again, people focus a lot on price, but the terms are just as important. All right. So let's transition from talking about the commercial terms. to the economics, to the financials. Do you have rules of thumb? So let's say I've gone through my FEL1, FEL2, maybe my feed. So I feel like I have pretty good visibility

into what this thing is going to cost, and I have off-take. What should I be targeting in terms of pick your metric, IRA, payback, et cetera? What is going to be good enough to attract some kind of external project-level capital to a first of a kind? I think the answer is not a single number, but rather it's a combination of factors that get to that de-risk point of view from the infrastructure investor as opposed to a hard, solid number.

Because the reality is the risk associated with first-of-a-kind plans most of the time will never compensate, you know, on a number, right? So you have to start thinking about the commercial construct around the project that will give the infrastructure investor a couple of things. One is very high certainty of the plant is going to finish construction and commissioning. And two, they really have to take a point of view around the downside, as I said. Infrastructure investors do not like to lose money. So how is that downside protected? So what you have to do is start putting together all of the risks around the contracts, right? Is your feet stock the same length as you're off-tick, right?

Do you procure their right PPA? Are you exposed to PPA risk? In a lot of the long-duration energy storage plays, that arbitrage, you know, on negative price power might only be for a couple of years. And the utility of the area might only be willing to offer it three years because they no, there's a new transmission line coming in, right? So how are you exposed there on the PPA side? On the offtake, again, you know, what are the obligations that you have under the offtake and are the, is the obligation to pay for that offtake really solid?

And how is the customer viewed? What's the credit profile, the customer, right? So as you start adding up all the different factors, whether it's feedstock, whether it's PPA, whether it's off-take, construction, and who exactly is going to operate it, you start creating a picture of, do you get to a good enough return that is safeguarded on the downside, where the infrastructure investor, one, could see that it's enough of a return, but two, what we've seen is most of these infrastructure investors really play for the platform, right? I'm putting X hundred million dollars in the first project.

What I really want to do is put a billion dollars into your next two or three projects. And a lot of them are getting options for those projects. But because what they really, they don't want to do a one and out project. They don't want to do 100, 200 million dollar investment. What they really want to do is see that company through that platform formation. The way it was done for solar, for wind, where we've seen this platform plays really sell at multiples to, you know, large-scale. infrastructure investors or pension funds in a way that was very profitable for the developers

of the companies. So again, the answer is very nuanced and is not necessarily a hard set number. It has to be IR positive for sure, and you have to really test out whether, you know, that protection against laws, against principal loss, is there. But after that, it becomes, you know, how much can the project deliver? But can you actually deliver in a platform where the investor could see high returns. You talked a little bit about CAPEX estimation.

I'm curious where you've seen people get that wrong. When people underestimate how much a thing is going to cost, is there any consistency to what they have underestimated? No, there isn't. Again, the reality is the EPC CAPEX world changed dramatically after COVID, right? Things that used to be very secured, large-scale EPC companies that used to be able to give you a, you know, lump sum turnkey contract are just not doing that. anymore in conventional technologies, right, let alone this kind of technologies.

So the CAPEX blowouts that we see a lot of times is, you know, again, is you go through the process, fell one is a plus and minus 50 percent sort of number. And as you go through it, there's a lot of things that the company didn't realize it needed in order to build a plant. So one is, again, the quote unquote, lack of knowledge around what it takes. to build a plant, hence the demo is a mitigating, a large mitigan for that, but you still have to go through the process. One of the things that we see on one of the projects that we committed to that was canceled

was, you know, the balance of plant, the integration of four systems where the price was very well known in those four different systems, but the integration and the actual, you know, commodities, the steel and the cement that when he... into integrating those four components just was not sized correctly because nobody had ever done before. So balance of plan integration, as I said,

around the modularity is still an issue. It's still you have to be careful on. But, you know, the main thing is no one has ever built this before. And a lot of the inputs are just not known until they just start going through engineering and you start realizing things that are needed in order to build

out that CAPEX. Okay. So finally, let's talk about financing is first of a kind. So let's say, you know, you've got all those other prerequisites. You've got your technology sufficiently dearest as much as it can be. You've got, you know, sufficient commercial offtake that is long enough term. It's bankable. You've got feedstock secured, all the things you need to have. You've got, you've got all the boxes checked. What should you be thinking about in terms of the capital stack on the project? What is realistic? Is there a world where you can get debt on a folk project? Does it basically never happen unless it's like

government debt? I mean, you know, what are you, what are you targeting? Project level investment or financing, as you mentioned, is, you know, even with a positive RR, as I said, is challenging because of that risk return mismatch there. So what you really have to do is you have to bring capital at different levels of your stack in order to be able to fund the project. A lot of times companies do raise top goal equity. And, most of that top quo equity goes to fund the project. I think that is one thing that we've seen done. Some of the company putting top co equity do want to take a bet on the project level and therefore they put money into that.

As far as debt goes, we haven't seen it. We've seen people be able to raise debt at the corporate level via venture debt or via corporate debt. Now, those are very low leverage numbers, right? not the 80, 95% that, you know, you will get in solar, you will get very low levels. But again, our contention is that if you structure your project and the construct, you know, the contractual structure of your project correctly, you should be able to put some sort of debt, very low level of leverages on it, because as I said, you have hopefully protected the downside.

And if you do have an infrastructure investor coming in to your project, it's not a far leap to say, can a bank put 20, 30% leverage on it? Again, that is the theory because in practice, it hasn't really been working yet. And what we find is most people are raising the money at the corporate level. Curious your perspective on this. So, as you know, there are lots of folks out there trying to introduce a platform to finance folk projects, infrastructure-type investment. And they all seem to run into the same like rock or hard-place problem, which is like you look at as an infrastructure investor and the returns aren't sufficient to justify the risk, as you said. You can downside protect to some degree, but not to the level that a traditional infrastructure investor would. And so then I think often they say, okay, well, maybe if I can't, like inherently there's no way to sufficiently truly protect the downside here.

Maybe I can juice the upside. And so then a lot of what they're thinking about is, okay, I will invest this will be equity more than it'll be debt. but I'll invest equity at the project level, but I'll get a kicker, which is like warrants in or options for the top co equity. Is that a viable, scalable strategy in your mind? It requires basically an infrastructure investor that has almost like a venture capital mindset,

which is where I think that's been challenging. What is challenging is, so one, I agree with the premise that, and as I was saying, is you have to be able to take a view at the different points of the capital stack in order to have a downside protection and a blended return that can get you there

because the project level investment by itself just will not do that, right? So that's one thing. The other thing is that that project investor has to be able to enjoy the fact that doing the first demo or the first of a kind is going to create a tremendous amount of value at the top goal, right?

And it will increase the valuation of top goal because without it, the company will die. It's the inflection. Exactly. It's the inflection point. So, again, the problem is that asset class does not exist today, right? And as you said, what do you need? In our mind, what you really need is to be able to have a point of view or LPs that, you know,

where you're raising money with the point of view around I have the necessary skills to look at projects and be able to really assess the risk of it and ensure that they're fully de-risk, right? Look at the Topco and the company and the CEO and say this people, this group of people will deliver not only on the project, but they have sufficient pipeline of projects, and they can deliver on subsequent projects, right?

And be able to say, look, I'm coming in at this level, you know, at the Topco, I'm coming in at this level at the Project Co. And with whatever instruments, as you mentioned, some of it could be warrant, some upside sharing. But also, I'm going to be able to put a lot of money going forward into all the other projects they do. And I think that combination is exactly what the world needs. We've seen it in practice. Infineum is a great example of a company.

When we started talking to Infinium a year and a half ago, he had the idea of, of first of a kind project. This is ESAF, by the way. This is ESAF. You know, e-fuels. It's E-fuels. It's E-fuels. And they were going through the demo phase.

They were trying to get that. And then they had the idea to convert gas to liquid plants into a E-fuels facility. Right. Now, at the time, there was no off-take agreement. There was no feedstock.

There was no PPA. There was in the commercial construct. and the construction plan just wasn't there. And that's where the team, the Cadillist team, really partner with them to be able to create this. And again, get them a 10-year-off-take agreement as opposed to the one or two, three years that they were being offered. Ensure that the feedstock and the PPA had the protections that an infrastructure investor would need. Ensure that they had their right team structure and they had thought about how are they going to execute the construction. the construction plan.

Did they have enough contingency? And even thought they were starting with a brownfield plant, you know, did they really size the Cappex to convert that brownfield plant into what they needed to, right? So all that work that went in,

you know, it got, you know, what was achieved is a structure where Brookfield could take a look at this and really see a path to, again, a construction project that could deliver some return, but the ability for

Infinium to deliver on future projects, and that's where they committed over a billion dollars to the platform. So we've seen it done in practice, and we've seen that there are investors out there willing to do that, but I do think again, back to the point,

I do think in this missing middle, in the Valley of Death and the missing middle of the capital stack that is talked about, that you could find a profit, and you should be able to find a profit. You just have to be able to, you know, do it out of a new asset class that's not either or, but rather a blending, a combination of it. But most importantly, you know, and our contention is that

capital is an issue, but the biggest issue is the skill set that is required to be able to help the company's the risk and really assess the risk of that construction and operation of first of a kind. All right. So I guess final thing, we've talked through a couple of these specific examples, but I I think folks will be interested to hear more. So can you give a couple more actual real-world examples of first-of-a-kind projects that you guys have gotten involved in? And I just a little bit about how they're structured and what they enable. Sure, absolutely.

And a lot of it has been collaboration with you guys. So I do think that, you know, it goes to show that this world is not going to be conquered. That value of death will not be conquered with specific, you know, VCs or infra funds or catalyst by itself. but rather the partnership. That's the main thing that we have learned from this whole thing. Put aside the 12 keys, if you can't really partner with the investors, with the companies, with future investors, it's really hard to get this done. A couple of examples of that are, you know, Rondo is a great example where, you know, a year and a half ago, you know, we spoke to Rondo and they had, you know, more than a dozen projects around the world that they wanted to execute on. But there wasn't, you know, there wasn't a specific clarity around what is the commercial product that they really wanted to put out there, right?

There were customers that wanted to buy the machine. There were customers that wanted them to build the machine. And then, you know, they were buyer from then. There are customers who just wanted the product, the steam in this case. And what we really focus on with Rondo is where is it that you can deliver, you know, this, your first of all? kind projects, in this case, three projects that we funded, and what is the best structure that is going to get customers to really buy off on it? And what we found is, and working with any partnership with them, we created a new commercial model where we called it Steam

as a Service, right? And with that, we were able to say, look, Rondo, you take care of the capex of attaching, you know, your battery to an industrial process, whether it is for utilities or whether it is for beverage manufacturing or food manufacturing. And you, the offer is, I will deliver steam, you know, on a monthly basis at this price. And the risk of charging that machine would be borne by the company. So one is you simplified what Rondo needed to do. And type of risks they needed to take. You switched from a having the corporate customer choose between spending X million dollars upfront on day one versus signing a, you know, utility type of monthly payment, right? Which, again, a lot of these corporates, even if they have a lot of money,

what we find is their personal investments that people need to take and their personal risks that someone that has been at the company for 20, 30 years need to take, and it's really hard for them to take it on new technologies, right? So how do you simplify? So the innovation of Rondo is how do we simplify the commercial offering in a way that was more palable to the customer? And along the way, what was so great is with our joint venture that we have with the European Commission and the European Investment Bank,

we were able to create a much larger funding package for Rondo to be able to fund this. machines, you know, with a combination of, you know, a catalyst funding plus European Investment Bank venture debt. Yeah. So that's one example. And the other great example is EH2, right, the electrolyzer company, whereby, you know, they had not been able to deploy their first project and they really needed to get going on

it. You know, there was a false start there in a first project. And what we really helped the company do, that first project, EH2 had a role of an OEM provider that were going to provide the electrolyzer stack. Someone else was going to build the rest of the plant. With the partnership with the partnership with them and catalyst, what we were able to do is help transform the company into the OEM delivery into a company that can actually deliver a project, right? the balance of plant that they're going to deliver in their first project is not something they had thought about it before. But what it does is it puts them in control of their own destiny, right?

They're not dependent on someone to build out a whole project, but rather they're depending on themselves, and we've helped them create an organization that can actually deliver that, right, and think about how, you know, the plan for delivery, how are they going to build the balance of planned, how are they going to get the electrolyzer, et cetera. So for us, you know, this is the kind of partnerships that work where we're creating that commercial innovation where we're helping companies transform themselves in a way that can help them, you know, control their own destiny, but really prove out the technology. And that's what we do.

Well, as an investor in both EH2 and Rondo, I thank you for both of those partnerships. But agree, they're both transformative for those companies and for those technologies and ultimately for those sectors. And they're both interesting, unique. Every one of these case studies is totally unique from every other one. This has been a fascinating and valuable conversation, as ours always are. But thank you so much for joining. There will be more folk to talk about in the future, so I'm sure we'll have you back.

Thank you. Appreciate it. Mario Fernandez is head of the Catalyst Program at Breakthrough Energy. This show is a production of Latitude Media. You can head over Latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Prelude Beck's visionary is accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at Preludeventures.com.

This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Markwan, theme song by Sean Markwan. Stephen Lacey is our executive editor. I'm Shail Khan, and this is Catalyst.