We recently chatted with Spring Lane Capital’s Rob Day about demand for sustainable infrastructure projects. Many developers obviously found it tough to break ground on new projects during the pandemic, with lockdowns and permitting delays causing disruptions that in some cases continue to today. But Day is optimistic about project growth in 2021. “It feels like it’s already getting back to normal out there in most places,” he says.
We talked to Day about what he’s seeing in the marketplace, in terms of investors and projects. Here’s an edited transcript of our chat.
What do you find investors are looking for when it comes to sustainability deals? Are there certain attributes that attract them, and what metrics they are seeking?
I can only speak to how we raised Spring Lane’s Fund 1, which we did a final close on in late 2019.
Some of the LPs we worked with were attracted to the yield-like returns made possible by being equity owners of cash-generating projects — especially for smaller-scale, distributed infrastructure with relatively short development and construction phases. That’s something that a lot of people don’t realize is a major advantage to the entire distributed infrastructure sector, relative to traditional utility-scale projects. Especially for those institutional investors transitioning out of fossil fuel investments into sustainability, without looking to lower their returns targets, the distributed sustainable infrastructure category looks somewhat similar to them from an asset allocation standpoint.
Other LPs we worked with are impact-oriented and see the need for much more rapid deployment of sustainability solutions to address climate change. I think anyone who’s been working around sustainability for a while knows many examples of promising solutions that should be more widely adopted but haven’t been. The lack of third-party capital to fund the deployment of these solutions is a major reason why. So while we didn’t pitch Fund 1 as an “impact fund,” if we can bring that capital to the table, and especially if we can bring along mainstream project capital after us, then that would be pretty impactful.
I do spend a lot of time speaking with institutional investors these days, and my sense is that their hunger for sustainable investment opportunities has only grown. I think it’s one reason we’ve seen such a wave of SPAC activity: for some of these institutional investors, putting money into a SPAC is a fast way to put a lot of capital to work in a “sustainability” category that has, for some, become a top priority almost overnight.
Which business models are allowing investors to finance systems that enable corporates to become more resilient from the growing impacts of climate change?
Project finance wants to take as little risk as possible, so the business models that will attract early project finance will be those that provide both cost and revenue certainty. What does this mean? Someone has to wear the risk. It’s a balancing act for entrepreneurs between asking their customers and suppliers to take all the volume and pricing risk, or asking their project financiers to take that risk.
We’re seeing entrepreneurs be successful when they can find a really acute customer pain point and solve it, to the extent that the customers are willing to sign long-term contracts with minimum volumes and price floors. This then allows project finance to feel like the opportunity is somewhat de-risked.
We’re seeing this in distributed water and wastewater; in electric transportation as a service; and in waste and the circular economy. I’m really eager to see this in microgrids. If entrepreneurs can figure out how to sell microgrids for reliability and get customers to sign up to a subscription-like service, that could unlock a radical transformation of the entire electric grid.
Speaking of that: are you seeing growing demand for microgrids and backup systems, from corporates or from municipalities, in the wake of the Texas power grid failure in February?
We haven’t seen that just yet, but we know it’s coming. We definitely saw an uptick in microgrid interest in California after the blackouts last summer. But honestly, as I mentioned, most microgrid project developers haven’t figured out how to sell based upon reliability yet. They are using batteries for grid services and not for backup power. That made sense when batteries were so expensive, but as they get cheaper and cheaper – and especially as we learn how software can be used to significantly reduce demand and thus the need for big batteries in the first place – developers need to start figuring out how to turn solar and batteries into reliable onsite power for customers who need a couple of days of uptime in an emergency.
Are there any state or even local policies and incentives on the horizon that you’re keeping an eye on, that might drive more capital into distributed sustainability infrastructure projects?
The new climate law in Massachusetts helps my state to stay on pace with New York, California, and other states that are passing aggressive carbon emissions reductions goals and putting some real dollars behind them.
The expansion of low carbon fuel standards beyond California, and the resulting low-carbon fuel standard credit markets, have the potential to drive a lot of project development — not only in renewable natural gas, but also in EVs, hydrogen and other verticals where the consumption of low-carbon fuels can also enjoy the benefits of those programs. We’re seeing a lot of entrepreneurial activity as more states look to adopt LCFS.
And if President Biden’s proposed $25 billion “predevelopment” fund is included in the final infrastructure legislation, that could potentially unlock a lot of local policies that would support the rise of more project developers across multiple types of distributed sustainability infrastructure. The fund would be made available for states to develop their own initiatives to fund development-phase, pre-construction work. It would be interesting to see how various states design those initiatives.
Beyond that, the policy emphasis around EV charging at both the national and the regional level is compelling, and will open up a lot of opportunities.
And interestingly, we’re seeing a lot of opportunities for distributed sustainability infrastructure projects being driven by state and local emissions-reductions programs specifically around ports. Ports are becoming an important, niche market entry for a variety of distributed generation, clean transportation, and emission-capturing technologies.
Finally, how are you seeing deal activity shaping up as we hopefully continue to shift into this post-Covid era?
At Spring Lane, at least, we’ve never been swamped with more deal flow. Our deal pipeline right now is more than 30x the size of our current fund. I don’t think Covid did much to slow down deal activity at all, to be honest. I know some firms essentially had to take the second quarter of 2020 off, or to focus on existing relationships with entrepreneurs instead of any new ones. But for us and some of our peers, we were able to charge ahead with virtual deal activity even around non-virtual project investments. 2020 was incredibly busy, and it looks like 2021 is going to be even busier. We’re hiring.