Navigating the ‘messy middle’ of sustainable infrastructure: Takeaways from Insider’s Guide to Energy podcast with Amanda Li
With billions in federal dollars set to flow into sustainable infrastructure, the project finance world is seeing more opportunities as newcomers enter the space — and collaboration will be key to the sector’s success.
That’s what Banyan COO Amanda Li foresees as investors rush to fund the “messy middle” of commercial and industrial (C&I) sustainable infrastructure projects. She made the prediction in the latest episode of the Insider’s Guide to Energy podcast, where she spoke about the challenges of scaling up C&I project finance, how collaboration can unleash the full potential of investment tax credits, and how taking baby steps toward standardization can help move project finance as a whole into the 21st century.
Despite early movers like Amazon and Microsoft investing in sustainable infrastructure, projects in the C&I sector have remained difficult to fund for various reasons. The creditworthiness of a business, the ownership of the facility in question, or even the size of a project might end a potentially profitable deal before it even begins. However, the IRA has created new opportunities for developers and investors by injecting new capital into the space and opening the door to a host of tax credits and incentives.
Those planning to take advantage of IRA benefits will need to expertly navigate complex deals and stay on top of compliance, both of which are challenging because project finance systems and processes are inefficient and inconsistent across the sector. If lenders can access better data, achieve greater alignment between stakeholders, and utilize standardization across deals, more projects will get the green light faster. Players in the project finance space cannot solve these problems alone, Li argues that they’ll go further and faster if they work together.
“Every other financial sector has figured out a way of doing high-volume deals by figuring out how to standardize some of the data, some of the ways we look at risk, some of the ways we collaborate together so that if you go from developer to developer to bank to fund to owner-operator, we’re not speaking completely different languages,” Li told Insider’s Guide to Energy hosts Jeff MacAulay and Chris Sass.
This unity is especially valuable as funds face a talent shortage in their race to staff up ahead of new government funding, such as the Environmental Protection Agency’s Greenhouse Gas Reduction Fund, a $27-billion investment created to “mobilize financing and private capital to address the climate crisis” — promises to unlock federal dollars specifically for sustainable infrastructure, along with community solar and cleantech projects in low-income and disadvantaged communities, transforming a space once occupied almost exclusively by green banks and community development financial institutions (CDFIs) with limited resources into a promising market for private-sector investment.
By updating systems to make existing teams more efficient and effective in handling new markets and growth, lenders can work to address the talent gap in the short term and maximize the benefits of not only new and existing government programs but also the promise of the C&I sector as a whole.
“That desire and need to collaborate to figure it out is increasing,” Li said, “and if we actually do manage to share those processes and create incremental improvements in standardization, that should help not only get those free dollars for [IRA adders like] wage and apprenticeship benefits, for domestic content, for Justice 40, but also to allow for a lot more funds to join the market. And then be able to invest into local and rural communities that have not traditionally had access to these adders.”
More transparency across the sector may also help address the mismatch between developers’ and investors’ views on risk-return profiles. Where banks typically take a conservative approach to assessing risk, especially with high interest rates, experienced developers don’t necessarily agree, leading to a shift in how these players operate within the space.
“For certain experienced developers who really understand the performance of their assets, we’re seeing, increasingly, that they’re holding onto their own assets,” Li explained. “They’re starting to become owner-operators.”
Li went on to underscore that these trends across growth in C&I, incoming IRA funding and compliance, and new entrants should all be seen as opportunities rather than threats, especially with proper tools and processes for collaboration and standardization. A rising tide lifts all boats.