Overcoming Barriers to Scalability in Sustainable Finance (Part 2 of 3)
Today, the sustainable infrastructure industry is at a pivotal turning point. More capital is available than ever before, but there exist barriers to efficiently connecting that capital to new opportunities.
This post is the second installation of our blog series on sustainable infrastructure financing barriers that discusses how inefficiencies and convoluted processes prevent scalability in climate capital deployment to small- to medium-sized deals.
Barrier #2: Project Complexities in Small- to Medium-Sized Deals
Today, small- to medium-sized deals lose out on millions of dollars of investment due to project complexities and inefficient processes. For sustainable infrastructure to capture the hundreds of billions of dollars unlocked by the Inflation Reduction Act, it must drastically simplify its processes and leverage automation to facilitate growth and profitability in small- to medium-sized deals. Using technology to foster a liquid, diverse market, the sustainable finance industry can accelerate the growth of small and medium-sized infrastructure projects to curb the climate crisis meaningfully.
Lower costs have opened the door for smaller deals.
As the renewable energy industry has grown over the last decade, a 60% reduction in solar installation costs has opened the door for a broader range of project sizes to pencil. By the end of 2022 Q3, SEIA estimates that more than 135 gigawatts (GW) of solar capacity was operational in the U.S., with almost one-third attributed to commercial, residential, and other behind-the-meter projects.
But even as smaller project economics have improved, overhead and other soft costs remain a barrier for developers and investors. Small deal complexities and the need for project customization mean more costs, potential delays, and greater risk.
These costs make pushing small deals through the pipeline difficult, even if they are high-impact and will ultimately produce favorable returns.
Why does this matter? While the IRA’s incentives benefit a wide range of investments, small to medium projects are getting the most significant boost. With the support of the IRA, projects in the one to five-megawatt range that previously were unprofitable are now bankable. Thanks to the IRA’s tax credits and establishing a $27 billion green bank, smaller deals can join the market – and they’ll be moving relatively quickly as developers capitalize on this opportunity.
Banks and funds that can quickly and efficiently invest in smaller deals will win in this new landscape. However, resource constraints, inefficiencies, and project complexities can still create high overhead costs in even the most financeable, high-impact deals.
The current processes need to be more scalable to meet future demand.
Imagine a bank with one billion dollars to invest in sustainable infrastructure. Previously, the capital would typically be invested in a single billion-dollar solar field or wind farm. However, in this example they are deploying those same one billion dollars to one thousand small million-dollar solar facilities.
That’s a 1000x increase in the volume of deals – and without any changes to current processes and tools, it could mean a 1000x increase in hours to close all of them. That’s an impossible amount of time - even for a 20-person team working around the clock.
While the above example is a gross oversimplification, it illustrates the importance and urgency of the massively scaled, highly efficient system needed to support the industry’s explosive growth. For some investors today, even a $50 million deal is too small and difficult to process; these are the ones that will fail to capitalize on the small to medium deal market growth – and these are the ones that will fall behind.
Achieve scalability with the help of software.
Utility-scale deals have historically ruled the sustainable infrastructure market. However - the technology is available to reduce risk, create standardization, and minimize overhead costs to open doors to small, distributed investments. Standardization across smaller deals will make bundling them into more significant investments easier, creating an inclusive investing landscape and empowering smaller and local banks to participate in and facilitate a more liquid marketplace.
To scale to meet critical demand, sustainable infrastructure investors need to foster a liquid, diverse market where every financial institution wanting to invest in sustainable project finance can do so with minimal barriers. A modularized deal approach paired with new digital tools can reduce barriers and foster opportunities for new entrants to participate, unlocking much-needed market liquidity and deal velocity.
“The Key to Unlocking the Full Potential of the Inflation Reduction Act, Bridging the Sustainable Investment Gap with Automation, Digitization, and Optimization” is the latest white paper from Banyan Infrastructure. It further discusses how technology can alleviate the problems faced by the sustainable infrastructure finance industry so it can take full advantage of the capital unlocked by the IRA. Download it here.