The five building blocks of project development for emerging, next-generation climate infrastructure

Many novel technologies will enable, or will become, the next-generation of industrial infrastructure - especially as we reach toward a more resilient, distributed and decarbonized future. The gaps from technology in the lab to deployed in the field have been well articulated. 

As a technology developer, you may have brought your science out of the lab, built an engineering-heavy product team, and have likely already started to commercialize your technology. A few material sample agreements here, a proof of concept pilot payment there - all awesome. 

Project development is the framework that your later-stage investors and partners will use to think about repeatedly scaling your technology in profitable deployments - and will expect you to fluently understand, too. Often, this leap from pilots and demonstrations to full-scale, commercially-viable projects demands an entirely new skill set and team set-up, as well as a lot more capital. So, what are the building blocks you need to put in place from day 1 to pull this off?

This is the first of a series of Insights with Hannah Friedman, of Mark1 and Planeteer Capital, about what it takes to incorporate best in class development principles within early-stage technology companies. Here, we start with the basic building blocks that support emerging infrastructure technologies turning into bankable projects.

1. The commercial foundations
The first step to laying the commercial foundation of project development is defining your inputs and outputs. You “define” these by driving toward commercial contracts with partners. 

Your inputs are your feedstocks – for example, if you’re a solar developer, you’ll look for where and how often the sun shines. If you’re producing a physical commodity, this is your feedstock agreement. Often, getting energy - especially in today’s power-hungry market - and potential interconnection to the grid is a critical aspect of project inputs. 

On the output side, you’ll look at who’s going to buy your output, how much of it and for what price – in the case of solar as an example, this is electricity. This is laid out in one of the cornerstones of project development: the offtake agreement. Some projects might sell their output into the market as a commodity with spot-market prices, but this is only a viable route if you can demonstrate there's an established market for what you're selling and is very challenging for project financiers to get involved with – something most early-stage climate companies struggle with.

Your contractual agreements will also outline what happens if you can't deliver the promised output or it doesn't meet specifications, what happens if your feedstock dries up, or what happens if the price of the inputs or outputs change dramatically in the market. These agreements are mission-critical to getting your project financed. 

2. Location, regulation and community
Now that you’ve mapped out the full scope of your project, including any byproducts, and the partners you work with contractually, you’ll need to decide where to build your site. 

A given site’s project economics will hinge on transportation and logistics – for instance, whether it’ll be cheaper to co-locate next to your feedstock, or closer to your buyers. So, naturally, your feedstocks (inputs) and product (outputs) may drive your site selection decisions, but your ultimate site drives a whole suite of development activities often referred to as the “social” development domain.

Development after site selection will involve navigating regulatory requirements, including getting permits from the local state and municipality. The project will also be deeply impacted by the community benefits you can deliver to local populations, and whether they’ve been properly, meaningfully engaged from the beginning.  

Sites can look different whether you’re developing a brownfield (retrofitting or used for previous projects) or a greenfield (from scratch). Sometimes, site specific development of services like transportation, water, electricity, trash, environmental assessments and more, can be accelerated when it’s already been done for brownfield sites. 

3. The technical nuts and bolts
The technical and engineering part of development involves assembling the physical components of your technology and the engineering of project integration and full connectivity. Prioritizing the safety of your workers and team is the paramount goal of this development domain. Implicitly, it has to work as planned, too. 

You’ll likely work with partners including engineering, procurement, and the construction (EPC) firms. Procurement will involve selecting your equipment and making sure the timelines of your purchases line up, so you’ll be ready to turn all of the lights on at the same time. Usually around the time that financing is fully inked (this varies by project), is a moment called Notice to Proceed, or NTP, in which construction and commissioning get agreen light for putting shovels in the ground. After construction, commissioning to turn all equipment on and ensure it works as intended will result in a final COD (commercial operating date), at which the commissioning phase transitions into operations. Planning all this out, accounting for schedule overruns and ensuring you have the right partners at each step is a critical part of the technical and engineering development domain.  

4. A capital stack strategy
As founders have experienced first hand, the financing process for these emerging infrastructure projects looks very different from incumbent industries in climate. In solar, for instance, development follows a segmented approach, with different players handling discrete parts of the process, such as finding a site or securing interconnection. That’s because the steps, the timelines, the returns and especially the costs are all (now) relatively predictable. But that’s not (yet) true for innovative industrial companies that are scaling up. This framework of passing the baton from each stage of development to the next buyer isn’t viable, since these projects are often new technology categories at their full-commercial volume for the first time - referred to as first-of-a-kind (FOAK) projects.

Instead, the technology developer (aka TopCo or ParentCo) funds nearly all development and more, often exclusively using their balance sheet and typically with expensive venture capital. Financing is unlocked based on hitting milestones as you de-risk the project through the early, middle, and later stages of development that prove to investors that the project is viable. The additional, later-stage financing, whether that’s project equity, grants, or debt, often has to work in concert or in a blended strategy at the TopCo and at the project level. 

Often, even when a FOAK project is funded fully on balance sheet of the TopCo, you may need to demonstrate the right financial foundations are in place to look bankable for projects 2 and 3. It’s true that flexible capital is increasingly available - with more investors who are willing to take on early stage project risk or invest in your TopCo as well as your ProjectCo - but it will remain inaccessible if you don’t have people on your team who understand the nuance of this capitalization model and can articulate it to investors in a way that meets their risk-adjusted return expectations. This is especially crucial when you’re keeping multiple options open – financing from the balance sheet while trying to attract development capital and external project financing or asset backed lending.

5. Proactive project management
Often, you hear folks describe project development as a stool with 4 legs. We’ve covered them all: Commercial, Social/Siting, Technical and Financial. The fifth and final, mission-critical building block for project development is a horizontal layer: project management. All great projects have a savvy, swift Project Manager who can keep all the plates in your project spinning, maintain a single source of truth, and make sure everything moves ahead on a reasonable timeline. Project Managers understand how the regulatory, technical, commercial, and financial strands of your project are interconnected, and they maintain the real-time decisions as they change in project charters, scopes, budgets, schedules and an overarching Project Development Plan. Do not discount the importance of an experienced and executive Project Manager! It’s their close oversight that will prevent unexpected obstacles from causing the project to fall apart.

If you are just getting started on this journey and want to learn more about project development fundamentals, highly recommend you check out the next Spring Lane Capital & CREO’s Developer University. If you are already in the early innings of developing your FOAK project and are seeking co-development support across all domains, reach out to Mark1 - a Developer-as-a-Service built specifically for emerging industrial companies.

Hannah Friedman is a climate investor and operator. She's deployed 10s of millions of dollars into early-stage companies and has directly supported more than $100M+ of fresh capital raised to invest in climate specifically. She spends an embarrassing amount of time with CFOs perseverating on capital stack strategies. Most recently, Hannah helped launch Planeteer Capital from scratch, a Pre-Seed climate tech VC fund looking for the next generation of hardware-enabled software. Grateful alum of Closed Loop Partners and Columbia University.