Interview – September 5, 2023
The energy transition is in full swing, but a great deal of work still needs to be done to prepare our world for the Paris climate goals. This requires not only a lot of money, but also creative structures to deploy that money effectively. There is a major role for so-called ‘alternative financiers’ such as StartGreen Capital, which pursue social returns alongside financial returns. What does their role look like? Sebastian Maks of Change Inc spoke with Coenraad de Vries, Nienke Rijpstra, and Anthony Viellevoije.
“Two major money flows are needed,” says Coenraad de Vries, co-founder and Managing Partner of sustainability investor StartGreen Capital. “One is for energy infrastructure, meaning project financing for the generation, transport, storage, and use of renewable energy. The other consists of risk investments in new inventions, climate tech.” Two investment segments, each with its own opportunities and challenges, he believes.
Limited role of banks
When thinking of financing, many people immediately think of banks; large, international corporations with plenty of capital looking for returns. But bank funding alone is not enough to pay for the energy transition. This is because banks have a different business model, De Vries explains, which is not always suitable for financing entire sustainability projects from start to finish. “Banks cannot take much risk in the preliminary phase of a project,” he says. “We shouldn’t expect that of them either. Moreover, much is standardized at banks. As a result, they can usually only provide limited customization.”
While taking risks and providing customization are precisely the two crucial ingredients when starting up more sustainable projects or startups. When financing a battery project, for example, you simply do not know at the start if, when, and in what quantity your money will return. And when finding investors for a promising technical innovation that has not yet proven itself, challenging financial structures are sometimes required.
Other financiers
“That is where ‘alternative financiers’ come in: impact investors, venture capital firms, and sustainability funds. They can help devise such structures,” says Nienke Rijpstra. Rijpstra is Investment Director of the Energiefonds Overijssel, one of the funds managed by StartGreen Capital.
The fund, totaling €330 million, has been earmarked by the province of Overijssel for the energy transition. With the fund, Rijpstra recently invested €20 million in a large-scale solar park in Almelo. The park is expected to supply 43,000 megawatt-hours of green electricity per year.
“Many solar park developers are suffering from high interest rates,” Rijpstra explains. “Therefore, the project costs are quite high. They do receive government subsidies, but they cannot make it on those alone. That is why they are looking for ways to improve the income side of their project.”
Ten years of power
The developer of the aforementioned Twente solar park came up with such a way. They found a party – Allegro, a growing Dutch charging station company – that is willing to guarantee the purchase of electricity from the solar park for ten years. A win-win, Rijpstra believes. It offers companies like Allegro the long-term certainty of power, which they are willing to buy for more than the market price. For the solar park developers, it provides guaranteed, relatively high income.
“For the bank, indirectly financing a growth company like Allegro is too great a risk,” says Rijpstra. “We are willing to take that risk. We think: suppose Allegro collapses after a few years, we can still sell the energy produced by the solar park to the grid. In principle, a solar park remains for 25 years. As a fund, we are therefore willing to run the risk that we will not get our investment back after fifteen, but only after twenty years.”
High risk profile for startups
Investing in climate tech companies involves even more risk. The landscape consists mostly of startups pioneering high-tech, expensive inventions that often have not yet proven themselves in the market. Think of innovative battery technologies or hydrogen applications. As a result, finding capital, also known as venture capital, is not always easy.
“You shouldn’t approach banks for these kinds of investments,” says Anthony Viellevoije. He is Investment Director at the Sustainable Economy Participation Fund North Holland (PDENH), another government fund managed by StartGreen Capital. “The cash flows of those companies are strongly negative in the beginning. Moreover, their assets cannot be resold in the event of bankruptcy.”
‘Entrepreneurs are the true creatives’
It is the role of funds like PDENH to support such companies with capital so they are ready for the next step in their development. This not only helps them move forward at the moment but also makes them more attractive for subsequent investment rounds. But before that happens, everything within the organization must be in order, and there must be confidence from all sides that the technology has potential for the future.
“The entrepreneurs are the true creatives,” says Viellevoije. “But as financiers, our challenge is to create support for putting money into almost inscrutable technologies. Even when there is a difference of opinion on what the exact value of a company actually is.”
Adjusting structure
And that can sometimes take a lot of effort. Viellevoije gives an example where StartGreen even had to change the entire corporate structure of a company to make it attractive for investment. “There was a structural flaw in how the company was founded. A large amount of the shares were held by parties that were no longer involved with the organization at all. Therefore, there was no incentive for the people who had to take the company further, as they owned few shares.”
With great difficulty, an attempt was then made to transfer a significant portion of the shares from the uninvolved parties to the founders. Ultimately successful, Viellevoije says: “We conducted one of the most complex negotiations ever. But because of that, we were able to set the foundation right again.”
Larger financing gap
Financing the energy transition does not happen without a struggle. For instance, lower subsidies and higher interest rates are causing declining project returns. Banks also seem less eager to finance large energy projects than before. “They used to finance about 90% of energy projects,” says Rijpstra. “Now it’s more like 60% or 70%. The gap that we, as alternative financiers, have to step into is therefore larger.”
In addition, De Vries points out that it has recently been difficult to fill sustainability funds with private capital. “There was a whole period before the war in Ukraine when parties were eager to invest in venture capital funds. Now they hesitate. They too are affected by interest rates and inflation. As a result, the institutional sector has become more risk-averse. This will not lead to many problems in the next two years because current funds are still well-filled. But after that, it will become problematic. We also saw that after the credit crisis in 2008. The crisis led to a cooling of risk financing that lasted until 2013.”
Plenty of knowledge close to home
That is why we must rely on alternative financiers, who continue to raise the importance of sustainable innovations with investors. “It is important to explain to investors which segments are relevant and which have a lot of value in the long term,” says De Vries. “We are capable of so much in the Netherlands, such as developing smart batteries and innovative agricultural applications. We must show that there is a lot of knowledge close to home.”
This interview appeared on August 30, 2023, on the Change Inc website: Creative deployment of euros for the energy transition: ‘Financiers must show that there is a lot of knowledge close to home’ | Change Inc.
