Prepared for: 7th International Bioenergy...
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Prepared for: 7th International Bioenergy Conference & Exhibition Prince George, BC, Canada June 15-17, 2016 Prepared by: Jeff Passmore, CEO, Passmore Group Inc.
Transcript of Prepared for: 7th International Bioenergy...
Preparedfor:7thInternationalBioenergyConference&ExhibitionPrinceGeorge,BC,CanadaJune15-17,2016Preparedby:JeffPassmore,CEO,PassmoreGroupInc.
“FuelingtheBioeconomy”Whatshouldwebetryingtoaccomplish?
� Createthenextindustrialrevolution?
� EU28bioeconomyisgenerating18millionjobs,andeuro2.1trillioninannualinvestment(EU5=e1.27trillion–Germany:e343billion,France:e295billion,Italy:e244billion,Spain:e219billion,UK:e171billion)
� MaximizeCanada’sappealforbio-economyinvestment$(i.e.,10%oftheworld’sforests,stablemacroenvironment,Butlowdemand-sofocusonexports&electrification)
� BuildanattractiveenvironmentforCapital–wearecompetinginternationally
� Getbio-economysteelintheground
CurrentContext2015In2015,Globalinvestmentincleanenergyhitarecord$US325billion
Investmentbycountry:China-$110billion(up17%from2014)USA-$56billion(up7%)Japan–$44billion(up3%)UK-$23billion(up23%)India–$11billion(up23%)
In2015,cleanenergyinvestmentinCanadawas$US4billion(down46%from2014)
Investmentbytechnology:Solar-$161billionWind-$110billionLargeHydro-$42billionBiomass&Waste-$6billionSmallHydro-$4billionGeothermal-$2billion
Themajorityofthisinvestmentwasfortheproductionofelectricity
What’sthe2016+opportunity?
Canadacommittedtocutemissionsby30%below2005levelsby2030(Parisagreement)–i.e.,~208mmtonnesofCO2
Federalsupport:
“CleantechnologiesareakeycomponentoftheGovernmentofCanada’sapproachtopromotingsustainableeconomicgrowthandwillplayacrucialroleinCanada’stransformationtoalow-
carboneconomy.”–NRCanMinisterJimCarr,June2/’16
TheMinisterannouncedthatCanadawillseektodoubleits2014–2015fundingof$387millionforcleanenergyandcleantechnologyresearchanddevelopmentto$775millionby2020.
Also,thisweek,MinisterNavdeepBains(ISED)announcedCanada’sInnovationAgendamakinginnovationanationalpriority
TheOpportunityalsoincludes:
1]Gridde-carbonization:SaskatchewanandAlbertahavebothannouncedtargetstoincreaserenewablepower
production
2]Electrificationofthewidereconomy(transport,buildings):OntarioandQuebec–80%reductioninGHGemissionsacrosstheeconomyby2050
3]Exports:Opportunityforde-carbonizationofUSelectricitygridfargreaterthanthatofCanada
OpportuniEesforbiomassTraditionalusessuchasCHP,spaceheating,co-firing–don’tleaveallthenew
electrificationtowindandsolar
Innovativeusestoincludeacombinationof:Ø BioenergyØ BiofuelsØ BiochemicalsØ BioplasticsØ Bioproducts(paints,solvents,personalcareproducts,detergents)
Inotherwordsabiorefinerythat:
Ø convertscelluloseandhemi-celluloseintofermentablesugarstoproduce: -buildingblocksforbioproductsandmaterials -transportationfuel
Ø burnsligninforonsitepowergeneration
Theopportunityismassive“TheBioeconomywillhititsstrideinthe2025–2030periodwithan
estimatedworldmarketofbetweenUSD2.6and5.8trillion.Atthattime,bio-chemicalsalonewillreach22%-28%ofthepotentialglobalchemicalmarketofUSD2.2trillion.”
-OECDBioeconomy2030report
WeknowhowtoreduceGHGsinpowerandtransport.Canadawillnotreinventthewheelhere-weshould,andwill,importproventechnologies
Buttechnologiesinthebioeconomyspacearejustemergingandthereisanopportunitytobeattheleadingedgebyformingstrategicpartnerships
SowhatmightacostcompeEEvebio-refinerylooklike?(Notunliketheoilrefinerymodel)
What’sCanada’spotenEal?Forestcover(348millionhectares)
Ifyouwanttoconsideracommercialprojectinthebio-economyspace,beawarethat…
…Capital
willbethebeginningandtheendofanydiscussion
Also,whenproposingacommercialprojectinthebio-economyspace,remember…
“Nosingleperson,nosingleinvestor,orbanker,orconsultant,
knowswhereallthemoneyis.”
-JohnMay,ManagingDirector,SternBrothers&Co.
TechnologyevoluEon-FromideatomarketadopEon*
1]FundamentalResearch $
2]AppliedResearch $$ 3]PilotFacility $$$$
4]DemonstrationFacility $$$$$$$$$$$$$$
*5]CommercialDemonstration $$$$$$$$$$$$$$$$$$$$$$$$$$$$(first~fullscaleplant)*6]CommercialRollout $$$$$$$$$$$$$$$...$$$$$$$$$$$$$$(multipleplants;materialimpactonmarkets)
Assumingprojectsponsor(s)provideiniEalequity,wherewillotherfundscomefrom?
XTraditionallenders/Commercialbanks: -riskaverse;needestablishedtrackrecord,abalancesheet&collateral;howdotheborrower`sassetscomparetotheriskofnon-repayment?
XAngelInvestors: -start-upcapitalinthemillionsfromaffluentindividuals;motivationisoftensocialgoodormentoringentrepreneursratherthanROI
-risktolerancepotentiallyhigh,butfundsinsufficienttosupportcommercialplant XInvestmentGradeProjectFinance:
-ifzerorisk,then~6%costofcapital;needproventechnology/trackrecord;minimum,B+creditrating-“zerorisk”meansnotechnologyrisk,nofeedstockrisk,minimalmarketrisk(windfarms–totallyde-risked,long-termoff-take=5.5%money)
XPrivateEquity/MerchantBanks:-pensionfunds,privateindividuals;fallbetweenVCandIPO;~16%interestrateunlessverylowrisk;“2ndofakind”stillnotbelowdoubledigit-couldofferupto$100mm+,butlookingforequityinanoperationalcompany-needatrackrecord
XSovereignWealthFunds:-investinthehundredsofmillions,butlowrisktolerance(nationalpensionfunds);mostlyequity-technologyneedstohavematerialimpactandhighreturns
x?VentureCapital: -earlyseedcapitalmaxoutat~$10-$20million;laterrounds(ifyoucangetthem)maxoutat$100mm(sufficientforcommercialization?) -binarybet=winallorloseall;acceptriskbutneedhighratesofreturn(earlystage=10-100x) -exitstrategy/timehorizon(3–8years)
x?Goingpublic/IPO:-isthemarketready,andwilltheIPOraisesufficientfundstosupportbothongoingcompanyoperationsandprojectfinancing?-areyou‘CapitalLite’-canyouoffermid-doubledigitreturns?(IPOshouldnotbeviewedasasubstituteforprojectfinance)-isyourtechnologydevelopmentadvancedenoughtowithstandthismajordistraction?
x?InvestmentBanks:-arefacilitators-donothavetheirownsourceoffunds,socostofcapitalandrisktolerancedependsonwhotheybringtothetable
-returnsneedtobecompetitivewiththemarket;risksneedtobeoff-loaded–likelyneedGovernmentloanguarantee?LargeCorporateStrategics:
-morepatientthanVCs,andhavelargecapitalbudgets,butarecommittedtocorebusinessandIRRof~20% -Cleantech/biorefineryinvestmentreturnsnotcompetitivewithcorebusinessinvestments;lowtechnologyrisktoleranceunlesstheyowntheIP -needchangeoflawprotection/policystability–havefearofstrandedassets
• SugarDaddies: -financeinitialprojectfrom“Corporatecash”–theirownbalancesheets;highrisktoleranceandacceptbelowmarketreturnsonthisfirstfacility -mayberecipeforoneortwoplants,butisitgoingtobuildanindustry?Oneplantdoesnotmakenextproject“investmentgrade”
� Government: -grants,loans,repayablecontributions,loanguaranteescanbestackedwithprivatefunds,butalsoneedPolicystability -preferableifprojectcanworkwithoutGovernmentoncriticalpath
� ProjectBondmarket:-requirescreditworthyprojectsponsorsand(intheenergyspace)offtakecontract;nointerestintechnologyrisk(Governmentloanguaranteecouldhelp?)
Soyouwanttobuildaplant–whatareyoufacing?Highcapitalcost+techinnovaEon=difficultprojectfinancing
-averagecreditqualityoffirst-of-kind‘commercial’facilitiesistypicallybelowinvestmentgrade
-first-ofkindprojectsarethereforenotinthewheelhouseofbanks,VCs,ortraditionalprojectfinancing(toomuchcapitaldeployedforuncertainreturns)
-potentialstrategicinvestors,whetherdownstream(oil/chemical),midstream(enzymes)orupstream(feedstock)havecompeting
internalcapitaldemands.Dotheyneed“opticaladvantage”overcompetitors? -aspubliccompanies,strategicsarelookingforattractivereturnsthatcandemonstrate:
-a5-6yearsimplepayback-acostadvantageovercurrentpractices-acompetitiveedgeovercapitalopportunitiesinotherpotentialareasofinvestment
-strategicsalsoconcernedaboutmarketuncertainty,andpotential“changeoflaw”thatwouldstrandtheirinvestments
-speakstopossible“syndicatedapproach”toprojectfinancing,andtheneedforpublicprivatepartnerships
Soyouwanttobuildaplant…Assemblingprojectcapitalinvolvesbothequityanddebt:
Equity:� Isaboutthefuture–whatareyoupromisingtodeliver?� Comesinfirstandcanrangefrom20%-50%ofprojectcost� Neededtodemonstrateprojectsponsor/proponentskininthegame� RemainderfromcommittedStrategicinvestors/CorporatebalancesheetsDebt:� Isaboutthepast–doyouhaveatrackrecord?� Comesinafterequity� Seniordebt-Commercialbanks–expecttimelypaymentofprincipaland
interest(thinkmortgage)� Subordinated,non-recoursedebt-Governmentsgrants,loans,loan
guarantees(Typicallylastin-followstheprivatesectorinvestment)
Soyouwanttobuildaplant…Whataretheresponsibilitiesoftheborrower?
Tostructuredebtsuchthatthereisnorecoursetoany“parent”company(lenderscanonlylooktotheprojectforsecurity),youmustconvincealender/investorthatriskscanallbemanaged:
technologyrisk(willitwork)constructionandoperatingrisk(ontime/onbudget/onperformance-EPCwrap)feedstockrisk(guaranteedvolumesatfixedprice/time)offtakerisk(purchaseagreement(s)withacustomer(s),hedgingstrategy)scale-uprisk(independentengineeringassessment)managementteamrisk(degreeofbusinessacumen,managementcontinuity)
Lenderwillassessrisks,thenpricethedebt(e.g.,whatinterestratedoesthelenderneedtochargeifthefacilityonlyoperates65%ofthetime?)Thegreatertheperceivedinvestmentrisk,thehigherthecostofdebtDebtfinancingisthebiggestchallengefacedbynewtechnologiesseekingtobuildfirst-of-kind,orevensecond-0f-kind,commercialfacilities
Soyouwanttobuildaplant…Knowyourcustomer:
Renewablefuelcustomerswillbelookingforafuelthatis:� highinoctane� lowinGHGemissions� cost-competitivewithotheralternatives� meetsobligationsofgovernmentstandards(LCFSormandates)
Renewablechemicalcustomerswillbelookingfor:� inexpensive,clean,competitiveperformanceproducts
(Note:Thismaygetyourproductontheirpotentiallist,butisnoguaranteeofuptake)
Ensureyourbrandisfirmlysetinyourcustomers�andprospectivecustomers�minds–includingfederal&provincialgovernments…
…Becauseyouneedcustomerpreferenceforbio-productstodrivedemandquicklyenoughtogeneratecashforyourbusinessfastenough(CocaCola)
Soyouwanttobuildaplant…
Doesyourproposedfacilityhave:
ü Scale-upriskmanagedü Constructionriskmanaged
ü Contractsinplaceforfeedstocksupply
ü Aready(offtake)marketforproduct(s)producedü Aprovenmanagementteamthatcandeliverresults
ü Strategicpartnerships
ü Publicsupport
ü Governmentpolicyandprogramalignmentü Alineofsightonhowtheprojectwillbefinanced
Soyouwanttobuildaplant…Whereyouneedtobeforfinancialclose…
(andalsotobeeligibleformanygovernmentfundingprograms)
ü Projectdebtandequityinplaceincludingconstructionandinterestscostsü Workingcapitalinplace(topayoperatingcosts)
ü Reservefundinplace(debtservice,maintenance,softcosts)
ü Feedstockagreementsinplace–priceandvolume
ü Ademonstrablemarket/offtakeinplace
ü ContractswithexperiencedEPCcontractor(includingpriceguarantee)inplace
ü Completionguaranteebytheprojectsponsor
ü Alineofsightonprojectcashflows
ü More…More…More
(investorstypicallyassumetheworstcasefinancialoutcomeandactaccordingly)
Possible(Bio)RefinerymodelStrategiesforimprovingrevenue,reducingcapex,and
allocatingprojectrisk:
Co-develop-buildstrategicpartnershipstospreadrisk(feedstocksupplier,off-taker)
Co-locatewithexistinginfrastructure(“brownfield”)-1stand2ndgenerationtechnologies-bio-basedwithhydrocarbonbased-buildsmaller,lesscapitalintensive‘bolton’facilities
Co-producefuelsandchemicals-extractthehighestvalueproductsfirst(togeneratecashflow)-ifpossible,startwithhighmarginchemicals,andevolvetofuels
SowhatistheroleofGovernment?(assumingpublic/privategoalalignment)
Thepublicsectorcanplayamaterialroleinbio-economycommercializationsuccess
What’sneededarepolicytoolsthatstimulatetheintegrationofnewtechnologiesintothemainstreameconomy–aneconomythat:
-hasestablishedinterestswithsunkcostsinfrastructure;-ishighly,andlegitimately,riskaverse;-needsgamechanginginvestmentrewardstoalterdirection.
SowhatistheroleofGovernment?Variouspolicyandprogramoptionsareopentogovernments
� Mandates–suchasRenewableFuelStandardsinCanadaandtheUS(volumeandtechnologyspecific)
� LowCarbonFuelStandards–suchasthatadoptedinCA,BC(technologyneutral)
� CarbonTax–BC($30/tonne),Alberta($15/tonne)� Productionand/orInvestmentTaxCredits(governmentsfiscallyconstrainedsokeepitmodestanddemonstratereturns–jobs,taxrevenues;CosttoGovernmentonlyuponprojectsuccess)� LoanGuarantees(ifproposedprojectmeetsGovernmentpolicyobjective,
governmentsshouldassumeadegreeofmarketand/ortechnologyrisk)� GrantFunding(focusistypicallypre-commercial)� Growerincentives
SowhatistheroleofGovernment?InApril/’16,200Clean-techcompanieswrotePMTrudeauaskingfor:
Ø $1-billionloanguaranteeprogramforearlystageprojectsØ a$500millionventurecapitalprogramØ another$1.25-billiontoexpandandrestructuretheexistingSDTCprograms
Ø taxcreditssimilartowhatmining,andoilandgasindustriesenjoy
OnJune1,35entitiesinthebioenergyspacewroteECCCMinisterMcKennaaskingthat:
Ø Canadaestablishanationalbioenergystrategywithinabroaderbioeconomyframework.
Otherthoughtsinclude:
Ø AnationalGreenBankand/orGreenCanadaSavingsBondstoprovidelowcostdebt
Mustframeyour‘ask’tocomplimentGovernmentpriorities
Government’smustrecognizethat:Certaintyisthemotherofinvestment
Assumingbio-economycommercializationisapolicygoal(jobs,economicdiversification,GHGemissionsreduction),governmentsneed
toemployeconomicinstrumentsthat:
- offerlongtermpolicystability/certainty
- areflexible,notexclusive(recognizethatsuccessfulcommercializationoftendemandsco-productionofmultipleproducts–i.e.,fuelsandchemicals)
- properlyshareandallocatecommercializationrisks
FinalthoughtreemergingtechnologycommercializaEon
Aswemovetocommercialization,theprivatesectorshouldassumeanincreasingshareofprojectriskssuchas:
ü technologyü managementü projectexecution/engineering/constructionü productproduction/performanceü environmentalsustainabilityü projectfinance
X“strandedassetrisk”
Tolaunchthebio-economy,thepublicsectorshouldensure:ü Futurechangeoflawprotection(grandfathering)–i.e.,assumeStrandedAssetRisk
Closingthought:TakeadvantageofuniqueandgenerousCanadianGovts’projectsupport
(SobuildinCanada;exporttoglobalmarkets)Ø ScientificResearchandExperimentalDevelopment(SR&ED)TaxCredits
-largeCorporationcanclaimataxcreditoneligibleresearchexpenses
Ø SustainableDevelopmentTechnologyCanada(SDTC) -TechFund:Developmentanddemonstrationgrantfunding(typically~$2–12m)
Ø AgricultureCanada-GrowingForwardTwo
-upto$10mminterestfreeloan(otherfinancing/termsheetsmustbeinplace)
Ø MinistryofStateforScience&Tech -SWOntarioprojects-upto$20millioninterestfree10yearloan(includesR&D,engineering,labourandcapitalcosts) -WesternEconomicDevelopment(BritishColumbia,Alberta,Saskatchewan,Manitoba)-$2–4millioninterestfreeloan -ACOA–upto~$1million
Ø ExportDevelopmentCanada
-loanforinboundforeigndirectinvestment(partnerswithotherfinancialinstitutions)–if50%ofproductionisexported
Ø OntarioMinistryofEconomicDevelopment,EmploymentandInfrastructure(&Innovation) -JobsandProsperity“NewEconomyStream”forprojects>$10mm-Grantsandloansupto40%ofeligibleprojectcosts -SWandEasternONDevelopmentFund:Grantupto15%ofeligibleexpstoamaxof$1.5m+interest-freeloansupto$3.5m
-ClimateChangeActionPlanincludessupportforresearchandcommercializationofemissionreductionandlowcarbontechnologies.Industrialbiotechnologyhasbeenidentifiedasapriorityarea.
Ø Alberta -ClimateChangeandEmissionsManagementCorporation–Grantsupto$10million -AlbertaTreasuryBranch–“patient”marketbasedloansupt0~$50mm;caninvest(butnotlead)outsidetheProvince -AgricultureFinancialServicesCorp.-max$5million,20yearloansat3%-5%interest
