Navigating the Valley of Death
Chris Groobey, partner at Wilson Sonsini Goodrich & Rosati, has always been intrigued by big things being built and projects coming to completion. For the past 15 years, he has represented development teams, navigated loan guarantees and pre-commercial funding difficulties, engineered joint ventures, and, connected lenders and investors with the people building the biobased industry’s “big things.”
How did you get involved in clean energy finance?
A few years after I graduated law school, I represented the U.S. Export-Import Bank in the financing of some power plants in Pakistan. That brought me into contact with another law firm that had a very strong energy-focused project finance practice. I knew that I liked the industry and that it was a complicated and challenging area to work in. So, I moved to that other law firm back in 1995 and that’s when I moved to energy projects full-time.
What was the project that really drove home the potential this industry holds?
The project that affected me most personally was working on the financing of an ethanol plant in Iowa Falls, Iowa, in 2002 and 2003. It was one of the first projects to be backed by private equity and project finance banks. I spent a lot of time in Iowa learning about the project and industry and meeting all of the people involved. The project truly mattered to the community and I was a believer in the product and industry. When the plant started operating, 5,000 people came to the celebration. I was really
proud to have had a role in a project that had such a positive impact on the surrounding community. I’m very fortunate to still be friends with many of the people involved in that project, and it set me on the path of being very heavily involved in biofuels for more than 10 years now.
You’ve ushered several projects through the precommercial stage known as the valley of death. What does it take to navigate through this funding stage successfully?
I think it’s a combination of moxie and humility. Successful entrepreneurs are a special breed. They dream big dreams, they push other people, they seek new answers. But the financial community can be very demanding as well, and especially for the first project, it has to be done right and conservatively. Especially these days, there are more people needing money than people who have it, so it’s a real fight to obtain financing for projects of any sort. The successful ones are those who both push to do something new and different while still understanding the ground rules and who follow them as much as possible.
What makes project finance and the idea of pulling together financial resources for a particular project, maximizing the chances of repayment and protecting the original investors from liability, different than other forms of financing methods?
The question for project finance is whether the developer can make the other parties involved—whether they are lenders or equity investors in the project—comfortable that you have done such a good job structuring the project that, if something were to go wrong and all you gave the lenders was the project itself, they would still get their money back.
Can failed projects be successfully run by equity and debt partners to recoup investment?
Yes, that has definitely happened, although sometimes not in the originally-anticipated time frame. I think a good example is first-generation ethanol plants. Essentially, all of these plants that were backed by private equity and project finance lenders went bankrupt or went into a restructuring process that people refer to as “handing over the keys.” Some lenders and investors in these projects got their money back after waiting out the corn price fluctuations or selling the projects to other ethanol producers. The people who took this approach were usually the lenders and investors who were more committed to biofuels and the agricultural sector generally. Conversely, other types of investors would just shut down the plants or sell the plants and the associated debt to vulture investors or hedge funds. While this was not ideal for the ethanol industry, it did provide opportunities for other, stronger investors to consolidate their position in the industry and also enabled new companies with new business plans. Not to pick on first-generation ethanol at all, there was a phase in the power industry in the early 2000s where a lot of people got very excited about merchant (non-contracted) power plants, and the vast majority of those projects didn’t work out either.
In a presentation to the National Governors Association in late 2011, you talked about the opportunity for states to invest in clean tech and that federal investment will trend downward. Is this still the case?
This is really a continuum. There has been a real transition of financing. The Department of Defense is driving a lot of the overall growth of renewable energy in the United States, but they are doing it by promising revenues to projects in lieu of investing in or lending to projects, which is what (the U.S.) DOE and USDA have done. The question now has become, with the demise of DOE loan guarantee programs, and with USDA’s energy programs in flux on Capitol Hill, what other financing mechanisms are available to support projects and how can a developer take advantage of them? We’re still in an economic environment where you have a very competitive job market, not just for people, but also for states. States will frequently do for energy companies what they do for auto companies or other big job creation engines that everybody wants to land for their state. The financial support comes in the form of favorable loans, sometimes equity investments or forgiveness of obligations that other people may have to pay. States were already leading thinkers in how to drive renewable energy with regulatory mandates, and now they are thinking about how to enable the companies to meet those mandates, preferably inside their own borders. It’s economic development 101, and it has been very successful for the companies that have taken advantage of it.
You watched clean energy development decrease after the economic crisis of 2008. Has the activity level in the clean energy sector completely recovered from the downturn?
No, it has not recovered. This is partly due to the expiration of the tax grant programs, partly to the demise of the European banks that were active in project finance and partly to the overall impact of the new natural gas discoveries and resulting expectations of low gas prices for years to come. But in general, the companies that remain are stronger from their experience, and the sector is full of quality and promise and back on the upswing.
What is the best argument for the continued investment by federal and state governments in clean energy?
Short-term, it’s jobs, jobs, jobs. As someone once said, “it’s the economy, stupid.” Long-term, it’s energy security, including price certainty. Renewables are at, or near grid parity, and the more we can insulate our energy prices from the fluctuations of the commodities markets, the better it will be for all of us.