#INTERVIEW with John May, Managing Director, STERN BROTHERS & CO, USA

Rethink Events - John May - Waste to Energy1) In your opinion, what is the biggest challenge facing Waste to Energy companies in taking their solutions to market?

The biggest challenge facing waste to energy companies is obtaining financing for the development of projects. The biggest issue to overcome in securing financing is dealing with the technology risk of various waste conversion technologies. In the decade that our firm has been financing projects in the industry, there has been a lack of consensus around which technologies are already commercialized. Since technology risk is a major element of the credit quality of non-recourse debt financing, this is a significant problem. In turn, without project financing, it is difficult for developers to continue to raise equity at the corporate level.

2) How is the European Waste to Energy technology landscape perceived by outside investors?

The European technology landscape is seen by the US capital markets as being the preferred source of many waste to energy technologies. Europe has a longer history in the development of these technologies, and more of them are proven at commercial scale. Investors understand that deploying European technologies will eliminate technology performance risk or at least significantly mitigate it.

3) What impact are low commodity prices having on investment in waste-to-value?

Low commodity prices are having a negative impact on investments in waste to value projects of various types. The low prices for oil, gas, and electricity make many traditional waste to energy projects difficult to finance because the margins for those projects are so thin. We are definitely seeing a trend towards the development of technologies to convert waste into higher value specialty products.

4) What challenges are we seeing in scaling up biofuels projects? What impact will this have on the investment landscape?

The two challenges with scaling up biofuels projects are technology risk and offtake risk. The list of second generation biofuels or biochemicals projects which have been financed at commercial scale is small. The commercialization of the technologies has taken too long in the eyes of most equity investors who are looking for returns and liquidity events. Very few bio projects are able to find classic offtake agreements with credit worthy counterparties such as oil, petrochemical, or chemical companies. The US EPA has not enforced the Renewable Fuel Standard. The result of this has been the inability of that law to be used by investors as a synthetic offtake agreement under which obligated parties, such as oil companies, are fined if they do not purchase advanced biofuels at yearly volumetric targets. The result of these challenges is that they have had a chilling effect on both equity and debt investor interest in advanced bio projects. The only relief our firm has found has come from either federal loan guarantees in the US, which address these risks and partially mitigate them, and from technology risk insurance being offered by third party carriers.

5) What is the single most important thing that a government can do to stimulate the adoption of advanced conversion technologies?

The most important thing that any government can do to stimulate adoption of advanced conversion technologies is to provide loan guarantees for projects such as flashapply.com using technologies which are not yet commercialized, and therefore not yet financeable in the traditional private capital markets.

6) How can technology companies reduce the risk for investors in financing their projects?

Technology companies can reduce the risk for investors in financing their projects by asking either their strategic or financially motivated investors to provide balance sheet guarantees which would cover performance risk of the technology to a reasonable period beyond commissioning of the project. The frustrating aspect of this sector is that there are many large strategic investors who are offering their own technologies in either bio or waste to energy, and they will not provide investment grade warranties for the technology performance, nor contribute equity at the project level. This shifts the risk of financing completely to the private credit markets when ironically it is the strategic investors who have the greatest interest in seeing these technologies commercialized successfully.

7) Which types of Waste to Energy technologies are currently generating the most interest amongst the investment community?

The type of waste to energy technologies currently generating the most interest with investors are proven technologies such as anaerobic digestion, waste gasification, and other technologies which can be deployed on a distributed generation basis at reasonable capital and operating costs. These are the factors which make those technologies financeable. There is less interest in large scale projects, where the capex required by the technology is too high to make the project cash flow, or early stage or as yet unproven at commercial scale technologies. There is a misperception that non-energy projects such as chemicals, other industrial products, or even consumer products, manufactured originally from waste feedstock, and therefore would claim to be sustainable, are something companies and supply chains are willing to pay a green premium for. They are not. Waste to value projects must compete with incumbent technology on price to the end user or consumer.

8) Is there a perfect set of circumstances that foster innovation, if so where does that exist?

Innovation involves more than the science experiment of creating a technology which takes waste and converts it into an energy or non-energy product. Innovation also requires that such a process be offered within a business model which makes economic sense. Thus, so many technology companies, along with the development project which seeks to deploy the technology, have not done the innovation work necessary to understand what their business model is and specifically what their go to market strategy is. A better set of circumstances than we currently see would be where scientists and technologies collaborate with business development and industry incumbents to develop a technology
that will scale quickly, and produce a product at the right price point which can capture significant market share in the near term.

9) How do you identify startup companies? Are you looking into industries that you already have a stake in, or are you looking at other industries too?

We identify start-up companies by attending conferences, reading industry feeds on-line and by relying on consulting firms who have both a micro view of technology deployment and a macro view of the waste sector in any particular geography.

It is not relevant to us as financiers that the concept for the deployment of the technology, or the industry, be one where waste to energy has already been attempted. The most relevant issue is whether the technology is solving a particular problem and is economically viable in a financeable way.

10) If you had to name a company as “one to watch” over the next 12 months, who would it be?

If I had to name a company to watch over the next 12 months it would be Enerkem out of Canada which is moving towards commercialization of a waste to biofuels and beyond technology using traditional municipal solid waste of feedstock. This is of interest because MSW is the greatest source of feedstock globally and therefore the potential application of their technology is tremendous.

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