Climate startups need more corporate help to compete for infrastructure funding

CORPORATES could give climate-tech startups a boost by committing to offtake agreements, giving the young companies a better chance of getting traditional infrastructure funding.

The agreements, in which one party commits to paying for the future output or product of a project, could enable startups to compete for various sources of capital typically denied to them, said panellists on Tuesday (Apr 16).

Meghan Sharp, managing director at investment firm Decarbonization Partners, a BlackRock and Temasek joint venture, said: “We need to see the corporates step up and commit to volumes and pricing sooner than perhaps they have historically done, so that these early companies can start to look a little more like what we would historically think of as infrastructure.”

Owing to the capital-intensive nature of the business, climate-tech startups have needed to tap a wide range of funding sources just to get their projects off the ground. But many struggle with securing the funding, which includes debt, public loans and the more-expensive equity investments.

Panellists speaking at the GenZero Climate Summit, organised as part of Temasek’s sustainability event Ecosperity Week, highlighted the importance of buy-in from corporates.

Henrik Wareborn said his sustainable-fuels tech company Velocys signed an offtake agreement with Southwest Airlines for a 15-year term. The agreement was signed in November 2021 – years before Velocys’ biorefinery will begin commercial delivery of fuel.

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Wareborn said securing the investment-grade offtake was crucial. “Only then will you have capital formation. Only then, will you have recognition of the value that is inherent in the stuff that you provide,” he said.

Sharp gave the example of a government loan secured by Monolith, a clean hydrogen and materials company that Decarbonization Partners funded.

Monolith secured a billion-dollar loan from the US Department of Energy, which enabled the startup to expand its production facilities in Nebraska. The company has agreements with Michelin and Goodyear, two of the world’s largest tyre companies.

“This is an example of where corporates can also play a role – not around financing the actual project, but making the project more safe and investable through those committed offtake agreements,” said Sharp.

Apart from traditional sources of funding, International Energy Agency’s chief economist Tim Gould highlighted the potential for carbon credits to catalyse climate-tech projects.

The industry still needs to address key issues, such as the lack of common principles market participants can use to fairly evaluate pricing and project quality, said a report released last Friday (Apr 12) by GenZero, a Temasek-backed investment platform focused on decarbonisation.

“But in our view, high-quality carbon credits can play an important role in improving the bankability of some of these projects,” said Gould.