The SAF Podcast
Welcome to The SAF Podcast, the only podcast on the internet that exclusively covers sustainable aviation fuel (SAF). So if you want to find out the real issues and challenges are for commercialising and scaling SAF production, look no further.
Every week we will be hearing from senior industry leaders who are actively shaping the future of SAF and aviation.
Hosted by Oscar Henderson and brought to you by the team at SAF Investor. Connect with us at www.safinvestor.com
The SAF Podcast
The SAF Podcast: Finding Project Finance
On this week's episode of The SAF Podcast, we are going to share a full discussion that occurred at SAF Investor London looking into "Finding Project Finance". Al Whyte, moderated a panel including; Wray Thorn, Focus Impact Partners, Andrew Eckhardt, Cranmore Partners, James Falzon, European Bank for Reconstruction and Development, Martin Forman, Sumitomo Mitsui Banking Corporation and Kevin Bogenreif, Summit Next Gen, all share their thoughts on the challenges of financing Sustainable Aviation Fuel (SAF) projects.
Our experts delve into the critical aspects of price discovery, feedstock costs, and the necessity for robust commercial structures. With technology as a cornerstone in SAF production and regulatory frameworks steering the market, we highlight how these factors shape investor interest and confidence in green initiatives.
Finally, we explore the landscape of financing emerging technologies and the strategies to navigate this terrain. From small commercial plants acting as stepping stones to full-scale ventures, we examine how credit officers gain confidence in new tech and the critical role of government support programs. Our panel reflects on the exciting opportunities and potential roadblocks, emphasizing that well-structured projects with predictable revenue streams are the keys to unlocking funding and driving sustainable projects to fruition.
Hope for all those not able to come to London you enjoy this fantastic discussion.
Moderator: Alasdair Whyte, SAF Investor
Producer: Oscar Henderson, SAF Investor
Music Yesterday, we talked a lot about the gap between getting your first funding and then building a project, so we're delighted to have a panel looking at project finance and I'm basically at your introduce yourself. So, ray.
Speaker 2:Yes, thank you all, sir. My name is Ray Thorn. I'm a partner and co-founder of Focus Impact Partners. We're a private investment firm that is endeavoring to bring a double bottom line approach to private investing and investing in companies that are good companies, in part because they're creating great outcomes for the world, and then, by hopefully helping those companies grow and be increased financial success, we can help them do more of the good that they're doing in the world and hopefully, by helping them be more impactful, we can help them achieve greater financial success and so bring a do well while doing good.
Speaker 1:And where do you get your money?
Speaker 2:from Well. So we have. We today are in a pre-fund stage, if you will. So we've been bringing capital together for individual transactions through SPVs that we've formed. Prior to forming Focus Impact, I was led the private investment efforts for a larger firm called Two Sigma, which is, and we were quite actively involved in the aviation sector. We built several aviation leasing companies during that period. We also are quite active in the energy space, so we've had a thesis around renewable fuels for some time as an area where we could, where we might be able to find opportunities to meet our double bottom line investment mandate. And then we just recently announced a transaction with a company with a SAF producer called XCF Global in the US.
Speaker 1:Great André.
Speaker 3:Yeah, hi, my name is André Eckhardt. I'm an executive director with Cronmo Partners. Cronmo Partners is a financial advisory based in Abu Dhabi. We help companies generally in the infrastructure space, including SAF projects, to raise capital in all forms, so basically a corporate level and DevEx capital and then all the way to project finance, equity and debt, and also help people on the development side of things, et cetera, et cetera. Personally, I got 20 years or so in project finance in banks and advisories, doing stuff from Canada to Argentina and from the US to Taiwan. I personally, on the sidelines, I run an aquaculture startup that is a CapEx heavy innovation. So I also feel with those people who have the issue that was discussed yesterday and that we also going to touch upon today. It's a general theme that CapEx heavy innovation is more difficult to finance and then take to project finance level. That we're going to discuss today across the board.
Speaker 1:It's just a fact, I think you're the first person I met who's hobby is an aquaculture.
Speaker 3:Yeah well, you know my wife isn't happy with it, but what can you do?
Speaker 1:It's better than cycling. I can imagine your garage, james.
Speaker 4:Hi, good morning everybody. My name is James Falzon. I'm an associate director at the European Bank for Reconstruction and Development, ebrd. For those that don't know, ebrd is a multilateral development bank. We operate in 36 countries, so Central and Eastern Europe, the Southern Mediterranean region, central Asia and part of the Middle East, and we invest across the board. I am responsible for helping on the strategic side, identifying new opportunities in the infrastructure space, within which falls aviation sector. So we have a bit of an emerging markets focus. But we do have, you know, 15 or 16 countries that are within the European Union. So we are a bit sort of within, you know, the EU, where there's a strong sort of regulatory push and emerging market context, which is sort of just on the outside of that.
Speaker 1:And do you have a deal size that you tend to? You know minimum deal size or are you flexible?
Speaker 4:We have a range of different instruments. We do equity and desk. So you know, on project finance side we can typically enter with 100, 200 million. It depends on the project size, depends on the maturity of the sector, depends on the country. But we can also do smaller ticket sizes depending on the context of the country and the actual transaction.
Speaker 5:Martin, hi everyone, my name is Martin Forman from Sumitomo Mitsui Banking Corporation. I should probably clarify Sumitomo Mitsui Banking Corporation has a heritage with Sumitomo Corporation and Mitsui and Co but we are an independent entity because also people asked me yesterday about this. So I'm sitting in a new energy and natural resources team in London covering Europe, middle East and Africa. The new energy is pretty much covered CCS, hydrogen, as long as it meets the end user regulatory environment, biofuels, where SAF is as well one of them, and H2 derivatives.
Speaker 5:From our side, saf, we see there's one of the sector where we could deploy debt at the moment and of course, as you almost everyone know, the pure hydrogen or these large export projects are targeting ammonia Simply are not happening, except one, to my best knowledge, in Saudi Arabia, and we see SAF as something that could take off very quickly, just as an SMBC and the wider Sumitomo Mitsui financial group. We also cover aviation, so we have an arm that is fairly large, lesser to aviation industry, it's aviation capital. We have also Sumitomo Mitsui Finance and Leasing that can provide a different type of financial product for SAF producers and along the value chain, and also we're working with the likes of Sumitomo Corporation to be a producer and within a wider group, we can provide all sorts of products and potentially also our physical self.
Speaker 1:Thank you, Marta, I think a lot of people in the room are looking at. The Japanese banks are doing a lot in this space. Do you think that's fair?
Speaker 5:I think that we have a very, very fossil heavy portfolio and even a Sumitomo Mitsui Banking Corporation has its own net zero target and also, sector by sector, I believe, we announced utilities target. To get to net zero finance emission, we had to announce oil and gas and so on and so forth, and so we are looking to transfer this heavy, fossil based portfolio into a low carbon energy. So, yes, we're looking at deploying the debt into our all sources sector, as I have covered, and one of them being south.
Speaker 6:Kevin, well, good morning. My name is Kevin Boganry. I am a managing director for Summit AG Investors. We are a large scale agribusiness operator and investor. We invest up and down the ag and renewable energy value chain. So that's our day job. We manage about $5 billion in assets under management across our portfolio.
Speaker 6:In addition to that, we're a bit unique as we're both an investor but we're also a project developer and sponsor. The way I like to think of it is in a lot of ways we create our own deal flow. We look at different interesting investments across really our focal points from ag and renewable energy, but we really see ourselves today as more of a project developer and project sponsor. So, in the capacity of that and how we're connected to SAF, we're actually leading a company called Summit Next Gen that's under development right now. That is actually the largest alcohol to jet project that has been announced. So I'm the investment lead on that, both from an investor perspective but also going through the challenges that, frankly, a lot of the producers and stakeholders in this room we've been talking about the last day and a half. So really excited to be on this panel and talk about it from the lens of an investor, but also from the perspective of what it's like to also be a developer.
Speaker 1:So do you have arguments with yourself?
Speaker 6:You know, we say that we're really good at negotiating with ourselves inside of our four walls. Yes, short answer. But you know, I think frankly it gives a different lens. And I'll say it this way A lot of producers and we fall into the same category have this idea of oh, look at this, this is going to be just this fantastic business plan, all these different things and what a fantastic opportunity SAF could be. But then, when we step back and we really put the lens of what probably my counterparts on this panel do, we say how does this make sense from an investment perspective? What's the number one rule in? How does this make sense? Is it going to make money? Yeah, it's going to make money and I think that's the fundamental challenge that we can talk a lot about SAF, we can talk a lot about energy transition, but the fundamental issue is does this make money? And where does that start? It starts with price discovery. I bet every single one of the folks on this panel grapples with that same challenge.
Speaker 1:I think that's a great question. Do you grapple with price discovery?
Speaker 2:Indeed, if you think about project finance and infrastructure type investing, generally looking for a relatively high degree of predictability and investing relatively large dollar amounts in long-term assets where the return is expected to happen over a long period of time, and so in those types of, with that type of investing, it's generally looking for things that can be repeatable and scalable and predictable, and so one of the key inputs in that financial equation is, of course, what is your revenue predictability look like? And a key component of revenue predictability, of course, is price. But it's not just price, it's also the duration that that price might continue for and it's the terms at which that price could be achieved. So, in SAF in particular, are you selling? Need SAF? Are you selling? Are you blending in storing? So there's a lot of not only just the headline price but a lot of discovery that goes into trying to develop revenue predictability which can achieve project finance.
Speaker 1:James, you were nodding there.
Speaker 4:No, absolutely, and I mean by its nature. It's a 10, 15 year financial model that you have to put together and the credit officer will ask how confident are you in your set of 6, 7, 8, are you going to get that price? What is the level of uncertainty and I think a big thing that we're also focusing a lot of effort on is the cost side of the equation, the feedstock, because obviously it's that differential that is quite critical and there's quite a lot of uncertainty with the price that a facility has to pay to obtain its feedstock. There's increasing competition and there's a lot of uncertainty about okay, there's going to be all these plans, come online, but if there's insufficient use cooking oil on the market, what's going to happen to the price? It's going to explode, similarly for the alcohol to jet that also there's feedstock concerns. So I would say the feedstock is really important part of that calculation that has to be done and looking forward 10, 15 years is an uncertainty and on top of uncertainty.
Speaker 1:Martin, this is normal, though, if you're investing in a fossil refinery, you don't know what's going to. How do you manage this?
Speaker 5:So I think in a subspace, first of all, refinery is quite predictable, what a feedstock is and what the product is going to, where it's going to go. I think that what we grapple, at least in SMBC, to really make sense out of all production pathways, because each of them is slightly different, especially in a feedstock side, and I don't think that the banks or lenders in general are accustomed to deal with let's say, biomass market or use cooking oil or ethanol and so on, and I think that that's where we struggle most. But put that aside, I think that it needs to be noted from our side. We can finance lots of different structures as long as they are predictable the commercial concept from a feedstock all the way to revenue. But also, it needs to be noted, more risk. The projects would like to take less debt they are going to get. So if people are looking at lots of debt, then you cannot have a risky project.
Speaker 3:Maybe just to add, because at the end of the day, every project finance whether it's equity, that does look at the same things. You look at what's my input? How much does it cost? Can I get access to it? Does the process work to produce my product? And then the product needs to be sold at a certain price. And the more stability and predictability you have across the board, the easier it is to get debt financing and then you have upside on one part or the other.
Speaker 3:Then obviously it gets an interesting case for equity and I think the good news for if you really look at SAF projects standalone investment decisions for something where the cash flow from that specific project needs to repay the debt on that project and the investors into that specific project then I think the good news for SAF and generally investment into this wider space is that it's something that all the banks and all the investors are extremely keen on. That's a fact. Banks, as Martin mentioned, need to go into this space, investors are keen on it, et cetera. I think the couple of points in the and the SAF space has also helped a lot, obviously by the mandates on the off-take side. Martin mentioned the uncertainties on the input factors, and Ray mentioned the ones on the sale side.
Speaker 3:I would add that maybe on the SAF side, obviously they're very different approaches in terms of technology and that is something that, by definition, banks, for example and I've been a bank for 20 years so I can say that aren't particularly smart, so they will not follow an engineer on all the nuances, on how this works and the upside All the interested in does this work for 20 years the way it should?
Speaker 3:And whether you then go to production methods that are based essentially on hydrogen production, you have obviously data points that show that electrolyzers maybe aren't as easy to handle as people might think. A lot of people coming from that perspective are essentially renewable energy developers who suddenly go like oh well, I'm just adding a little bit something to my wind and my PV project, and maybe that's a little more difficult than you would think. So you have to be very careful on how you approach that, and that obviously goes to all the other ways of production that are licensed for SAF. You have to be not all of them are state of the art, so you have to, or state of the art as it is, so you really have to make a good case, to present that to equity and debt, and then I think again it's a space that people are really interested in putting equity and debt into.
Speaker 6:Kevin do you want to add. Well, I think the common theme is everybody's trying to size up the business model. Are you a price taker, are you a price setter, and what's the variables to predictable cash flow? And it's kind of simple. Whether you're an equity investor or you're a debt investor, you start at the top of the income statement. What's the price If we think about SAF? Look around the room, raise your hand if you are a buyer of SAF today.
Speaker 3:Don't be shy.
Speaker 6:Okay, All right. So the price of SAF in Europe is about 3,000 euros per ton. It's about 8.5 to $9 in the US. Are you a buyer on a 10-year term at that price? Raise your hand.
Speaker 6:Here's the price discovery issue, and what we just talked about is the uncorrelated nature between JET and the feedstock price, whether that be HVO, whether that be UCO, and how we're going to find that feedstock of ethanol and the example. All of these are uncorrelated pricing mechanisms. Layered on top of that, we have technological risk. So when we think about the concept of this panel, which is how to find project finance, whether that be debt or equity, we think about this challenge that is the structural short of SAF 2030 and beyond. If you look at feedstocks that exist today in production capacity massive problem 2030 and beyond to be able to hit this. But we're talking about an end user customer that deals with single digit profit margins.
Speaker 6:We just we looked around the room the people that are buying SAF. There's very few in this room and every one of them is trying to figure out how they buy SAF at the lowest possible price, but they actually enable the development of that. There's your fundamental challenge. We're all solving to the same issue. So the irony for us and how we think about SAF. I think you really have to look at the different technological pathways. You have to really look at the technical risk and then you have to say are you a price taker or a price setter, and what is your view? If your view is you can be a low cost producer or you can be the lowest cost per ton of CO2 abated, okay, that's where this group is going to get excited. But it starts with who is going to buy on a long term basis that supports a 10 or 15 year model, and until that real demand signal is there, I think you're going to continue to see this challenge.
Speaker 1:But we've got so many offtake agreements.
Speaker 6:And how many of those are at FID?
Speaker 1:So you don't. If someone comes to an offtake agreement without price on it, you just discard it.
Speaker 6:So I would say it really goes back to the individual merits of a project developer. And I think, to be direct, there's a lot of challenges with the stakeholders in this market because there's a lot of people that read IRA in the United States. There's a lot of people that picked up the mandate in the EU and said, okay, there's going to be a bunch of money to be made in the SAF, let me go get offtakes but not actually do the engineering work. And what I heard every one of these folks say is really clear. They want to understand what's the technical risk, what's the project development risk. All of those things, whether you're debt or an equity investor, matter.
Speaker 6:These projects cost a tremendous amount of money to do at scale. They have a tremendous amount of engineering. The challenge with the offtake discussion that's been done so far is there's a lot of companies that maybe are not as advanced on the engineering that have announced offtakes that are a long ways away. But at the end of the day, what has to happen in those offtakes? There has to be pricing certainty that gives that cash flow. I think that that market is evolving to that point. I think that there's a real understanding that all stakeholders involved really have to get to that certainty. But I think to date that's been missing, matz.
Speaker 5:So I'm hoping that hopefully SMBCs will be able to land to some of the SAF projects, at least in Europe this year or early next. So we are quite excited. But what Kevin said is true, we're still grappling internally. How are we going to deal with it? I've seen a few offtake agreements binding offtake agreements signed, but again it's about a commercial concept. One thing is to have a price certainty, but then you run into the issues whether the plant is going to be producing as expected, and some of the base cases we have seen or presented were quite optimistic. If I haven't put it in this way, I come from an industry in a way. I spent 12 years in a BP and some of the base cases are saying 96% plant availability. It's great, but I don't think it's going to happen for the first-of-a-kind plant. So that limits the debt and our pitiful risk.
Speaker 3:Sorry. I would like to add one point to, I think, the very good point that Kevin made. If you compare this, it's a nascent industry. If you compare it, for example, to renewables, 20 years ago you had a similar issue, right, because there wasn't a clear mandate. People would produce it, it was expensive, but then you could find small-scale stuff that you could feed into, but that wouldn't allow you to bring down cost of production because you couldn't build an industry in that. And some European countries come in and basically said, look, we're just going to do a feed-in tariff and we're just going to create the demand by that. And yet other people and other countries follow with different means. But essentially what you did, you took away off-take risk by pooling it. Right, you just had a mandate that you had.
Speaker 3:And SAF is sort of a ha. And we see that also in other industries H2, et cetera. It's a similar situation. The problem there is to date and for example in H2, the European Union is doing that with their auctions, trying to create a certain level of demand that people can bid into in order to create an industry, in order to bring down the cost In SAF. So far it's sort of very bilateral discussions and everybody's sort of. That's a bit of I don't know. It's not evidence-based, but the bit of the gut feeling is that airlines and other supplies, whoever comes with a project that sounds halfway decent, they say, okay, well, we sign up to that, so we're in the game, but that's the minimum. And to your question is that would you disregard the off-take contracts? Well, I guess having I want to call it a partnership with an off-taker is better than not having one, but it's not the same thing as having a contract that says I'm going to buy this at price X for 15 years.
Speaker 1:But if you've got an EU mandate that says that by 2030, X amount has to come 2035, it almost does matter who the off-taker is.
Speaker 3:That's right. But at the end of the day that's a coordination game, right. All the players have the mandate, but they somehow have to individually try to get it. Ideally what you do if you're airline one, you wait for airline two to buy all the expensive stuff to create the industry, and then, as airline one, you go in and buy it cheaper. That's essentially how you would do it in a game theory game.
Speaker 2:I was just going to add one thought, which is that there's a real opportunity for both financial as well as commercial innovation in this area. So we think about traditional project finance as having an off-take agreement with a credit-worthy party, that's, for a long duration the duration of the useful life of the assets and a supply agreement, similarly a long-term supply agreement. And you asked about crude I was there refining. One of the keys to success is either physical or financial hedging in crude refining. Physical hedge, of course, is preferable either long-term physical supply or off-take.
Speaker 2:But there is opportunity for significant financial innovation, financial market innovation as well, that can create financial certainty, at least for some period of time, around your intake and your off-take and therefore create that predictability that allows for project finance. There's innovation around the technology performance side. I think you might hear later from New Energy Risk, which is an insurance company that provides performance guarantees around technology and the technology performance do its rated capacity that supports debt financing. So there is, I think, an opportunity for this market to develop financial and commercial innovation. Booking claim is very interesting. It's not necessarily the commercial operation of the producer, but rather is there a commercial operation of a financial party developed that does take that risk and match buyers and sellers in a market that can provide certainty back to a producer because of its credit-worthy balance sheet. So I think there's, given the need for SAF whether it's mandated or it's industry and customer-driven there's a lot of opportunity for financial and commercial innovation that could support the type of project financing we're talking about.
Speaker 5:So, from my side at least, the Refuel EU I think that you would have to ask lenders to take, effectively, market and price risk. The penalties, as far as I understand, are based on our weighted average. No one really knows what each SAF is going to be costing, what the structure of the market is going to be and the volumes is another thing. We roughly know what the volume is, but what actually the volumes will go into the market and how it is going to interplay. It's going to be difficult. So I don't think that Refuel EU on its own is good enough for lenders on a long-term basis.
Speaker 6:So I'll hit the aspect of mandate, because that was your question. I think fundamentally the mandates work. From a US investor producer perspective, the Refuel EU mandate as well as what's going on in Southeast Asia, here in the UK, I think, is a really important demand signal that's going to help drive to pricing certainty. So if we didn't have those, I don't think that we'd all be in this room talking about SAF other than probably more of an ambitious or call it, egalitarian view. So that perspective works.
Speaker 6:I think the challenge that everybody from a stakeholder view has is what is the regs going to be? And most all of these regs are in process right now. So back to the price risk what is the feedstock that works? What's the specific certification targets? Where are all those things that are going to come into play? I think that gets ironed out relatively quickly. But from a project execution standpoint, these are large-scale projects. They take years to engineer and develop. So one of the questions that popped up was 27.50 Euro per ton SAF price. Do we think that the price is going up or going down? That's the fundamental question. I can tell you unequivocally we think the price is going up, which is why I think from the equity standpoint. Arguably, with mandates, this is an easier solve than for conventional debt finance, because we can take that risk. The issue is where does that demand really kick in? Does it wait until 2030? Or does it actually start to accelerate faster? Because I think the price of SAF goes up as you put more constraints on the feedstock.
Speaker 1:Can we do a yes-no? Do you see the price of SAF going up or down? Not a yes-no, an up-down.
Speaker 2:I think that it's very likely to go I agree with Kevin in the near to intermediate term, but I think over the long term it will likely asymptotically decline. Up-down, Up-down, yeah.
Speaker 3:I agree with all three points Kevin made. It goes up. The mandates help. I'm not saying they don't help, I'm just saying that they don't coordinate as much. And thirdly, obviously yes, it's going up because the demand goes up. The feedstock prices will not go anywhere else, so that's by definition. They will go up and that's also the point that it's easier for equity to handle that than for debt. That's why Martin earlier said it's not going to be super leveraged, probably. So just confirm that was up.
Speaker 3:That was up. Yes, that was a long way of saying up.
Speaker 4:Yeah, I tend to agree. Prices will go up in the near term. The mandate, at least in the EU, is it's pretty aggressive. It's a lot of volume of SAF that needs to come online. There's a big lead time for a project to come online and start delivering. It's 2024, right, so it's not too difficult to do some of the maths and see there's going to be an issue in one or two years with people scrambling to start getting these projects in the cycle. And there was an interesting question about whether financiers want to be the root cause of the not really I was going to end on that one.
Speaker 4:But if a project hasn't really started to be developed now, let's say, you come tomorrow with a new concept or a pre-feasibility it won't be financed for another two years, two, three years. So these projects need to start kicking in now and the process needs to start going. And because it's probably not happening at the pace that we really need to see it, I think there's going to be an increase in price, at least in the next few years.
Speaker 1:It's interesting though, isn't it? Because that's the frustration. You know they talk to many of the producers in the room. They just find the process of getting project finance so slow and so frustrating. Anyway, sorry, going back, Martin, up or down, I haven't asked you.
Speaker 5:Which SAF are you talking about? We can do each one, yeah, but for me, saf, hopefully, is going to go at some point down. Also, it really depends when it's going to be produced, at least in Europe, by yourself. I'm not sure where it's going to go. There might be this solid waste plus fish etraves that might maybe go down. I'm not sure about alcohol to jet in the long term. So I'm not sure which part of which SAF is going to go up and which it's going to go down. I think that's where we, as lenders, struggle, as well, okay, we've got a nice question, james.
Speaker 1:We've already been told that bankers don't look at tech, don't understand the technology. How do you view investments in different technologies? Do you agnostic or are you more likely to back?
Speaker 4:Yeah, I think whenever we're speaking with a credit officer, we have to give them comfort that we know this thing works, it's been deployed, if we can say that there's been a pilot and then someone scaled it up and they've delivered and we've got hard data.
Speaker 4:It's always easier Now, as a multilateral, we can draw upon some donor funds that we can blend in project finance structures so that and there's different sort of guarantee instruments that we can also bring to play, particularly outside, for example, the EU, and that helps traditionally with some of this technology risk and piloting. You know certain technologies may be established in the US or Europe but you know in Central Asia or North Africa they're new right, and so there's a justification for us to bring some donor money in and try and alleviate some of that uncertainty. But ultimately, you know we have to make the case that this is going to work, and the more evidence we have of that, the better. Understandably, that's frustrating because you know we do need to scale quickly, and so I think the more progress that we can draw upon and present as commercial successes, the easier it is going to be to make those cases.
Speaker 1:So, following on from James's point, martin, the best way to de-risk a project is to have a small commercial plant. Would you fund small commercial plants to support deployment of new technologies?
Speaker 5:I think if you ask me, probably maybe a year and a half ago, probably, we would say no, but at the moment we are technology agnostic, so we don't know which technology we're going to support. Maybe in the long term, and certainly yes, we would like an industrial scale pilot we would be looking at and we're looking at as we speak now. So, by all means, yes, so we want to learn about these plants on a smaller scale before we potentially start writing our bigger tickets.
Speaker 1:Andrew, as an arranger, you obviously want the biggest deal size possible for your commission.
Speaker 3:No, we also take double the percentage on a smallity. That's not a problem. No, but I think this is I mentioned that in the beginning I was actually in Berlin last week on a workshop organised by the Ministry of Economics there trying to sort of find ways how you finance CAPEX, heavy innovation, to get to that, and I think that is a big problem in this space, that it's not all the technologies. You can say I can do it at level one and therefore I can do it at level ten. So lender investors that will ask you to do something that is between the lab and the industrial, but that is super. Number one it's super difficult to finance. Number two it's relatively super expensive because it doesn't like development costs in terms of land rights and that that that doesn't really matter that much if it's size hundred or size five. So that remains a big issue. I think and to be honest I don't have a silver bullet for that, I don't know the perfect solution but it's really something where it's up to developers for me and developers both in the sense of project developer and technology developers to find the sweet spot between breaking their projects into small pieces and steps as possible and at the same time, do stuff that is is meaningful.
Speaker 3:And as a final point there to the. You know project finance slows things down. I've been doing this for 20 years. I've never seen a really good project that was not financed. So at the end of the day, things get financed, but you have to understand what equity and debt are looking for and also what their roles are as a bank. It's not the role of the bank to to, to to. There's no upside, it's only downside. So what you look at and what you need to to to give them comfort with is the downside is covered. That's as simple as it is, and you cannot talk to them about the. The, the ability to scale is, and that is. The bank is not really interested in that.
Speaker 2:To be frank, yeah, I was just going to add to that that the lenders, the return that a lender can potentially earn, is not really compensating for technology risk. It is, and so they, you know, and and also there's the, there's the personal aspect of you. You don't want to be the credit officer that approved something that doesn't work Right. That's not good for, that's not a good career enhancing you know. So not only is it return, it's a bank, it's not.
Speaker 2:But I but so I think that's you know. Having you know as much certainty and predictability around the performance of the project is, you know is is really key to you know its financial success. Equity. You know risk, in particular you know venture capital risk can take, you know, technology related risk and other markets can potentially take technology related risk, but certainly not, you know not financing markets. Now in the, from a US perspective, there is a panoply of, you know, government support, you know for lenders and and that is whether it's the USDA program or state level CPAS programs or programs under the IRA. They, you know they all, they're all three letter acronyms but they're, you know, and they're very, quite you know, hard to, it can be quite hard to navigate. There's, you know there's programs through the FAA, for example, that but that you know that is a way to achieve. You know finance. You know debt financing, if you will, well in advance of when a project might you know ultimately, if it were left to market forces, might ultimately achieve it.
Speaker 1:Okay, kevin, yeah, or actually, do we have any one who'd like to make an old school question or come up with a typing?
Speaker 7:Mm-hmm.
Speaker 1:Yes, I'm coming to you now. Racing Matt, you can go first because you're closest.
Speaker 8:Thank you. So, matt Fincher, uk policy manager at Transport and Environment. So we've we've added up. There's there's 40 odd e-carousine projects that have been announced in Europe. None of them have reached FID yet. Specifically, not abstract specifically is there a problem with e-carousine projects in Europe, which means you guys just start financing them?
Speaker 6:I'll take a stab at that, because we've looked at a host of different other investments in e-fuels. We've looked at other energy transition investments broadly within our mandate and we're equity investors. I think the way you solve the the equity and the debt financing, but really the equity financing issue the return has to be worth it, right? So if you're going to take and you're going to take on first of a kind technology risk, which I would consider e-carousine, e-fuels, you're talking about something that, on a comparative basis to fossil fuel, is multiples of cost of production before you've even put margin in. So if you step back and you say these guys from a debt perspective, their risk is binary, it's a there's no, there's no recovery value to that asset once it's developed, that's 100% equity risk.
Speaker 6:So if you're an equity investor and you say I've got the ability to go to a de-risk industry with well understood technology, wraps from EPC providers, guarantees and less correlation risk and I can make an unlevered return on my money and get a payback in three to five years, versus you go to something that does not exist today and there's no guarantee of return. I mean capital is going to flow efficiently to where it actually thinks it's going to get returned. So I think that goes back to who's backing up and taking that price risk off the table for those projects. To say, okay, cost of production on an e-fuels business, I'll use dollars. Let's say you have a really low cost and abundant renewable energy source, you're still somewhere between 10 to $15 per gallon of just manufacturing cost and capital cost. Back to that same question of where we started. Who in this room is willing to go and buy SAF on a forward 10 year contract that gives adequate enough protection for the equity investment to say that's where I want to put my money.
Speaker 9:Yeah, good morning Jensen. Yeah, good morning Andy McNeil with Arcadia e-fuels. Just to take you briefly back to your conversation at the start there about confidence in revenue, something we spoke about a little bit about yesterday I just wanted to get your perspectives on how distinctive or not the UK government's commitments around the revenue certainty mechanism for SAF production in the UK might be versus other jurisdictions. Thank you.
Speaker 5:Thank you very much for the question. So from our side, as SMBC, as I said, I have quite a wide remit. So at the moment we're looking at UK projects, be it a carbon capture and storage or industrial carbon capture, including CCUS-enabled hydrogen, I should say so I think it very much helps what UK government does. It took a time but at the moment we hopefully are going to see some project taking FID later this year.
Speaker 5:If government keeps going the way it's going and I think it comes down to again like probably what Kevin a little bit said then we as at least in my business units we're going to have a portfolio problem because we're going to start seeing projects coming to us from CCS pure hydrogen, h2 derivatives, biofuels and so on and we will need to divide our portfolio amongst all these projects. So and then it comes down to where the risk is lowest and the stack up, the risk matrix for us. Where are we going to put most of the money? But certainly what the UK government does really helps what I think the price certainty is not all what it needs to be done. I think that the soft plants, the construction risk, plant performance risk is still not addressed by that in my view, but it's the right direction to go in the UK.
Speaker 3:If I may add, I'm normally very much towards light government, but I think that government procurement for SAF and other new sort of I want to say produce can be a good solution, I think, whether it's H2, it's SAF and others, and essentially you put like a pool government agency between the suppliers and the demand that is there through mandates and carbon pricing and whatnot, and in my view that's, for example, the European Union auction is going towards with the H2. And in my view, if the governments would do that right, they would actually do make money on that over the long term. So it's something that you need pre-funding for, but you can take care of it.
Speaker 10:Right, Francesco Beraldi, Arcadia Foods. I appreciate the bank perspective, Got it. Everyone does his job right. But you can't compare an investment on SAF renewable energy with a mandate with an LNG plant and I'm coming from all in gas, okay. So, of course, there you have the price security, the technology security. So applying the same model, it just doesn't work, Because then if we don't share the risk among the parties so the developer, the EPC contractor, the licensor and eventually the lenders it's not going to happen. Simple as that. And then back to the question from the anonymous. You want to be really the showstopper for this, Because that's really where it is. I hear you oh, who wants to buy this at this price? Okay, but it cannot be traditional financing with this kind of business, Not now. It's like I want to echo what Gene said yesterday, when they say they were going to the moon and it's an exaggeration they were not ready to go to the moon.
Speaker 3:Yeah, but then that rocket wasn't financed on a project finance basis by a bank.
Speaker 10:Well, we have a government that gave a good mandate. The mandate is there. You said two. No, we all agree it's quite aggressive. We need templates like ours and so on. But, guys, really, if we don't move this, stop this bankability. That is a beautiful world, but it's quite. It comes with a price to it. It's not going to happen. It's not going to happen in time to be ready for it. That's just the sharing, and I appreciate your perspective which one runs his business and so on. It's really where we're stuck now.
Speaker 1:Okay, Got one more. Martin, did you want to say something?
Speaker 5:Yeah, can I reflect maybe a little bit on that. So I think that from SMBC there are certain risks we simply don't take. So if the project sponsors or developers come and ask us to take it, the answer will simply be no. So I think there are risks we can potentially take, but not all of them. We are being asked today and I think that we are not trying to apply, at least from my side, same financing structure as we did for LNG or upstream or Lengas and so on. So we are grappling with it internally, what is possible. But again, certain risks we simply don't take as lenders because you don't give us an upside. So if you don't give an upside, don't ask for that risk to be handled by lenders.
Speaker 2:In my view, so we're just going to add one thought, which is this is an area that could be ripe for public-private partnership around financing and we've seen examples of that from a US perspective and other markets where the government either provides guarantee or actual indebtedness and enhances the potential for the project to be financed.
Speaker 7:So, if I may, jonathan Wood from Nestay. So, matt, the bottom line is each of these different production technologies has a much higher level of incentives as you go further out. Isaf is looking at multiple, as Kevin said, the price level, cost level is multiple times out of fossil jet fuel or, for that matter, heifer, or probably alcohol to check. So unless we have more certainty around the price, the bankability is not there.
Speaker 1:Okay, we're running over, so final question this is a yes-no a bank's going to be the reason that we don't meet net zero targets, yes, no, can I say banks? I mean the people on this stage.
Speaker 6:You mean people like to give financiers a hard time.
Speaker 1:What a novel concept that is, I think, after 08. You deserved it.
Speaker 6:Wow, I don't think banks are going to be the problem for why SAF doesn't scale up.
Speaker 5:Martin, I agree with Kevin, absolutely not.
Speaker 4:James Goncault yes, I would say it's going to be part of the issue but ultimately it's a policy question. Sorry, you wanted a yes-no but I think one of the challenges we face. We can blend public money into these projects. But there's a bit of an issue maybe a bit of an elephant in the room that putting loads and loads of money, of public money, into the aviation sector in a climate emergency is not necessarily perceived as it's not welcomed. When we go to our board with anything in aviation it's very, very difficult and I think the scale of financing that's needed. There's a huge communication that we all need to do to policymakers to be able to get the policymakers to step up with the financial support as well, because we can bring those guarantees in. We can structure projects with guarantees. We can blend grant money but the money. There's a bit of a reluctance to plough a lot of public money into the sector.
Speaker 1:It was a great answer, but was it yes or? No.
Speaker 4:Can I say yes and no?
Speaker 3:So to this question, it's a clear no. And to the question about how to finance TRL not yet TRL9 projects. That was here at some stage for a long time. If you're in the European Union, look at the EIC Accelerator. That's probably the best option.
Speaker 2:I know as well. I think when you're mandating something that's non-commercial, in a sense that you're mandating the usage of higher input costs, ultimately someone has to pay for it. It's either the customer or the vendor or the government. And so I think great, good projects that have clear revenue predictability will clearly get funded.
Speaker 1:And on that upbeat note, Thank you very much. Worthy to the community you.