Long has the renewable energy industry waited for this moment: Riding the momentum of the past decade, dominant renewable technologies have reached cost-competitiveness with fossil fuels, and other emerging technologies that support the decarbonization of food, water, and waste are diversifying a quickly evolving and expanding market. And, of course, the Inflation Reduction Act (IRA) unlocked historic federal funding levels and established unprecedented legislative certainty for long-term industry support. Stronger and with more capital than ever, experts agree that the market is primed for rapid and explosive growth.
Critical to this growth will be project management software for renewable energy development that provides seamless documentation and data management while enabling banks, lenders, and developers alike to manage complexity, mitigate risk and maximize returns at scale.
But despite the clear need for innovation, traditional financial institutions have historically resisted adopting new technologies for project finance, opting instead to augment archaic legacy systems with spreadsheets, emails and PDFs. Bluntly put, this approach is short-sighted, inefficient, and expensive. These processes require too much time and manual labor from already slim teams while exposing counterparties to increased complexity and higher risk. In fact, a single loan can require 150 hours of unnecessary labor while also losing up to 70 bps.
Banks clinging to yesterday’s outdated tools will be woefully underprepared to scale efficiently for tomorrow’s challenges and profit from the market’s imminent growth, especially as assets become more distributed. With higher volumes of transactions comes higher mountains of paperwork that can critically delay a deal or wash away the margins with overhead.
The good news? Unlike the multifaceted issues of transmission infrastructure expansion or interconnection reform, this can be addressed primarily with technology: The industry can adopt a digital data management and risk monitoring strategy that leverages today’s automation and optimization technologies.
By bringing project finance tools into the 21st century, financiers can increase transparency and liquidity, tighten timelines and overhead, and reduce barriers to entry, fostering a flourishing, diverse, and scalable sustainable infrastructure market.
Need for better tools
Historically, traditional utility-scale energy infrastructure deals have relied on a Frankensteined combination of multiple on-prem systems bolstered by webs of spreadsheets and other static documents. This translates to time-consuming manual processes, workflow redundancy, and opaque, disorganized data management.
Already highly cumbersome for managing large deals, this approach becomes prohibitively costly when investing in smaller distributed projects that have more data, contracts, and counterparties: The overhead required to finance a single $1 billion deal pales compared to the overhead required to finance 1,000 $1 million deals. A lack of deal transparency further stifles market diversity, as significant, entrenched players have typically been the only ones with the specialized industry knowledge to confidently assess project risk, track covenants and navigate other deal complexities.
While industry experts agree that the IRA’s legislative certainty and dedicated funding will undoubtedly accelerate market growth, the reality is that its tax credit, adder eligibility, and ongoing reporting requirements add multiple layers of complexity and risk that necessitate more organized and robust data management than what traditional tools can offer.
Other areas of finance have certainly benefited by adopting automation, digitization, and other advancements in fintech. In a recent industry report, over 35% of American businesses reported that payment automation saves their finance teams more than 500 hours per year on average. These same gains in efficiency and cost savings can be achieved across renewable energy project finance; in fact, one green bank will save over 1,400 processing hours across 30 reduced steps by replacing its manual systems with end-to-end software.
Three steps for growth
We’ve identified three steps that the sustainable infrastructure industry can take today to increase operational efficiency, decrease overhead, and accelerate deal velocity by adopting today’s technologies:
1.Initiate digitization today to build the foundation for future workflow automation.
Most challenges associated with today’s data management stem from siloed systems and the need for manual auditing, copying, and pasting. With a simple upgrade to centralized and digitized data management, organizations can prevent human error and minimize data inconsistencies and redundancies.
This simple step can not only lower the cost of capital and increase velocity and liquidity but also afford significant efficiency gains that accelerate market growth. For example, thanks to the digital data collection and automation afforded by fintech advancements, it now can take only minutes, instead of weeks, for a business to apply for and get approved for a commercial loan. Why can’t we do the same for project finance?
2. Create standardization to minimize risk and overhead, enabling a greater diversity of opportunities.
With a suite of tax credits that improve project economics for a wide range of technologies, the IRA is opening doors to more diverse opportunities within the sustainable infrastructure market – in particular, smaller deals in the 1 MW to 5 MW range are becoming more bankable. However, these opportunities are severely hampered by the bespoke nature of smaller projects that, combined with today’s inefficient processes and outdated tools, create barriers to investment in even the most low-risk, high-impact deals.
While complete standardization of sustainable infrastructure may not be possible today, some modularization of deal components can be achieved. By identifying similar components across deals, banks can decrease complexity and create greater predictability, which in turn can improve workflow efficiency and reduce perceived risk, lowering barriers and creating more opportunities for new entrants to participate.
3. Digitize compliance to take advantage of tax credits and manage ongoing requirements.
Today, Deal teams, often already small and overworked, must contend not only with increased volumes of opportunities but also with the mountains of data and documentation needed to track and measure eligibility for the IRA’s tax credits and adders. To be able to take full advantage of IRA benefits while also meeting requirements with auditable, organized documentation, the industry should increase transparency through centralized tracking and preparation of ongoing obligations.
In particular, a cloud-based data room can serve as a single source of truth, providing an infallible system of record and facilitating 360-degree visibility across all counterparties. This means that organizations can not only ensure an organized approach for evaluating and tracking tax credit eligibility with a clear digital audit trail of relevant documents but also hedge against future changes in guidelines and requirements.
Evolve today to scale tomorrow
Today, more opportunities exist in the sustainable infrastructure market than ever before, and they are only predicted to grow in volume and diversity over the next decade. However, the industry’s slow adoption of more advanced, flexible, and accessible project finance tools will continue to limit deal velocity and increase barriers to entry, hindering the acceleration of market growth. To fully capitalize on C&I opportunities, the industry first needs to embrace existing technology to not only improve data access and management but also kickstart much-needed gains in operational efficiency, deal transparency, and standardization.
As we start to reap the benefits of the IRA, it will become increasingly urgent to evolve project finance management tools. Bolstered by advanced technologies, we can bring capital more efficiently and cost-effectively to a liquid, diverse and scalable sustainable infrastructure market.
Amanda Li, CEO of Banyan Infrastructure, has over a decade of experience across sustainable infrastructure investing, management consulting in tech and finance sectors, and engineering. She leveraged experience from Generate Capital and McKinsey & Co. to co-found Banyan Infrastructure with CEO Will Greene in order to reduce the barriers for sustainable infrastructure financing through the company’s purpose-built project finance software.
