Biomass project finance experts introduce aggregation strategy

By Luke Geiver | October 13, 2011

The biomass industry is a new frontier for the team at the Gemstone Group, a renewable energy investment banking firm, and according to Gary Kleiman, founder, his team is looking for opportunities to partner and help people with their projects. Kleiman, formerly with PNC Bank as a corporate finance and project financier, formed his investment group in 1993, has worked with wind and solar and now has a plan to utilize a concept he calls project aggregation (he developed the idea in the solar industry) in the biomass industry. The idea is to take smaller projects that are easier to get done, aggregate or combine those roughly 20 to 30 projects into a package, and then present a large single package containing those small projects to investors.

In the case of biomass those would be, for instance, hospital projects that convert to biomass CHP or other similar smaller scale biomass-based projects at the municipality, local or small business level where such entities aren’t necessarily looking to make a profit, but rather save money on energy. “This,” he said, “could give investment communities the credit and investment characteristics they are looking for.” The biomass user would essentially lease the biomass boilers and relating technology paying monthly dues and in return the Gemstone Group would pay for the equipment, install it and secure the feedstock agreements. As Kleiman explained, a feedstock provider would be more interested to sign a supply agreement if they had access to 10 projects as opposed to one. The Gemstone Group would get the tax equity benefits, money from the lease payments after paying off the investors who provide the capital to start the projects, and the investors would get instant portfolio diversification, because as Kleiman explained, if a investor has one large $100 million project and it fails, they are in a tough spot, but if only five out of 30 projects fail, they are still financially stable.

During the 2011 Northeast Biomass Conference & Trade Show in Pittsburgh, Steve Flaherty, director for RBC Capital Markets LLC, joined Kleiman and others to discuss project financing options for bioenergy projects. Flaherty helped to put Kleiman’s idea of project aggregation into perspective. The time and effort it takes an investment banker to complete a deal for a project at $5 million or $200 million, especially one affiliated with a large bank (RBC, or Royal Bank of Canada, is larger than U.S. Bank), takes roughly the same amount of time. So, as Flaherty explained, an investment banker would rather complete five $200 million projects then 200 $5 million projects. The idea behind project aggregation, as Kleiman said, is to put a larger package, roughly $30 million and up, in front of the investors.

Given what Flaherty said about his company’s “bread basket for investment,” or investments in the range of $100 million and under, Kleiman’s idea and the perspective Flaherty described, the idea may already have some merit. “Where I see the most viability [in the biomass industry] is what I call on-campus projects,” Flaherty said, “where you have a customer that wants a biomass project for savings.” As a specialist in state agency, municipalities and other similar areas of debt financing, Flaherty said that at the moment, because of current markets that make large deals difficult to accomplish and time intensive, a real opportunity exists for such on-campus projects.

Although the general sentiment during the panel discussion titled “The New Normal: Why Project Finance Alternatives May Be Your Only Option,” was that project finance for biomass projects are difficult to complete through both equity or debt financing, Adam Stern, executive vice president for the Gemstone Group declared that the current financial difficulties faced by project developers are not necessarily a bad thing. If, he said, a project developer can find a way to finance a project and get it going, that biomass project will have a great advantage over other projects and may in some cases be without competition.