Barriers to the Timely Deployment of Climate Infrastructure

Many climate solutions scale more slowly and need more capital than other kinds of technologies. For example, after promising climate technologies have built pilot projects, they need capital to build demonstration projects. But early climate infrastructure (ECI) projects in the demonstration phase don’t always fit into venture, growth, or project finance investment criteria. As a result, they may go unfunded in a “second valley of death.”

To understand what exactly is needed for climate technologies to move beyond their hatchling stages into large-scale deployment, Prime Coalition, Schmidt Futures, and Blue Haven Initiative came together to launch a research project at Prime.

Through interviews with over 140 senior members of the climate ecosystem and extensive deskside research, we discovered that climate technologies face 4 gaps, described below, on the road to large scale deployment. Read the full report/summary at the buttons above, and learn more about our work in this space here.

Gaps 1 and 2: Late stage demonstration and first-of-a-kind (FOAK) projects fall into a missing middle

In the early stages, a climate tech company builds lab-scale prototypes, pilots, and incremental scales of demonstration projects. Once the commercial-scale demonstration project gives visibility into expected costs and performance, the company can then build a FOAK project and additional projects (FOAK 2-to-n) as appropriate to demonstrate profitability. 

But the capital available doesn’t always match the needs of solutions where they are. Venture/growth capital does invest in lab-scale, pilot projects, and early demonstration projects. Project financiers do make infrastructure investments after they are comfortable that a technology/solution has little risk of failure and predictable cash flows. Neither are the right fit for solutions scaling from demonstration to commercialization.

Gap 3: Small standalone projects are often neglected by project financiers

Project finance requires extensive diligence and structuring costs. A small project often becomes uneconomical once these transaction costs are taken into account. As a result, in the current status quo, project financiers favor supporting multiple small similar projects by the same company at once, because it brings the overall transaction costs down. 

But a new small business often doesn’t have the capital or resources to deploy several projects simultaneously. It will typically start by deploying projects one at a time, progressively scaling up operations and financial resources until it can deploy several projects in parallel. Project financiers are more likely to pass on these early projects.

Gap 4: Funding early development costs for all deployments is tough — even more so for FOAK projects

Before a project is built, it must go through project development, including getting real estate rights, securing permits, designing the project, and budgeting and contracting to build and operate the project. If any of these steps fail, the project won't get built. Through this “go/no-go” period, a project might reach the end of its development budget and fail to show viability. Investors prefer to fund construction of the project rather than these development activities — a gap that is even more acute for nascent technologies.