During COP28, Convergence announced Powertrust as among the grantees awarded an Asia Climate Solutions Design Grant for designing a blended finance facility to address climate energy transition across South & South-east Asia.
Convergence’s Design Funding and Market Acceleration (DFMA) Manager, Krishna Malhotra, spoke with Powertrust’s Head of Product, Joseph Armah, about what they aim to accomplish in designing their blended finance vehicle and their experience as a Convergence grantee.
Conversation has been edited and condensed. Find the recording of the full interview here.
Tell us about Powertrust. What is the blended finance vehicle you are designing and the development challenge you are looking to address?
Powertrust is a managed marketplace and what we do is enable multinationals who have stated net zero emission targets to procure energy attribute certificates from renewable energy developers across the global South.
The way we do it initially is through bilateral agreements. You might wonder why we have this objective. If you think about it, these multinationals have stated renewable energy targets in terms of emissions and they want to be able to deploy capital to do that. At the same time, we also have developers, normally distributed across the global South, who would also like to have some capital, which would be a nice slice of the capital structure. But they are unable to do that and we have very small capacity. We're talking solar lanterns with three or four megawatt capacity.
One way to do this is to aggregate all these projects and present them in a way they can be financed. That is what Powertrust does at its core: bring multinational organizations together in order to acquire these projects with respect to their specific energy attributes and be able to get these transactions done. We act in this space of creating a marketplace. This cannot easily be achieved with the current model. There are a couple of reasons, the first is that developers want capital upfront and because they want capital upfront, it's not possible to wait until projects are developed in order for them to get the capital. The multinationals, on the other hand, want to pay after the renewable energy certificates (RECs) or energy attributes are delivered. So you have a conundrum where you have one entity wanting the capital deployed after the RECs are received and the other entity wanting to have capital in order to develop the projects. What we have put together is a blended finance prepayment model that allows this action to happen. Developers get their capital upfront to develop their projects. The multinationals are able to get renewable energy credits that can show there is additionality that has already been achieved. In addition, the developers will have a revenue stream that is denominated in USD, they will have cash flow that is certain and they will have the capital upfront. This allows them to de-risk their projects and bring other investors on board. When we think about what this blended finance prepayment model can do, we can walk through some of the attributes. The multinationals can pay upfront for multiple years of RECs. The mechanism allows upfront payment to these developers so they can have capital upfront. That also creates a new tranche in the capital structure, so they can talk about their debt and equity and this new tranche that is coming in.
So, the question is, why blended finance? The idea of blended finance, as most of you are reading about and thinking through it, really allows us to reduce the cost of capital, because you're thinking about capital coming from different tranches.
Also, some of these projects will be riskier than usual. You want to be able to attack these riskier projects. But you want to do it in such a way that your weighted cost of capital is done, and this project can easily be financed, and you can think about first loss positions and guarantee positions.
This also enables corporate participation. One of the biggest developments that we’ve seen is that all these corporations are now really focused on their emission targets, and deploying capital. And this has happened in the US, in Europe and other places where corporates have been very active. Allowing these corporates to take part in this type of project in the global South is very important.
The last thing is the development finance institutions (DFIs). They see the ability to mobilize capital. They are more incentivized to invest in these projects. In terms of the stakeholder, what are the stakeholder impacts? So the developer gets more capital upfront. The investor? They have a return on their investment, and the corporate will get a return on investment as well via renewable energy credits. So the idea for us was, how do you come up with a way to mobilize funds to solve two key questions: provide capital upfront, aggregate this project to scale and be able to finance them?
Can you talk about how design funding fits in with the blended finance vehicle that Powertrust is designing? What are some of the goals you’re looking to achieve as part of the feasibility study?
When you really think about it, it is a lot of work to put together a facility or a financial vehicle. Often those who are coming from the development side, or maybe from the position of having worked on these projects before, they actually have deep domain expertise in that area. In our case, we had deep domain expertise in putting together bilateral contracts with multinationals on one side with us on the other side, and also had contracts with developers as well.
What becomes clear pretty quickly is when you're trying to put together a financial vehicle, there is a different set of work that needs to be done to prove that the concept is viable, sustainable, can be financed and is bankable—and that investors will get their return. The whole process of getting that done requires detailed explanation and analysis, and testing, and putting together the structures.
How do you expect this grant will support you in designing the proposed vehicle?
One of the key things and the benefits of having a facility like this and support from Convergence is that we can pay for the work that we have to do in terms of designing the vehicle before asking investors to put money into it. Some of the things that we're doing with respect to having this ability is pay for our legal fees, to design the structure, to travel, to go to conferences—really, everything that has to do with putting the structure in place, testing it and making sure that it's bankable and can be leveraged to achieve the goals that have to be achieved.
Based on your experience, what should prospective applicants focus on when applying to the Asia Climate Solutions Design Grant?
I think there are quite a few things to look at. The first is to understand that the application process is quite rigorous and detailed. The concept note must be succinct and carry across the message you want to convey such that you know the team can understand what you are trying to put together.
Second, you have to devote resources to getting the application in hand and if you are called upon to answer questions at any step of the process, even during due diligence, make sure you have the resources to do that. The third part is your team's breadth and depth. I think one of the things that made us successful was that we had a very deep bench. We had breadth, depth, and experience on the ground. This really helped us articulate what we were trying to achieve.
I also think that the questions that you are asked, there’s a reason why they’re asked, and you cannot blow them off. You have to take time to answer the questions in a very thorough manner.
The last part I'll add to this is the element of passion. If you're truly passionate about doing something new, you're always going to hear that this is not gonna happen, or this is not possible, and that comes through in your application. So when there's doubt or confusion, you know the person who is evaluating will understand. I think one of the things that we were able to bring to the table is to have folks who actually believe in what we're trying to do, and have the passion to achieve their goals, despite naysayers.
We had deep breadth, deep domain expertise, and we actually got the grant in the end. So all these factors are critical when applying for the grant.
What advice would you give prospective applicants applying to the Asia Climate Solutions Design Grant?
The first is understanding what exactly you are trying to address. So for us, we wanted to get into mitigation, we wanted to know that this was a new vehicle that had not been done before and we wanted to understand the structure. We wanted to understand whether, if we wait, if we were to put one and two together and ask people to invest in, would they actually invest? I think one of the challenges that most people face is they can put together a facility or a vehicle, but they think it is just an extension of the work they are doing without having thought about the fact that even though you might have deep domain expertise in one area, this is a whole new thing and you have to really understand the process.
We've worked really hard on our project. At the time, we thought we were at the proof-of-concept stage. This is funny because I just wanted to add, as one of the things that I learned from this process, and as we were going through the back and forth of the [Design Funding] questioning, we realized that we are more at the feasibility stage, but not yet at proof-of-concept.
The back-and-forth with Convergence was really key for us. So you really have to understand where you are in your process, because sometimes you might think you are done until you start answering questions and realize, “oh, no, you are not there yet.”
So I'd say, be mindful of where you are in your trajectory of moving from feasibility all the way to full funding.