We look at projects. A lot of projects.
CoPower may be best-known for our signature Green Bonds, but what makes them possible are the real clean energy and energy efficiency projects that back them, not to mention the many months of due diligence that go into making sure they’re worthy of your investment portfolio.
In the spirit of transparency, we’re giving you a behind-the-scenes look at how CoPower screens and chooses projects to invest in, and what goes into building a high-impact, clean energy-backed investment product.
Where we focus
CoPower exists to finance small- to mid-size clean energy projects, providing them with the support they need to get built and help us transition off dirtier forms of energy.
We focus here for a reason. A solar project on the roof of a school, for example, will have more difficulty securing financing from traditional infrastructure lenders (eg. banks and pension funds), than a solar project the size of a football field. In most cases, the economics, impact and project features are comparable, but so is the amount of work it takes to carry out due diligence. This means that larger lenders tend to focus on larger opportunities, leaving otherwise good but small projects with few financing options.
A solar project on the roof of a school will have more difficulty securing financing from traditional infrastructure lenders than a solar project the size of a football field.
You could say we’re picky
Risk mitigation is of the highest importance to us when financing projects, just like it is for banks and pension funds. Having worked in corporate lending at TD and Deutsche Bank for over twenty-five years, CoPower’s Chief Investment Officer, Kathrin Ohle, has developed a systematic evaluation process that ensures the most promising projects rise to the top, while clearly identifying projects with unacceptable risk.
In the past year and a half, we’ve screened almost $1B in clean energy and energy efficiency project investment opportunities. We’ve passed on half of them, and the other half remains in our pipeline under preliminary screening or at different stages of due diligence. Of all the investments we’ve screened, to date, we’ve financed less than 2% of them. That’s not to say that many more are not excellent projects, they may just not meet our specific criteria, or may be at earlier stages of development, and are therefore not yet ready for financing.
Risk mitigation is of the highest importance to us when financing projects, just like it is for banks and pension funds.
From the outset, we look at seven key considerations, before deciding to dive deeper:
1. The project must reduce carbon emissions (or be expected to reduce emissions), either by reducing electricity use or increasing clean energy generation. Equipment (“physical assets”) must be deployed to provide those emissions reductions, which might include solar panels, LEDs, geo-exchange systems, or many other possibilities.
2. The technology must be proven, and have adequate warranties and insurance. CoPower focuses on technologies, like solar panels, that have been in use for decades to minimize both the risk and impact of potential problems. Emerging technologies can be exciting, but are best left to speculative investors who can tolerate significant losses if previously-unforeseen challenges arise.
3. The developers must have a proven track record. Experienced teams will have enough prior projects for CoPower to perform thorough due diligence, to keep our risks low. Newer developers often do excellent work on compelling projects, but we’d rather pass on good investments, than risk having a good investment turn bad. We often maintain a relationship with these newer developers, checking-in over time to see how their business is developing.
4. The project must generate returns to support the investment. These returns will either come from the sale of clean energy generated or from savings in the case of an energy efficiency project.
Helping individual projects is great, but catalysing the growth of an industry is better.
5. The project must be located in Canada or the U.S. We would love to do projects further abroad, but for now we are focusing on our own backyard and within regions where the regulatory and legal systems are well understood.
6. The counterparty - the entity that has agreed to purchase the energy or the efficiency services - must be creditworthy. This could be a government or a diversified pool of counterparties, such as a pool of condo corporations, or an investment grade corporation, who has contracted to pay for the energy generation or efficiency products or services.
[The seventh criteria is a strong nice-to-have:]
7. The opportunity should be scalable in terms of market or partnership. This goes back to our mission of building the market for small-scale clean energy project lending. Helping individual projects is great, but catalysing the growth of an industry is better. We’re looking for long-term relationships where we can help one another grow. In addition, CoPower can reduce its own overhead costs by doing additional business involving the same technology or with the same developer. This can reduce per-project due diligence expenses because an in-depth evaluation of the developer will have already been made.
It’s all about the details
If a project passes our initial screening and initial due diligence, CoPower starts negotiations with the developer around investment terms. CoPower’s Investment Committee will then provide approval to issue a non-binding term sheet (a high-level outline of CoPower’s proposed terms of business with the developer). Alternatively, they might ask the project team to carry out further screening and due diligence to better understand the investment opportunity.
Once the developer signs the term sheet, it’s time to dive in. Due diligence may sound dull, but in fact it’s one of the best parts of my job as CoPower’s Director of Projects. I get to go into the field to meet the people we’re considering working with. Building trust is very important, and you can’t do that from behind a laptop. You have to go on site to look for signs of quality workmanship and that the projects are operating as expected. We need to trust the organization with our investors’ money, so we need to meet the people behind the project and see that they’ve got the requisite skills and experience. We also want to see that they’re in it for the right reasons, and that company morale is high.
We do our best to bring the human touch to project lending and a willingness to sit together and find solutions.
It is a big time commitment on CoPower’s part, which is why it’s only initiated once terms are agreed to. CoPower examines the financial and legal aspects of the project and conducts one or more site visits. An independent engineer with expertise in the relevant technology is often engaged. References are called. Detailed financial models are reviewed and tested.
We do our best to bring the human touch to project lending and a willingness to sit together and find solutions. As a result, developers tell us that they feel they’re getting a partner, not just a lender. That relationship pays dividends when it comes to evaluating future projects because both sides have a close understanding of each other. And by helping CoPower select the best projects by the best project developers, our investment decision-making process helps us reduce our Green Bondholders’ risk while paying competitive financial returns and making a positive impact on climate change.
Jonathan Frank is CoPower’s Director of Projects. Jon has been focused on sustainable energy and climate since 2007 and has been involved in developing renewable energy projects since 2009. Jon is a partner and Director of Projects at CoPower, one of Canada’s leading clean energy investment platforms.