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Aaron Ratner

President

Cross River Infrastructure Partners

June 8, 2021
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Ep 27: Aaron Ratner - President, Cross River Infrastructure Partners
00:00 / 01:04

Bret Kugelmass
We are here today with Aaron Ratner, who's the President at Cross River Infrastructure Partners. Aaron, welcome to the Energy Impact.

Aaron Ratner
Thanks for having me.

Bret Kugelmass
I was super excited to talk to you after I heard you on Jason Jacobs, My Climate Journey podcast. You guys covered a lot there. And I encourage anyone to go and listen to that one as a prep. But I'd love to just get started and kind of hear about your story from the beginning. Where are you from?

Aaron Ratner
Sure. So, I'm from Boston, Massachusetts. I grew up there and lived there my whole life until I went to college, went to university, finished university in Japan, and then came back to the States a little bit and lived in Silicon Valley during the first internet bubble, a long time ago. And shortly after that moved out to Hong Kong in the year 2000 to go and work for an entrepreneur out there setting up businesses in China and around Asia.

Bret Kugelmass
Can we just take a step and just talk about some of the cultural differences? I mean, I imagine, I spent a decade in Silicon Valley and I know that as the “full of free ideas, say whatever you want,” the move fast and break things culture. And then you just mentioned two Asian cultures, which I I don't know personally, but from what I've heard are much more reserved and cautious about everything that they do. Was this a big culture shock? And how did you handle that?

Aaron Ratner
Yeah, I mean they're very different places. Actually, within Asia, Japan, and China and Hong Kong are very different cultures. But certainly coming from Silicon Valley and the first dot com bubble where everybody's hair was on fire, moving out there was really interesting. I worked for a guy named Simon Murray, who was formerly the CEO of a company called Hutchison Whampoa, which, at the time, was the largest trading company in Asia, and Simon was a taipan, which is a term for a leader of one of the big trading companies in Asia. He had been a mercenary in the French Foreign Legion in Africa, He was the oldest man in the world to walk unassisted to the South Pole. A real renaissance man. He had assembled a multi-strategy investment firm with an advisory board and investor group that was just second to none. He had access to a lot of people and he was a very proper British guy who wore very nice suits five days a week, even when it was 99% humidity. And certainly the British part of Hong Kong was very reserved and very proper, but the Asian cultures are also in their own sense, have a very interesting sense of time. They just feel like they've been around for a lot longer, because they have, and so when you're in China, you're in Hong Kong or in Japan, things might feel like they're moving a little slower, because people just have a different sense of where their horizon is.

Bret Kugelmass
Wow, I've heard that before, you know, that, often is the colloquialism, the Chinese are patient. They've been around forever. Look, they wait, even with Hong Kong, they were able to sign a 100-year agreement and say, We'll be back, we'll be back to get you. And so, you're saying that's actually true. That's not just something people say,

Aaron Ratner
Yeah, they have a different actual sense of space. There's a really interesting book called The Geography of Thought. And one of the experiments the author does is he shows a group of children a fish tank, and he asked the Western kids, What do you see in the fish tank? The western kids point out the biggest fish and then the next biggest fish and the fastest fish and the most fish with the most stripes. And then he asked a bunch of Asian children the same question. A lot of them start talking about the environment, and how many fish there are, and how many plants or how big the tank is. So, it's a really totally different sense of environment and surroundings. And that may actually be one of the reasons why, if you look at China's growth in clean energy, and cleantech right now, it's pretty incredible. Everybody thinks of them as a very dirty, polluting country, and they have some pollution issues, but they're also making long term bets towards renewables that a few other countries are.

Bret Kugelmass
Aforestation too. I saw this YouTube video the other night, which astounded me, what they're doing to combat desertification in their northern regions.

Aaron Ratner
Yeah, the Gobi Desert is moving east very rapidly. And so they've got to be planting trees and working on that, or they're going to lose a lot of land.

Bret Kugelmass
So, what about you? Did you pick up any of this? Did you try to incorporate into your philosophy on life as you spend time in this culture?

Aaron Ratner
Yeah, well, I was raised somewhat Buddhist and my father sort of instilled that upon me as a young child and practiced martial arts when I was a kid. So yeah, there was a bit of that. But I certainly got spun up in Silicon Valley, and I was an entrepreneur in college and being in Hong Kong 20 years ago was really wild. That was when China took off and we were setting up businesses in China and Japan. Going to those cities today is a real adventure. Going to mainland China 20 years ago was incredible, every single business trip was just fascinating. So, I think it certainly did give me a sense of scale and a sense of what you can accomplish if you have the kind of resources available out there.

Bret Kugelmass
And when you say setting up businesses, what does that mean? Like there's an idea and you hire a management team, or what is it?

Aaron Ratner
We had a multi-strategy investment firm, and we were focused on venture capital and private equity in Asia. We were a limited partner with Sequoia Capital. We put some money in their funds and the idea was that we would help their portfolio companies expand into Asia. We were a little early for that, but we were on the right track, I think. We also set up investment firms. We established, put together a team and set up a private equity investment firm in Shanghai in 2002. We did the same thing in Japan, and then we set up a public equity fund in China in 2003. We would bring together the team, bring together the capital, and help them get up and running.

Bret Kugelmass
And what sectors did we focus on mostly?

Aaron Ratner
Those are generalist sectors, but back then in 2002, that was when the first wave of Chinese companies were hitting the NASDAQ. So, it was a really, and it was a time when a lot of Chinese nationals were returning to China from Western education, both at university and tech company level. There was a lot of activity in Shanghai and southern China, Shenzhen around that time.

Bret Kugelmass
Technology companies, though? Or what-

Aaron Ratner
Yeah, the first one that we- the fund was called Milestone China. And the first fund had three NASDAQ listed IPOs. All technology companies, mostly advertising and consumer facing.

Bret Kugelmass
And you'd mentioned you had a bit of an entrepreneurial streak yourself, how did that manifest itself moving forward?

Aaron Ratner
Well, I left Hong Kong in 2005, and went to Stanford for Business School. And when I got out, I was still, I had been living in a world where people were taking money and making money out of money, and there wasn't necessarily a whole lot of meaning to it. I kind of in hindsight, unfortunately, had a bit of that cadence stuck inside me and I sort of jumped out of Stanford and went into the hedge fund world for a while and tried my hand at a few different angles at that. I wasn't actually that good at it because, ultimately, I realized I didn't actually care about the work I was doing, it had no meaning for me. So, I actually shifted around a little bit after business school and tried a few different jobs, went back to Los Angeles and went back to Hong Kong for a while. It took me several years before I settled back into something that was really meaningful for me and that was a company that I started up called Emerging Energy that set out to build and operate floating power barges, to rent them to emerging market governments. I had met a guy who had a contract with the government of Bangladesh to provide them with three 100 megawatt power barges. These are basically large barges where you mount generators, and you just park them on the shore, or you bring the fuel and run electricity into the mainland. It's a pretty interesting business because you can provide a power plant without needing to put it on land or get it permitted for the land. And it's a lot easier to refuel when it's on the water. It's a very challenging business, because any country that is that low on electricity generally has other complications around the way it's run on an administrative level. So, getting those contracts and those deals done was really challenging. We started the company, and we spent a lot of time in Bangladesh, which was very exciting. Bangladesh has less electricity per capita than North Korea. It was a pretty challenging country in which to operate. And then we tried to do that in Nigeria, Lebanon, Cyprus, and Kenya, and works in Central America and South America. And it was very hard work. We had a few partners, we funded the business ourselves. Those projects are very expensive. They're about $100 million a piece. You need real equity capital and put at risk in order to-

Bret Kugelmass
And how much power do they produce?

Aaron Ratner
About 100 megawatts.

Bret Kugelmass
You said $100 million for 100 megawatts?

Aaron Ratner
Yeah, you're buying used generators?

Bret Kugelmass
That's pretty good.

Aaron Ratner
Yeah, I mean, it still is not clean power. I mean, these are places where it's more imperative to have food refrigerated during the day and lights on at night to keep crime down and to provide electricity for television, which is actually the number one birth control device in the emerging market, than it is to have solar power. And actually, in a lot of the equatorial countries, solar can be challenging, because you have smog around cities and the air can be a bit hazy. So, it was much more about getting electricity into those markets than clean energy.

Bret Kugelmass
But just to go back to what the origin story of this idea is, and you're a hedge fund guy, I understand you want to do something more meaningful, but power barges are physical infrastructure, like real stuff. And that's a bit outside just the pushing numbers around the world. What attracted it to you and how did you- you weren't overwhelmed by how different the challenge was from what you previously encountered?

Aaron Ratner
In hindsight, it would have served me well to be more overwhelmed a little earlier. But it sounded really exciting. I think what drew me most to it was the outcome and the mission and what you could do with the planet and how you could help people if you brought them energy. Eventually, we started talking about clean energy, but just the idea that you could rethink distributed infrastructure. Even back then, the World Bank wasn't underwriting large monolithic coal-fired power plants. But the effect of that, where you had electricity coming into poorer countries where you created jobs that were using sewing machines versus manual labor, you're really having a very positive effect on societies. That felt like something that meant a lot to me. And we spent a lot of time chasing those projects. Eventually, we walked away from a couple of deals, because it just didn't seem like they were going to finish in a way that was going to work for us. Some of those countries have a lot of issues with corruption. But it was a great lesson in the value of the passage of time and the meaning of what we're doing with our lives on this planet and how much better it felt trying to do something that was positive, than doing something just trying to make money out of money.

Bret Kugelmass
That's amazing. Sorry, one more technical question, just because I think that particular technology is actually quite fascinating. Was the grid infrastructure already in place to connect the barge to, or did you have to develop that half of that as well?

Aaron Ratner
Most of those barges get parked in sort of harbor side and industrial parks where there are large industrial buildings where they have things like sewing machines, or basic manufacturing where the current existing grid isn't able to power it consistently. And so you're plugging- it's almost like off-the-grid where you're plugging directly into a manufacturing park. In places like Bangladesh, back then they had such a small amount of electricity capacity, or production capability, that, when the monsoons came and washed a lot of saltwater north into the rice fields in the southern part of the country, they would have to shut down all of their manufacturing capacity just to power the water pumps to keep the saline from burning their food supply.

Bret Kugelmass
Wow. And then, on that question, the question of weather, what happened in adverse weather conditions in the harbor? Do you have to batten down the hatches whenever there was a big storm coming through?

Aaron Ratner
Yeah, but no more than you would a normal large boat.

Bret Kugelmass
But did it require turning off the power?

Aaron Ratner
No.

Bret Kugelmass
Alright. Great. Listen, that is a great way to get yourself into the energy game to deal with all those challenges. I bet anything that came after that seemed relatively simple.

Aaron Ratner
Yeah, it should have.

Bret Kugelmass
So what was next?

Aaron Ratner
We ended up winding that down and figured we'd go back when we had a bit more risk capital at our fingertips. And I still might do that one day. I met a woman named Ashley Allen who was very early in the impact investment business. She had run a consulting firm called Endeavor out of Washington, DC that was, in the 90s, an impact advisory consultant to politicians, wealthy families, movie stars, and she was trying to figure out a way to commercialize that more than just make it advisory. So, we started an impact investment merchant bank, called i2 Capital Group. And the idea was that we would focus on a few sectors - environment, education and energy - and we would go out and find companies that were in the impact space that needed financial advisory where they were raising real capital that needed to structure themselves and and go and do that work for them, and eventually potentially become a principal investment firm or see where it went. We got involved, our first project was a project called the Sweetwater River Conservancy, which was a land conservation project up in Alcova, Wyoming, in the central part of Wyoming. There was an entrepreneur from Florida who had decided he was going to build the largest wind farm in America in Eastern Wyoming, which is one of the windiest parts of Wyoming. He had this big 2.3 gigawatt wind farm all designed up. GE was going to provide the financing for the turbine. He wanted to run a direct current line down to Utah to the salt caves and then basically use that for compressed air to power up Southern California electricity. He had it all kind of mapped out and then realized that the sage-grouse were up there. Sage-grouse is a bird that's protected by the government and installing that wind farm was going to disrupt the sage-grouse habitat. So, he needed a way to create alternative conservation land and offset for that, until we came across mitigation banking, which is a structure wherein private capital is harnessed to turn land into permanent conservation land or restore land in the case of rivers or whatnot that have been destroyed by cattle farming, for example, and then which creates credits, which energy companies or infrastructure companies buy to offset their development. So, in Wyoming, we went out and raised about $130 million. We created something called a Habitat Restoration Note, which was just a very low interest piece of debt that sat on top of the equity to get the project finished. We didn't, no one had ever done it before, so we figured we'd give it a cool name, and required about 1.3 million acres of semi-contiguous land in that central south part of Wyoming, which is an amazing part of America. There are areas there that look like Africa, there's a herd of gazelle running through there, this really incredible part of our country. So, we got to spend a bunch of time up there, which was amazing, riding horses around and just looking at the land. It really just gave me a profound appreciation for nature, for our country, and for the size of the US. You think about how big this country is, and just how much land there is that's pristine still. But it was very slow going. And those projects, when you're taking private land and you're turning it into federal land, there's a lot of people that have to sign off on that. And it was a very slow going process. So, after a while, I grew a little impatient and I wanted to get back to the investment side of things. I was in San Francisco at the time, and I was at a conference on climate bonds, given by a guy named Sean Kidney, who was one of the first people in the sort of green bond, climate bond space. I bumped into one of the founders of Generate Capital and started talking to him. Several weeks later, I was the first Developer in residence to Generate.

Bret Kugelmass
Developer in residence, is that kind of like entrepreneur in residence?

Aaron Ratner
It is, yeah. At the time, there were six of us. There were the three founders and three others. We were in the office of the founding chairman and the business was just getting off, hadn't even had his first financial close. But we were working on projects, and there were the sort of solar projects, the storage projects, and there was everything else that was coming inbound. And just coming in because of the founders and the track record they had. I was sort of focusing on the special project. We ended up doing- I spent my time in anaerobic digestion. We acquired and turned around a few anaerobic digesters, one on a dairy in New York, and one, it's a mixed digester up in Michigan. Then we did a deal converting agricultural waste to a form of carbon, so a value upcycling project. And then we thought a lot about setting up a special situation vehicle or doing something that would complement the sort of path that Generate was on and, to their credit, those guys stayed the course and they did a great job. They built an amazing company doing what they know how to do really well. I left after a few years and became a partner at Ultra Capital, which is another sustainable infrastructure fund. I joined, I headed up origination, so I was sort of responsible for thinking about the sectors we were exposed to and the kind of deals we were doing.

Bret Kugelmass
And what does origination mean in this context? Do you have to find deals or even pre- that where you're just defining the categories that you want to play in?

Aaron Ratner
It's a bit of both. When you have capital, you have a lot of- everybody should have some form of inbound, but it was also about the sectors we got to be in, and how to approach them and then where within each sector were the deals that, projects that we can we can achieve and succeed on given the parameters of the capital we had and the kind of risk we were willing to take.

Bret Kugelmass
What were those parameters? What I actually find interesting about this sector, now that I've gotten a chance to talk to a ton of people in project finance, is you have to have a lot of - you don't have to have a lot of conversations - but you have to have a conversation to figure out exactly like the risk appetite and the IRR targets. It's not something that people just post on their websites. Like, some venture capital firms, to their credit, I like when they're like, We're an early stage company, we write one to $2 million checks, you have to be pre-revenue, or you have to be post-revenue, this is the sector we play in, like, don't bother us if you don't meet these parameters. But I don't see that at all for infrastructure investment vehicles. I would be curious to hear you reflect upon that.

Aaron Ratner
Yeah, I think that was one of our challenges. I think that's easy to do if you're in the solar space, or the storage space. And it's easy to do if you're managing billions of dollars a week, because you can just tell everybody you don't do anything that's less than a $500 million equity check. But in that small distributed infrastructure, five, six years ago when it was just getting off the ground. It was challenging, and we were underfunded. We had some other challenges that led us to do a few deals that were probably a little bit more bespoke than we may have wanted at the time. We did a landfill gas deal. We had a really cool deal up in North Dakota called the Red River Biorefinery that takes about 700,000 tons a year of agricultural residue and turns it into ethanol. It's a really interesting project. But one of the things that happens in these projects is, in general, they all become more expensive as time goes on, because the more money you spend on engineering, the more you realize how much work you're gonna have to do in order to have a successful project on your hands. And you can try to cut corners, you can try to spend a little bit less than engineering. There are ways that people think they can fine tune the capital efficient between the time they decide to do the project and the time they start investing in breaking ground, but the project is a project. The project is its own animal and it's going to be exactly who it wants to be. If you don't nurture it, and spend all that money on engineering before you break ground, you're just setting yourself up for a lot of pain. That's true across any sector of any project in this sector.

Bret Kugelmass
And then, when you say a new type of anaerobic digester, one of the things that I've also found when speaking to a lot of project finance folks is that they don't like to take on technology risks. How do you tell the story that, Yes, it's a new configuration, it's a new type of fuel, but it's not a fundamentally new technology platform that we're sitting on here, even though it might be the first-of- a-kind that's ever been built like that before?

Aaron Ratner
Well, I mean, you hopefully don't tell yourself any stories, right? I mean, one of the biggest challenges in the sector is that everybody feels really good about the fact that they're trying to make the world a better place and they're probably sleep deprived, and very few people are getting paid enough, because everyone's starting businesses, so everyone's infected with their optimism, and telling themselves every morning to get out of bed. But that can be, and you need that to get your day going, but then you gotta put that down and drink reality all day long. So, I think that's one of the real challenges in the sector, the tech risk part. And certainly, in my previous life, there were situations where the engineering folks got it wrong and the project didn't work. But in project finance, as a form of religion, you generally want to have - and this is something that we do at Cross River - we look at a lot of first commercial opportunities, but first commercial doesn't mean it's never been done before, it just means it's never been done at full commercial scale before. And so, in order to make that final leap, you really need what we refer to as a reference facility, something that's up and running at a reasonably similar volume that has been going for enough months or years to evidence that it has a high degree of probability of succeeding.

Bret Kugelmass
So, tell us more about Cross River and how all that came together?

Aaron Ratner
Well, as I was responsible for origination at Ultra, I think I was probably driving a lot of my colleagues crazy because I was running around talking about land-based fish farming and hydrogen and carbon and sustainable fuel and sustainable protein. One of the realities of project finance, private equity financing, there's a lot of asymmetric risk to the downside, because you're putting all of your capital into the project and if it's an advanced project, where they are human beings operating something that's organic, you have an infinite number of ways for there to be mistakes made every day. But because you don't have any equity in the technology company, your upside is limited to the projects that you finance. And so, you end up, if you take any technology risk, you bear that 100% yourself, because the technology company benefits from all the lessons learned, they go off, and they go do another one with all that IP they created, and hopefully they're successful. Whereas, you're sitting there holding the bag at the project level, and licking your wounds for potentially forever until you get rid of it. It's a challenge. I was sort of thinking more about newer markets. I was starting to think a lot about technology enabled markets and starting to hear whispers of trillion dollar markets - carbon capture, hydrogen, sustainable protein, mobility - and just trying to figure out how to integrate more towards the engineering side of things and bring on more engineering resources earlier before the investment decision was made and then post-investment decision. I had written a few term sheets to my now partners at Cross River for a couple of projects. One was a wastewater lagoon portfolio with Tyson Foods and the other was a really cool carbon capture to algae project with a company that takes CO2 coming out of flue stacks, turns it into algae for either high end nutraceuticals or sustainable protein for animal feed. And I was really excited about that. Those are big, big programs and they take a little longer, but they're big markets. So, when things sort of evolved, it ended up being appropriate for me to go and go more on to the development side. I think, in hindsight, that's probably a better fit for me. One of the things about this sector is there are a lot of very smart people going to investment firms because the investment firms are the ones with the capital, and they're the biggest entities in the space, but not everybody is suited to be an investor. There are a lot of people who are much better at being developers. The ecosystem needs everybody and it needs people to do what they're best at. So, I went over to the development side, and Cross River Infrastructure Partners is really a development platform. So, what we do is we partner with either development teams or technology companies, and we sit in between the technology companies, developing teams, capital partners, we have a lot of great relationships. We don't have a fund, but we have a series of investment funds that have written us term sheets and have indicated they want to be investing in our projects. And then corporate hosts, so whether it's Tyson Foods or big industrial companies, we have a small portfolio of corporations that are interested in being pilots for all these things that we're working on. What we do is we help these technology companies to structure their offering as a service in order to accelerate their sales and development into the market. An example is, our partners over at a hydrogen company called BayoTech in New Mexico and we partnered up with them over a year ago. They make a containerized unit that produces hydrogen on site, which is incredibly valuable, because right now, there's no hydrogen transportation infrastructure in the United States, really anywhere in the world. Hydrogen really is best consumed on-site, and has a very high carbon footprint and costs to move it around. So, we partnered with BayoTech before they even sold a single unit and we helped them design something where we would sit there alongside their sales team and offer 10-year fixed price hydrogen contracts. So, whether it's hydrogen or carbon capture, or carbon utilization, you're taking CO2 and turning it into something else, a lot of applicable technologies in the sector where you actually have to physically roll out the project. It's not something you can throw on a compiler on the internet and just a billion people can look at it overnight. It actually has to be built and has to be built properly, because, if your first project goes sideways, you end up spending two years and every single conversation talking about your first project to get your second one. It's really important in that early scale up to execute flawlessly. What we do is we work with these technology companies and design as a service programmer, our capital comes in and underwrites the risk, so we become the consumer of the actual technology and the customer becomes a consumer of whatever the output is, whether that's hydrogen or carbon capture. So, you de-risk the offering for the early customers and you incentivize them to take it on, because most consumers early on just want the result. They don't really need to own the equipment, even though they understand what depreciation is, even though they can kind of get their heads around it, it's just too early. Before a full operating unit has been in the field for over 12 months, a lot of people sit there and say, I'd like to be the 10th customer, or the first customer on the 366th day of operations of that first unit. So, when you can de-risk it for those customers and you can work with insurance companies to put some protection on that, you actually have a very valuable offering in the market. That's one of the biggest gaps out there. Right now there's plenty of money for solar and for storage for wind. There are other technologies that are being de-risked. Anaerobic digestion is being de-risked pretty rapidly due to the boom in RNG, which is great. But for other more nascent technologies, carbon capture, hydrogen production, hydrogen utilization, synthetic fuels, mobility, in order to really achieve the decarbonisation objectives that our species ought to have - but certainly people in the sector have right now - you've got to offer it sort of as a service model to make it easier to consume and get more units in the field or we're just not going to get there quickly enough.

Bret Kugelmass
This sounds to me just like a PPA in the electricity world where I guess you'd be the independent power producer in this analogy, and you've just taken this model that works for power and translated it into other sustainable resources?

Aaron Ratner
Exactly. We actually have a carbon capture company that we refer to as an independent carbon producer.

Bret Kugelmass
So, then you're playing a little bit of the role as an IPP, you're playing a little bit of the role as a- are you also essentially an equity holder in the technology vendor itself? Is that part of the arrangement?

Aaron Ratner
It depends. At the moment we have not done that to-date. But what we realize is that a lot of the technology companies we're working with are growing really rapidly and so, part of our the shift in our model is we are working on various formats of investing in some equity exposure of the technology partner that we have as we helped them get set up

Bret Kugelmass
Yeah, because it seems like you guys are doing all the hard work and taking all the risk. You've essentially done something that is extremely difficult and out of the wheelhouse of a technology company. It would be nice to see you guys compensated for the ride up.

Aaron Ratner
I wouldn't say we're taking all the risk, because some of them might be listening to this podcast, but look, I mean, technology companies need to do what technology companies do best, which is develop their technology. They're all in an arms race. Everybody's trying to do it. If you look at the big sectors right now - hydrogen, carbon, sustainable protein, stable agriculture - there's an incredible amount of investment in hardware and trying to make it cheaper and more deployable. That's pretty difficult.

Bret Kugelmass
And I didn't mean you're taking the technology risk. I meant more of you're taking- the problem is that an off-taker of whatever your resource is needs to feel comfortable, especially if it's a new technology, and you've created a vehicle that allows them to feel comfortable. To me, that's probably one of the bigger risks of the business side of bringing new technology to market.

Aaron Ratner
Yeah, it has value. And that's one of the reasons why we started this business. That's part of the "kool-aid" that we drink every day.

Bret Kugelmass
That's awesome. You've mentioned a few of the technologies that you've got involved in materials, very futuristic. Maybe not so futuristic, like out of their own possibility, but are up-and-coming frontier technologies that are definitely key to achieving our climate goals. Are there any others that you didn't mention, or any that are not quite ready for you yet, but you're keeping your eye out on just in case a research, lab-scale prototype becomes reality?

Aaron Ratner
We're doing a lot, we're spending a lot of capital and time developing sustainable protein projects. Whether that's carbon capture to algae, or particular forms of ag residue, or food processing residue upcycling into sustainable protein, or even purpose-grown crops where you can extract an extremely high quantity of protein out of them. We think that's just an enormous market coming right now. The planet is going to have somewhere between one to 2 billion more middle class citizens in the next 20 to 30 years and those folks are generally going to want to eat more protein. It's not coming from animals. There's just not enough space on the planet to feed the animals that those people want to eat. We're going to need to find other sources of it. And certainly what's happening in the plant-based meat product space is fascinating and there's a huge demand for inputs in that sector. So, we're spending a lot of time there and we're spending a lot of time on carbon utilization and carbon transformation. So, small, on-site modular technologies where you can capture carbon cost effectively, and then either use it as carbon. So, an example would be at a food production facility where you're capturing CO2 out of their flue stack caps, picking up CO2 and then running it back into their facility for some industrial purpose, or carbon transformation, where you're taking the CO2 and you're transforming it, either breaking apart that molecule or adding something else to add to turn it into some industrial product, where again, you can on-site be capturing CO2 out of an emissions stack and converting it into a valuable product as part of the supply chain at that particular manufacturing facility, rather than having to be purchased from somewhere else,

Bret Kugelmass
What technologies are available for that conversion? Is there a form of electrolysis for a CO2 molecule that you can just kind of pump in some electricity and you get out some O2 and some C?

Aaron Ratner
There are a few companies doing that right now. They're basically creating CO for ethylene production and then the oxygen, various things you can do with it. That's one pass. There are other companies that are taking CO2 and adding calcium or other other things to it to make it a valuable industrial input.

Bret Kugelmass
Yeah, I mean, it seems to me, when we started up our research group and we just tried to take a technology-agnostic approach to trying to understand what was really necessary to achieve our emissions goals on a global scale in a short timeframe. Our conclusion was you needed to create a carbon economy, where goods and services that had carbon as a key component to them, that you can make them cheaper to produce them in a carbon negative fashion. Right? That comes back to this on-site stuff that you're talking about. If you can find the applications where it is cheaper to pull CO2 out of the sky, or out of the water, disassociate it, and then produce the remaining products out of it cheaper than drilling it out of the ground and burning it, then that would solve all of our problems. Literally, if you just created an economy that looked like that, market forces would take over and solve our CO2 problems. Is that in line with your guys' thinking as well?

Aaron Ratner
Yeah, I think somewhat. There's a couple of things happening. One, the cost of technology is just plummeting across the board. Bloomberg, New Energy Finance just published the latest cost curves for solar and storage. They're just dropping so much faster than anyone thought. Every few years, these curves get updated. Everybody looks back and says, Oh my gosh, it just happened and we could probably know and then they do their thing and they look at their next five year projection. They don't change it. So, you just have to think that the cost curves are coming way down, but it also seems like that there's a lot that's going to happen in the price of carbon, whether it's penalties for companies that are emitting CO2 into the atmosphere, or companies that are capturing that CO2 and then selling it as captured CO2 versus mined CO2, they may get more money for it. There are a lot of blue products out there now. Blue hydrogen, right, you're making hydrogen capture the CO2, it becomes blue. That's going to fetch a higher price in the market than grey hydrogen. That seems like industrial consumers driven mostly by consumers are going to start looking for greener and greener products, which is going to change the price of carbon in the supply chain.

Bret Kugelmass
Yeah, I think that makes sense to try to get some of these technologies up and running. But like on the global scale, I just don't see, you know, government mandates, and carbon taxes. Because when it comes to climate, it's not enough to just reduce half of the carbon that we're using, or even three quarters. We have to eliminate all of our carbon emissions, and then go after historical emissions if we actually want the temperatures to stop rising. It seems to me, I like the government actions and policies that kind of gets the technology rolling, but I don't feel like we can actually count on it to go the whole way, which is why I love this idea of a carbon negative economy that's self-sustaining on its own.

Aaron Ratner
Yeah, absolutely. I mean, direct air capture at some point will become cost effective. It might need to be run by nuclear power, which would make half of the direct air fans go sideways. But, once electricity is almost free, and the technology is cheap enough, there'll be some real validity to that model. Until then, point source will remain really important. Point source gets a bad name, because people say, Well, look, it's coming out of a gigantic cement facility, you can just shut the cement facility and not produce any CO2. But there's a baseline of sort of anthropogenic production that we need in order to keep functioning as a society. We need the roads to stay roads and the buildings to stand up. There's some amount of production we need just to get back through our day and grow as a society, even to build renewable technologies and you can't excuse that. I think there will be a higher price for carbon capture to the lowest cost of production facilities, for example, or just places that are doing it as efficiently as they can.

Bret Kugelmass
Yeah, I never get those people who are like, We don't want to do point source because it gives them a license to emit. And I'm like, Yeah, we like their products. We should give them a license to emit, as long as it doesn't do any environmental damage. What are these values that you're trying to put onto this problem that has nothing to do with that?

Aaron Ratner
Yeah, it's hard. It's hard. You have to be really pragmatic if you're going to turn the aircraft carrier. One of the things that is hard in this sector is that people let their idealism cloud their sense of what's achievable in the short run. The reality is, we've got to make short run decisions in order to survive into the long run anyway.

Bret Kugelmass
Yeah, absolutely. You mentioned nuclear there for a second. Can you elaborate on that? Have you guys looked at any - and we're big fans and we'd spent a lot of time looking at the sector and some of the emerging technologies - have you got a chance to look at any of the newer technologies coming out, like the small modular reactors or anything like that?

Aaron Ratner
We have. We just started a nuclear development company. We're putting together that team now, slowly, but we've got our first technology partner and that sector that we're working with. These are projects that will break ground somewhere between five to 10 years from now.

Bret Kugelmass
Can we hear about this company? What's the name? What country would it be in?

Bret Kugelmass
It's pretty amazing, we've been following it very closely. Our only criticism is that five to 10 year schedule, there's just no reason for it. When we built our original fleet here in the US, they deployed first-of-a-kind technology in under a year, and they licensed it in under two years. The first 52 plants that we built in this country, nuclear plants, full scale ones, were all under three years worth of development. And 26 of those are still running today. The only thing that frustrates me, I love everything about what the nuclear sector is doing, but the only thing that frustrates me is the timeline of development.

Aaron Ratner
I'll let you know the next time I'm back on your show. I'm gonna keep that one, but it's in North America and it's in the business of small energy-efficient nuclear reactors. There are amazing technologies out there that can do this with non-weapons grade material. They have technology systems now that, if there are any number of malfunctions, can really avoid meltdowns that would become toxic to the surrounding environment. There are companies out there that are using nuclear waste as the feedstock, which is really interesting. So, you think about a nuclear power plant, you put that thing right next to a large nuclear waste dump, as a feedstock source. There's just a lot of innovation happening there. There are probably 50, I think the DOE is tracking over 50 companies in the small nuclear reactor space right now. That's gonna end up being a very prominent sector.

Aaron Ratner
I think there are a couple of reasons. One is permitting, it's tough to get that stuff permitted right now. The second is capital availability. These first projects are somewhere between 300 to $500 million, so there's a lot of at-risk equity capital that needs to go into it. There are very few growth equity nuclear investors. There are some venture people putting money into nuclear, but there's a huge gap across a lot of this sort of mission critical technologies - carbon, hydrogen, nuclear - in that kind of advanced growth, stage equity, which is really where project finance comes in. So, there's a capital deficiency issue and then I think there's a heightened sense of risk around environmental damage and then, also, you know, adverse actors who would somehow access those sites and try to do something bad with them. There are a lot of things that happened between when the US built those nuclear facilities and today that require them to have a bit more security than we did back then.

Bret Kugelmass
And some of these - you used you picked your words carefully there, I'm going to try to remember them - you said, like a sense of risk. If the technologists are able to show that it's not a real risk, but it is really just a sense of risk, is that enough for the banks, the equity financiers for the insurance companies, are they- have you found, in your experience, have you found that they are open to technical arguments for that type of stuff and they're not just kind of like falling victim to public perception?

Aaron Ratner
In nuclear, I think there are public perception issues or shareholder issues. Everybody works for somebody, and whether you're a bank or an equity capital partner, nuclear is one of those sectors where you kind of need to check with all your investors and your board before you do it. Because, if you get one person who has a wild hair about it, you can get yourself in trouble for it.

Bret Kugelmass
And then your role is to line up both the equity and the debt side on these types of projects?

Aaron Ratner
Yeah, we get involved very early. We have somebody who helps us with grants and other sort of forms of non-dilutive capital. We have development capital investors that we talk to about putting in single digit millions into the projects before they break ground. And then we have a group of infrastructure investors that we talked to, they're mostly sovereign wealth or oil and gas oriented. Then there are a few sustainable infrastructure funds that are doing really well that we talked to. And so yeah, our role is to help the technology company stay focused on being a technology company, and to spend all the equity capital that they raise, developing their technology and their company, and to work on developing the projects. And so we'll bring in people with expertise around permitting, and siting and contracting for the offtake and the feedstock and whatnot, and fill those resources, line them around the development schedule that everybody agrees to, and then at the right time, start talking to the project capital, what the project looks like, and socializing it sometime between 12 to six months before that project is supposed to break ground, we know who the investor is and we're just finishing everything up with them.

Bret Kugelmass
On these newer technologies, what kind of Rolodex do you have to go through to find the equity that's comfortable with pioneering something?

Aaron Ratner
It depends on the size of the project. If you're talking about- in the sector, let's take carbon, for example. If you're talking about $5 million, small scale, single ton of day carbon capture units that are going to capture it, you know, store it, and then sell it to an industrial gas company like Linde, or somebody who's going to come by once a week and pick it up and then just white label it and sell it to their customers. That's a project that can be put up, constructed within six to nine months. And it's a small check, right, so you can iterate on it quickly, the project capital can fund that and then get the rights to go fund another 10 to 20 of those. There's a pipeline there where you can amortize any of the bumps in the road that you get on the first project. That's different from a gigaton scale carbon capture project that's never been done before, where you're in development, and you don't even expect to make a final investment decision until, say, the end of 2023, right, two or three years from now. And in that case, nobody even knows what the price of carbon is going to be 36 months from now, so there's no way to have a final discussion with an investor because nobody knows what you're underwriting. When you've got longer development cycles, you need to do a lot more talking to the pools of capital, but as it's happening in the sector right now, across all these sectors, as these verticals, there's a greening of the sub products right. There's blue petroleum coming out of refineries right now if they can share their carbon, right there's, there's blue hydrogen, turquoise hydrogen, all sorts of color hydrogen. People are innovating here around creating markets for the off-take and that's really that's why, because once you have more products available, and that's why, that's probably how selling bathroom supplies were marketed by consumer companies in the 70s. Right, they just carry three bars of soap and sell them and everyone feels like they're making a choice, even though it's the same bar soap with a different smell. That kind of product availability is going to help expand the market and bring more people into it.

Bret Kugelmass
I like those lessons learned. Tell me about some lessons learned in terms of the criteria to get a project finance, I know this is a specialty kind of outlining these. You mind walking through a few of them?

Aaron Ratner
Yeah, sure. I think the number one, the number one criteria, remember, is try really hard not to fall in love with your project. Because these things take a long time, and you get to know the people working on them and there's a familiarity bias that comes into play, all sorts of cognitive biases that you develop, because the development cycle is so long they make you become much more comfortable with the project as time goes on. And that clouds judgment. That's actually one of the key differences between a developer and an investor. A really good investor can come in and shed those cognitive biases, and really the developer can bear hug them all and, between the two, they can get a project done, because you kind of need both in order for the stars to align. But the criteria for getting the project done, are kind of- there are sort of six of them, right? There's the site, where is the project going to be? And what are the permits going to be required to get that project done? In certain states in this country, it can take 90 days. In other states, it can take close to 18 months to get particular permits, whether it's an air permit or a wastewater permit. Picking a location for a project is really important. California is a great example of that. Everybody's enchanted with California, they want to do projects in California, because it's sunny and beautiful. And California is perceived to really care about clean energy, but trying to get basic permits in that state is very, very painful.

Bret Kugelmass
I don't know if you follow Bill Maher, but he had this counter of "days till solar" and it was over 1000 days for his backyard solar installation. And this is a celebrity.

Aaron Ratner
Yeah, I mean, we worked on an anaerobic digester in Southern California that had a site picked out and the last permit application was 1,000 pages long.

Bret Kugelmass
What's the deal with that, though? I've never understood, when it comes to governments that want to incentivize development of a specific type to kind of fit their social values, I get, okay, they figured out we can throw money at something, either new tax incentives, or subsidies or grants or national lab funding, whatever it is, we can throw some money at it. But nobody, none of their advisors tell them, Hey, cut the bureaucracy and that maybe there is a better way to get projects going? Is it just not on their radar, or is there some more fundamental problem with the government that creates this bottleneck?

Aaron Ratner
Well, remember, everybody who is involved in the permitting process has a job to do that. When you start talking about making permanent more efficient, you're talking about job loss. So, it's a threat to the people who hold those rubber stamps. It's worth bearing in mind that it's their job to sit there and do just that. So, they have no incentive to take themselves out of it and make it more efficient.

Bret Kugelmass
And does that even include, I mean, what I would think if I were in the shoes of a developer in California, I would get all my other developer buddies together and get into the governor's office and be like, Listen, if you seriously want to position yourself as a leader in these types of technology, you've got to use your governor powers to get the rubber stamp guys in line. That's not possible?

Aaron Ratner
Well just keep an eye on what's about to happen in Texas. Between the wind and the solar and the amount of hydrogen, the green hydrogen that is going to get produced there, the amount of carbon that's going to get captured and either sequestered out in the Gulf or sequestered in for EUR, or sequestered over East into big hubs in Louisiana, Texas is about to completely take off. And it will be the clean energy sector of this country, mostly because of the talent that's down there. One of the things that people overlook in the sector is the fact that folks in the oil and gas industry actually have a lot of experience in energy and infrastructure.

Bret Kugelmass
I've said that for years, don't make them your enemies, clean technology companies, make them your friends. Anyone who's a mechanical engineer, undergrad or something, half of my friends went on to go work for Schlumberger or Exxon or something. These are smart guys, you don't want to- you want to use their skills, not dismiss them, because they're part of the Big Bad oil industry that, Oh, by the way, happened to create energy and prosperity for you and your parents and your friends for the last 100 years. Sorry. Yeah, got me on a little bit of a soapbox.

Aaron Ratner
Going back to your question on projects, there's no one way to do it. There are key criteria around making sure, if it's project finance in particular, you need to de-risk it as much as possible, right. The whole theory behind budget finances, you're able to capitalize a project without selling equity in the corporate. And the company, specifically, because there's enough cash flow, that's safe enough for that investor to think that that return is sufficient. So, you just have to de-risk it, you have to always be de-risking it. It's challenging for a lot of entrepreneurs in this sector, because they're entrepreneurial. And they themselves are taking a lot of risks. Every day when they wake up, they're taking risks trying to keep lights on and keep food on the table for their families. And so when you are involved in taking a lot of risk every day, it's sometimes difficult to turn around and do your best to make sure your investors aren't, but that's a key discipline in this sector. And it's something that's happening more and more now that the sector and a lot of people coming out of business school or getting into it, people from the oil and gas sector coming into it, there's a lot more discipline coming in, which is great.

Bret Kugelmass
You've characterized your business model where it fits. I, personally, kind of have seen some of the challenges as we look into what it takes to get clean energy project finance, just love kind of where you put yourself in the ecosystem. I'm wondering, are there others following in your footsteps? And were you still kind of breaking ground here? And then I have a second question after that around what you do to help your different development companies work with each other, from a lessons learned perspective, too. Maybe you can answer those?

Aaron Ratner
Sure. Well, I think there are folks coming into our part of the ecosystem. We definitely need to break ground. I mean, we've got some really smart people on our team and we're thinking very long term here. We talk about the infinite game a lot and what we're really doing and the importance of creating an institution that outlives us all, so we're very mission driven, although, we're also trying to make some bread along the way and have some fun. We intend to continue to break a path and innovate and try to create ways of doing things that are new, and hopefully, people who come after us or alongside us figure out better ways to do it, and we can learn from them. So, we definitely don't want to be the only people doing it. But we're doing what we think we know how to do best and I think there are more people getting involved on the development side across both the investor side. So, investment firms are now realizing that they need people with expertise in development in-house just to vet the developers, because investors are generally not that good at vetting development teams, at least historically. At the same time, technology companies are starting to hire people who are responsible for project delivery. So, there are the- that garden is getting encroached upon from a variety of fronts. But my sense is that the competition will inspire more talent and will inspire more capital and certainly inspire the people at Cross River to think a little bit smarter and work a little harder about what we're doing, which we're always trying to do. I welcome all that, I think that'd be very positive.

Bret Kugelmass
And then my second question is, you've got all these different technology vendors that you're helping bring to market and they have different technologies and compete in different spaces, but probably have a lot of similar challenges that they're encountering. So, it seems to me like it's a very ripe opportunity to learn from each other in a very non-competitive manner. Do you host conferences? Or, maybe now that COVID-19 is over, do trips or something where you can get the entrepreneurs together? And they can kind of talk about their battle scars and that type of thing?

Aaron Ratner
Not yet, but we will, eventually. I think there are two things that we do. One is, we're starting to see a lot of intersection across technology. So, the folks creating hydrogen want to start capturing the carbon because they want to maybe making blue hydrogen or the-

Bret Kugelmass
Oh, literal synergies, not just lessons learned, but actual infrastructure.

Aaron Ratner
We're connecting our hydrogen folks to our carbon capture folks. We're talking to the people who are talking about large scale carbon capture, need renewable energy to keep their costs down. There are some companies that are interested in sustainable protein, but they want to capture their carbon as well. So, there's a lot of- there are people who want to reduce their carbon footprint of their industrial fleet and so they need hydrogen, but then need a retrofit on their vehicles. There's a lot of interconnecting there. And then, one of my advantages is that I have made more mistakes than I can count, and I've been a failed entrepreneur a lot more than I've been a successful entrepreneur. So, with the entrepreneurs we work with, in general, I'm older than them and can offer them a bit of an ear and some experience around what to do when you get knocked down and how to get back up and just kind of stay focused on the long term and the mission at hand and how to think about what really is success and failure, because the sector is still nascent. It feels like it's been around for a while, but in the end, you think about the next 30 years and all the change that's coming, we're really just in the dawn and what's going on. So, there's gonna be a lot of change. A lot of transformation and a lot of new technologies and models and industries created and staying flexible and just learning from what happens every day is going to be critical.

Bret Kugelmass
I feel like I've got 10 more questions I could ask you, but we're a little low on time. So, hopefully we can continue this conversation, maybe in person some time as well. But one last one just for you to wrap up on. You put on your magic cap, we're 10, 15, 20 years out even and tell me what we see. And give me the optimist. I don't want to hear the pessimistic version, just give me the optimistic version of what we've accomplished as a society.

Aaron Ratner
Well, I think if I look out 15 to 20 years, electricity is free. Protein is largely pain free. So, we're not hurting a lot of animals creating a lot of protein. And that form of energy abundance and clean transportation leads to a quieting down of civilization. One of the nice things that happened when COVID hit was the whole planet stopped vibrating, because everybody just got a little quieter, and they all went home and thought a little bit about who they were and their mortality. And they didn't drive around as much and didn't fly as much. And everybody just took a deep breath. And for the most part, people enjoyed it, other than the fact that they were worrying about dying from a virus. But I think about what happens to the planet when that form of clean energy, we're just going to stop shaking the earth a little bit. And that vibration, that toxic vibration -everybody feels it under their feet, whether they know it or not - when everybody feels a little less, everyone's just gonna feel a little bit more common, maybe we can all get along a little bit better. And in that society where transportation is clean, and free and abundant, and everybody's got the water and the air they want to be drinking and breathing, my belief is that people will treat each other very differently and that will become really a form of an upward spiral, which we really gotten off track from. And we've been in a downward spiral as a civilization in a society for years now.

Bret Kugelmass
Aaron Ratner, thank you for joining us on the Energy Impact.

Aaron Ratner
My pleasure. Thanks for having me.

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