Bret Kugelmass
We're here today with Kristian Hanelt, who's the Managing Director of Ultra Capital. Kristian, welcome to Energy Impact.

Kristian Hanelt
Thank you. Thanks for having me, Bret.

Bret Kugelmass
Yeah, absolutely. So we'd love to begin by just learning a little bit about you, how you got into the sector. What was your first introduction to energy or investing?

Kristian Hanelt
I grew up in the West coast in Northern California and went to college on the East coast, and really majored in rowing. In college, I spent most of my time on the Charles River doing that, but I was very interested in economics in school and got a job offer to move to Boulder, Colorado and work for an energy consultancy right out of school.

Bret Kugelmass
Not a bad place to spend your 20s.

Kristian Hanelt
It's a wonderful place to move to when you're not quite ready for the real world and you're sort of back in a college town and half in the real world. I moved to Boulder, I loved the mountains, very excited about living out there, and went to work for a company called PA Consulting Group. PA was a consultancy covering the energy industry, we did a lot of econometric forecasting used to value all these power plants that were getting financed and built all across the country. This is the glory days of Enron and the independent power producer. I really cut my teeth on the fundamentals of the energy industry and then the power industry working out there.

Bret Kugelmass
What was one of the things - when you first got into the sector and were just kind of learning about everything and getting up to speed - can you remember something that surprised you based on what your knowledge of the power sector was before you became an industry professional?

Kristian Hanelt
I was surprised how many surfing breaks that I grew up surfing on that had power plants that were associated with them. I mean, in all honesty, this was before renewable energy really had any momentum at all. I think I was just very fascinated with understanding the way that the dispatch worked according to power prices and load forecasting, and just sort of the way that the grid is ultimately managed by utilities.

Bret Kugelmass
When you say dispatch, is that like allocation of energy across the grid?

Kristian Hanelt
Correct, it's basically, Okay, I need X amount of energy at this given our, here's all the resources available that stack from cheapest to most expensive and how I need that incremental megawatt-hour that's required to keep the lights on, just kind of understanding where all these power assets were working on their behalf, where they fit into the grid and the dispatch stack was really interesting to me with that interest in statistics and economics and things like that.

Bret Kugelmass
It's amazing everything that happens behind the scenes that we don't think of as general power users when we turn on the light switch. It's actually quite complicated.

Kristian Hanelt
We're a little more focused on it and a little more aware of it. So, I worked at PA for a couple of years and then, right as Enron was going bust and that sector was experiencing some real headwinds, I got a call from a recruiter to go to work for a guy by the name of Bill Koch, who's one of the Koch Industries brothers, although he sort of split from the family business a long time ago. I knew of Bill from the fact that he wanted the America's Cup and I come from a family of sailors. He had owned a coal mine in western Colorado and in the process of mining the coal, encountered a lot of natural gas in the coal seam. He wanted to capture and sell that natural gas in the coal seam. So, he bought the gas rights to hundreds of 1000s of acres nearby the coal mine and started a business to export the natural gas there. I joined that business, I was the third employee or so, focused on-

Bret Kugelmass
Wow, pretty early on. Okay.

Kristian Hanelt
Yeah, that was another job in sort of the fundamentals of energy and the oil and gas business, which I really enjoyed a lot.

Bret Kugelmass
And they call that upstream, is that right? Is that the term, upstream? Is that referred to where you get it out of the ground, essentially?

Kristian Hanelt
Correct. And so, I spent a couple of years working for Bill, both in the gas business, but also for some of his other businesses as well. Great experience. Years later, I'm on panels at conferences and things I'd like to be able to tell people I've done this in the solar industry and before that, I worked for a Koch Brother, where I cut my teeth on coal mining and fracking.

Bret Kugelmass
I'm sure that went over well in the renewables crowd.

Kristian Hanelt
It was interesting, because we were the first oil and gas producer in that particular region in western Colorado. We encountered a lot of pushback from environmentalists. We did a lot of things for the environment. For example, the coal mine has a waste gas power facility on board now where they sell the gas that's effectively renewable or using the resource that would otherwise be going in the atmosphere and that power is currently purchased by Aspen Ski Resort, so, that was a good project to be involved with. I participated in some of these town halls, for lack of a better word, around getting our initial wells drilled in western Colorado to explore for gas and it was really interesting to me, seeing the environmentalists, or really the people that were residents, kind of being incredibly almost violent with how they would push back on maybe further development up there. There were people with kind of hang nooses in the crowd and everything else. It was very interesting. Being a Northern Californian at heart, I grew up being very much environmentally focused, and so I kind of felt like the bad guy a little bit being part of that business. But, at the same time, I got involved with some of the oil and gas advocacy groups in the Front Range where you understand the impacts of $1 per MMBtu natural gas price hikes on low- and fixed-income families. I got passionate sort of leading up to go into business school with sort of the economic trade off required to have a more environmentally friendly energy consumption, and also, the impacts on needing to do it in an economically viable way.

Bret Kugelmass
Yeah, this is the conversation that I feel is stomped out a little bit too much by some of the climate talk, is energy access and energy poverty and how much that affects human wellbeing, just the cost of energy itself.

Kristian Hanelt
It's a huge issue, and it's going to get much worse and it's going to be- I think California is going to be a little bit of a melting pot for where that really meets the road. Because - if I could digress, backup for a second - I've got a cabin that is at the end of the line in the forest up in Mendocino County, and I have probably a mile of line that PG&E has to maintain just to go to my 1,200 square foot weekend cabin. So, they're in there every year, cutting all the branches, taking down trees, reducing the fire risk. I've got six kilowatts of solar at my cabin. My electricity bill is $10 a month. So, PG&E is spending thousands of dollars to protect my access to that power and instead, who's paying for that? It's the people that can't afford to really break from PG&E. I think that there's a real need to figure that out. What I think should happen is PG&E should pay for me to install batteries and go off the grid completely and not have that.

Bret Kugelmass
Why don't they?

Kristian Hanelt
But why don't they? I think the restructuring of the utility revenue model and their responsibility towards people like me needs to be fixed. I think that people are focused on it. They just hired a guy named Jason Glickman a few weeks ago who is going to be a new VP of Short- and Long-Term Strategy there, and I know him a little bit socially. He's got a big job. He's definitely the answer to the call to take that job, because it's a real challenge, and I think that the increased penetration of solar is really going to accelerate the friction around the relationship between the utility and its customers. So, going back to Colorado, once I got sort of an appreciation of that trade-off of environmental versus economics, I went to business school. I was fortunate enough to get into Stanford, so I got to go home and go to a great school at the same time. That was really during the sort of Clean Tech 1.0 timeframe where things were really accelerating. I went to business school knowing that was what I wanted to work on and, because I was in Silicon Valley, I had a wonderful opportunity to network with a lot of the people that were really driving that movement. I did a lot of great internships, worked for a lot of great VCs and companies and came out of there and then ultimately ended up in the solar business, where I got in the solar industry in 2007. I started a business, with a couple other people, named Tioga Energy. We ultimately raised $40 million in venture capital, financed 100 or so commercial projects. That was a really fun business. I date myself by what you paid for your first solar modules. I think we paid $3.80/watt for solar modules. I think now they're - my information is a little outdated - but probably 30 cents a watt.

Bret Kugelmass
I remember when my first job out of school was working for Nanosolar, and I remember when the target was $1 a watt. It was like that's what the whole industry was trying to rally around. Maybe if we get there, solar will be a thing!

Kristian Hanelt
You know, we had to raise money. I think the cost of the money we were raising for projects was like 17%, was what we figured we were giving these investors, and now that number is 7%. It's quite a different world, then versus now. So, I spent 10 years in the solar industry working for Tioga Energy, then Clean Power Finance, which is now known as Spruce Energy. In both jobs I was running the project finance team, so, in charge of raising capital for the projects. At that time, tax equity was really the stigma, the hard thing to raise. You had to really get lucky and have a great story to raise the slice of capital that you needed to monetize the investment tax credit, which was the key subsidy for solar out there.

Bret Kugelmass
Tell me more about the breakdown of equity and debt for financing these projects? And what were some of the challenges that the investors had to mentally overcome when looking at a new technology in a new industry?

Kristian Hanelt
It seems funny in hindsight, right, because solar has come so far, and it's so efficient, as far as the capital raising side of things now, but in the early days, first of all, on the tax credit side, the whole industry had to go through the financial crisis together, which means that the key providers of tax equity were banks and very profitable corporations, and a lot of them took a lot of write-downs during that period of time. The Treasury put in a refundable cash grant for a while, but that program had its own twists and turns. So, that was exciting. On the debt side, there's been a lot of advancement on that end. Now, there's a lot of stuff in the distributed solar side, it's done through the ABS markets.

Bret Kugelmass
ABS - can you break that out?

Kristian Hanelt
Asset backed security, so securitization markets where you're essentially giving sort of institutional investors an opportunity to buy slices of debt associated with pools of assets. There used to be just a handful of lenders. It used to be relatively expensive and the transactions used to be relatively complex to close.

Bret Kugelmass
When you say relatively expensive, what did the debt providers at that time require in terms of returns like 7, 8, 9 percent?

Kristian Hanelt
Yeah, 7, 8, 9 and then you saw deal documents and things that didn't need to be as complicated as they were. So, you had a solid six figure legal budget for per transaction where it was up to the developers or the originators to be paying all the legal costs. And so you had very expensive law firms that would make things extra complex.

Bret Kugelmass
It's like typical supply constraint on the lender side.

Kristian Hanelt
You had a lot of concern over who made the modules. There used to be this bankability list. First of all, making solar modules is - some people will disagree with me - but in general, they're very simple pieces of technology, there's no moving parts. The sort of variability between one module and others, is not that high.

Bret Kugelmass
But there was probably some risk about the longevity of any given panel. I remember, even when I was working on the manufacturing line, and we were really worried about keeping them dry, like applying desiccant, to seal them, to keep the moisture out, because that could degrade the life from 20 years to 10 years. Was that possibly some of the concern? That if they just didn't have the record of how long they ran, that the financier might think, these panels might not last a full 20 years?

Kristian Hanelt
That was a lot of concern. And you had some novel technologies like First Solar, and their technology. But I think, in general, it was really a lot of new entrants coming out of Asia and a lot of concern that shortcuts are being taken in manufacturing.

Bret Kugelmass
Oh, like, just cheap Chinese manufacturing, that stigma. Which, no longer what people consider to be the case anymore. But back then I imagine it was still much like, Chinese toys are cheap, so maybe Chinese solar panels are cheap.

Kristian Hanelt
Yeah, there was a lot of that. So, you had to balance this approved list and this bankability list. There just wasn't a lot of capital out there. That's changed incredibly, and we'll talk about that. But there just wasn't a lot, it was a struggle to find debt, it was a struggle to find tax equity.

Bret Kugelmass
So, what did you do? Like it was on you, it was your responsibility?

Kristian Hanelt
Yeah, it was my responsibility. And also, my team's and board's responsibility, and my CEO's responsibility. That was sort of the breaking point for companies back then was whether they would be able to be successful.

Bret Kugelmass
What was your strategy? Was it just like, make a list of every bank and start calling? Do you hire advisors? How did you find the capital?

Kristian Hanelt
It was an all-of-the-above strategy. First of all, you had to have a good company that was capable of originating quality projects and executing on them. If you can do that, capital will find you. But then beyond that, once you've sort of identified the list of potential investors, you had to build a relationship and there had to be trust and there had to be a track record that would make things work successfully. At the end of the day, it's a people business and there has to be a lot of confidence in each other to get these things done. I think back on 2008 and 2009, sort of surviving the financial crisis. That's sort of what got us through that, was key relationships with a handful of people that ultimately were backed by quality businesses and execution, but at some level, were based on relationships.

Bret Kugelmass
Even with tax equity drying up, it was possible to make these projects competitive?

Kristian Hanelt
Well, fortunately, the cash grant program came in at the right time, and I think provided an alternative. The cash grant was different, it was a different group that administered it, and then the IRS and so there was a fresh level of scrutiny on what the rules were for applying for tax credits. But all in all, it really saved the industry at a key point.

Bret Kugelmass
Was this like an Obama era program of some sort?

Kristian Hanelt
Yeah, correct, it was put in- I'd have to go back and look, I think it was put in fourth quarter of '08 or first quarter of 2009. I think that the Biden administration is very focused on sort of the renewal of the investment tax credit, or the extension of the investment tax credit, having a portion of it or some level of it, that can be refundable as well. It wouldn't be administrated the same way as the cash grant, it would be via a direct pay mechanism. But there is a potential for it to come back, which I think would continue to accelerate some of the financing around renewable energy.

Bret Kugelmass
Cool. So where did you go from there?

Kristian Hanelt
After 10 years in solar, sort of sitting in the hot seat to some degree on these companies, I was ready to get off the solar coaster, as they call it. I was very intrigued by a lot of these other sectors that I thought were sort of approaching commercialization around sustainability. So, I met some of the other founders of Ultra Capital and signed up.

Bret Kugelmass
Well, pause for a second. What was this streak in you about sustainability? You did your job, you helped get the get the solar industry ramped up. You could have gone on and done anything, and then walked around proud at cocktail parties saying, I was there at the start of clean energy, and I made it happen. Why continue with the sustainability?

Kristian Hanelt
Not mutually exclusive. I think it was a fun ride in solar. Now I look, we're still involved in solar and I see the kinds of efficiencies that exists in the solar industry today. My DNA is probably looking for something that's a little bit on the earlier stages of innovation, and solar, as it got bigger and bigger, I still like to learn, I'm still involved with solar, but I'm looking for areas where the traditional solar capital hasn't yet figured out a way to make it efficient yet.

Bret Kugelmass
That stands in contrast to a lot of other equity investors, and certainly debt providers that want to see something that is established and known and has a track record and is the opposite of new. When you started putting your team together and decided that you wanted to go after new sectors, how do you justify to your LPs is that you can make this work?

Kristian Hanelt
That's a great question. Our view is that there are a lot of technologies out there and a lot of companies out there that are capable of executing on sort of traditional technologies deployed in a new way. So, for example, we've been involved in renewable natural gas, which is a sector, I think it's got a lot of legs to it, basically creating and selling pipeline quality gas from sources, such as landfills or dairy manure streams. A lot of excitement there, a lot of capital kind of going into that space. And I think you're gonna start to see that sector in particular get sort of more mainstream than it's been today.

Bret Kugelmass
So, this is essentially methane that would have gone to the atmosphere, been a super potent capture of greenhouse gas, but instead, these newer methodologies are able to capture it, pipe it to a source, and burn it just like natural gas that you find from the Earth would burn.

Kristian Hanelt
There are two main programs driving that sector. One is the Renewable Fuel Standard from the Bush era program about greening up the transportation fuel federally. And then the other is the California LCFS program, the Low Carbon Fuel Standard program. That's a California-focused program driven to, again, increase the renewable content in our transportation fuel. That one in particular has sort of been really pulling the industry into some of these sectors like dairy manure and those sort of waste streams. Landfill gas has been around for a while, it's shifted over time from using landfill gas to produce power to now using landfill gas to put it into a pipeline. The sort of renewable natural gas from dairies is, I would call it a sector that's really been a focus in the last five years. There's a lot of big strategic companies coming into that space right now. So, you've got, DTE Energy, Chevron, you've got Exxon, all these folks, Mittal, they're all participating in a big way. In Ultra, we've been focused on developing projects that people like that would be interested in being a part of.

Bret Kugelmass
Cool. And when you say, developing projects, are you doing the sourcing of the facility? Or does a project sponsor come to you, and then you provide the capital to ramp up their origination efforts?

Kristian Hanelt
It's the latter. We're not capable of being developers ourselves. So, we look for development teams, as well as companies that have been in the space and have some capital of their own, but potentially need some capital to co-invest alongside them and the projects that they're working on.

Bret Kugelmass
Do you ever spin up a development team from scratch? Do you ever hire a bunch of headhunters and put together a good management team and say, go after some of these opportunities that we're seeing on the market?

Kristian Hanelt
Sort of. We will definitely partner with teams that are small, have a really good idea and really help them through that growth from a very small team in our office to a medium sized team that's spun out and growing and ultimately, if they outgrow us, that would be the sign of victory for us.

Bret Kugelmass
When you say, a team with a good idea, what exactly is a good idea in this space? Is it just like, Hey, we see the consolidation of this dairy farm industry, and we see the access to the pipeline, and so we can connect those two dots? Or is it something really much more innovative, like - I mean, I don't even know, like, we apply this new valve technology, all of a sudden, it opens up these different regions? Like, what do you mean?

Kristian Hanelt
Let me go up for a bit. The way that we think about investing right now is, we're looking for the points of friction in the energy transition that’s happening now. There's a few truths that are out there that are really driving the types of opportunities we're looking for. Number one, there's a ton of cheap capital coming in that wants to invest in renewable energy and sustainability. It's just billions and billions of dollars. Their issue is really, how do I find quality places to deploy that capital, because, you know, they, they are cheap, for a reason, they don't want to take a lot of risk. They're looking to put money in at scale in the projects that are already de-risked. So, how do we accept that fact and be part of that ecosystem? The second thing is, solar energy is the cheapest form of electricity this planet has ever had. And it's going to continue to scale massively, as time goes on. What that means is that electricity in the daytime is going to be free or negative, and then infrastructure needs to be built around that to sort of support the continued growth of solar and ultimately use that to decarbonize the whole entire grid. Then third is, storage is going to be a huge role in that, right. So, you're gonna see, now you've got battery storage. It's growing at a great rate, the cost of capital for it is very cheap. It's still got a long way to go to make an impact and you're gonna see, sometime in the 2020s, short duration storage really started to drive out natural gas from the power generation grid, specifically, those sort of peaking facilities, and then you're gonna see long duration storage, probably in the 2030s start to drive out the baseload natural gas generation and coal is going to be phasing out all throughout that period as well.

Bret Kugelmass
I guess the problem that I've heard in meeting with you authors of the IPCC and scientists around the world and energy policymakers is, Yeah, while solar is the cheapest when you're in the right time at the right place, those other two things that you mentioned, transporting those electrons and storing those electrons to translate it through both space and through time, you have to factor those costs into a total system cost, which makes it no longer the cheapest possible energy source. It seems that there still has to be other energy sources that are brought to market to get to where we want to go with our total decarbonisation goals, like actually beat out dirty fuels when it comes to producing heat, for instance.

Kristian Hanelt
Yes and no, I mean, I think what you describe are the pinch points that I'm referring to. In that case, the reason why it costs a lot when you ultimately get it to where it needs to be is because the transmission infrastructure in our country is not where it needs to get to. And, candidly, I think that's where the federal government really needs to step in and this infrastructure plan to get the grid to where it wants to be, because what we've seen is a lot of solar projects don't make sense or aren't as attractive as you expect when the cost of that infrastructure layer on top of the cost of constructing the solar facility.

Bret Kugelmass
All that's great from a US and a clean air perspective. But from a climate perspective, I think the problem still remains that you have to solve it on a global basis, which means that you don't just have to build the transmission infrastructure here, you have to build it in India, and everywhere across the world, where impoverished people are just going to look for the cheapest solution, no matter what, if you want to solve the climate problem. Clean air and clean energy for America is, I think, pretty solvable by getting after these pinch points.

Kristian Hanelt
Yeah, I think that's right. Well, let me talk a little bit about kind of where we've been focused on that. We see a lot of friction being created by where the solar penetration is going. So you're seeing value shifting from energy to capacity markets, because as you saw in Texas, you can have all the renewables you want, but if, you know, if the sun's not shining, or if the transmission is constrained, doesn't allow all the solar in West Texas or the wind in West Texas to get to where it's needed in Houston, it doesn't matter. So, we're looking for, where are there strategic assets locationally on the grid that we can perhaps deploy solar or storage and do that. There's a lot of focus on identifying resources, that might be able to be a better development asset than ones where they're ultimately going to be constrained for transmission reasons. DG solar, so obviously everybody wants solar on the rooftop and close to the load. There's been a couple of sectors that we feel like have been kind of ignored from the distributed solar movement to date and really, a lot of that is around commercial properties. The sort of paradigm where you've got a small to medium sized commercial real estate owner, they have a tenant under a five-year lease. You can't really finance a project with the PPA like the Walmarts or the Amazons have been doing, so, you need to have sort of an innovative product to get solar on that real estate owner's rooftop. There's a lot of things in the electricity industry. The sustainability sector, we've been really focused on RNG specifically, and we've developed a few projects, we've learned a lot over that time period, and we think that there's going to be a lot of opportunities to invest alongside development teams that are also bringing their own projects to market and leverage what we've learned today, which is not all positive, but educational nonetheless.

Bret Kugelmass
What are some of those hard lessons?

Kristian Hanelt
When you're a developer, you have an idea of what the project's going to cost and it's going to cost this much and I'm going to raise this much from debt and this much from equity and I'm going to have a nice ownership stake when I can pay those guys off. So, you start building this project, well, ideally you start engineering the project, and the cost keeps ticking up and ticking up. But finally, you've got your turnkey engineering procurement construction project, you got somebody to hop board who says, I'm gonna build it for this many millions of dollars, this much is going to come from debt, this much is going to come from equity. But you're getting your project built and you're on budget, you're feeling pretty good about it on schedule, but maybe takes longer to ramp up to what you expected to be than you want or maybe it takes a while to get registered under one of these incentive programs that the federal government or California is administering. And all of a sudden, you have a need for a partner who can come in with capital and get your project stood out until it's actually operated as a pro forma model you said it would. So, we think we've got a lot of experience kind of going through that process, where a lot of other people are coming through that process right now and we think there are some opportunities there to help folks out.

Bret Kugelmass
Have you guys made an internal playbook, where it's like, Hey, here's our Bible for not running into trouble? You know, watch out for this law change, watch out for this permit from this agency.

Kristian Hanelt
Everybody who's in project finance has scars on their back that they put the mirror and look and they can find those and keep them forever. But yeah, we have invested a lot into internal resources and processes. We've got an internal software system that we've developed that helps us with project risk management, both financial risk management as well as score cards, and a lot of data. We do like to think that we're somewhat structured in how we go about evaluating these projects. But so much of it at the end of the day comes down to people and judgment and guts and things that you can't exactly put on an Excel spreadsheet.

Bret Kugelmass
And then what about project size and type? What's your guys' sweet spot?

Kristian Hanelt
Great question. Our smallest investment has been a $5 million commercial solar portfolio, that hope is going to be a blueprint for larger investment down the road. We did the pilot project and it was a first time product, again, focused on those kinds of rooftop owners who have been underserved in terms of solar projects. And then we've done about $110 million, at this point, agricultural waste to ethanol project in North Dakota. It's a project that takes sugar beet waste and potato wastes and makes ethanol and we commissioned the project started in March of 2020, so, right into the teeth of COVID. For a good chunk of 2020, we made ethanol for hand sanitizer purposes. So, we were in the hand sanitizer business for a while and now we're transitioning back to vehicle fuel. So that's a really exciting project. That project, north of 100 million, but in general, we are on the smaller side of infrastructure investors. So our sweet spot might be more $20, $30, $40 million.

Bret Kugelmass
When you say those numbers that you are giving, is that total project cost, or is that the equity component?

Kristian Hanelt
Total project cost. That project was financed with debt and equity.

Bret Kugelmass
Okay. And then so for the equity component, your guys' sweet spot for coming in is what, $10, $20 million?

Kristian Hanelt
10 to 40, 10 to 30, something like that. We use debt, it's nice to have all equity at times and sort of not have the discipline of debt hanging over your head.

Bret Kugelmass
Tell me about that? Why do people choose not to use debt? Why not take it if it's available?

Kristian Hanelt
Well, it's not a question of using debt or not, I think it's a question of when to put on debt, right? If you're doing, you know, greenfield developments, or if you're acquiring an operating asset with an eye towards optimizing it, or rehabilitating it in some way, shape, or form, you can have a lot of flexibility if you build an asset, get it operating the way you want it to, and then bring on cheap debt. It can be more expensive to bring on more expensive debt earlier on and then if the projects don't work as you expect to, it can put a lot of stress on debt service. It's nice to not have that hanging over your head, at least for that period of time that you're bringing the project into compliance.

Bret Kugelmass
I see. Got it. So, if there are risks out there to the project itself, maybe the way it runs, or some integration of some technology, or the performance of the asset itself, or your whatever fuel source you're using and its availability, a bank could look at that and say, we're not just going to charge you 5%, we're going to charge you 9% or something, and that makes the economics much worse. Is that type of stuff we're talking about?

Kristian Hanelt
Yeah, that's one big thing. The other thing is, let's say I'm building a $50 million renewable natural gas project. Now, a lot of these on paper have unlevered returns that are really, really attractive.

Bret Kugelmass
What's an attractive unlevered return?

Kristian Hanelt
Well, on paper, if you're selling dairy renewable natural gas in California right now with a well-designed project, you're making north of $70 an MMBtu for that renewable natural gas. Normal natural gas right now is selling at three to $4. The premium for renewable natural gas is huge. People see that and they get really excited about these projects. and they model them out and they say, I'm gonna make a 25%, unlevered IRR on this project. A banker is gonna look at those cash flows coming off those projects, and let's say it's a $50 million project to construct, you may take those cash flows and apply a discount to them, what they call it a debt service coverage ratio, and then you might present value the cash available to pay debt service back to the present day. On paper it might say, that project can support $70 million in debt. Well, no banker is going to give you $70 million to build a $50 million project, right, they're gonna want to make sure you have skin in the game. I have a couple options as a developer. I can borrow what most people will give you to build something, which is, you might be able to get 70-80% debt financing based on the construction cost of the project. But those lenders may want to put in some prepayment penalties if you want to get them out of the way earlier, right? So, rather than putting in $20 million of equity and $30 million of debt, to put it, build a $50 million dollar project, if I really believe I can get that project performing the way that my performance says I should build it for $50 million, and then borrow $70 million once it's stabilized, and then I've made money on it and I still own the project. So, there's an example on paper of where it may make sense to not put debt on the project and when you're commissioning that project, you're sure happy you don't have to make your debt payments while you're still wrapping up your operation.

Bret Kugelmass
So, just so we can help levelize across different types of projects, what is a typical debt service coverage ratio that you might apply in your modeling, like 1.4, or something?

Kristian Hanelt
It depends on the sector. Solar has been coming down and down and down. And now you're seeing like 1.25, which is still too high, in my opinion. Shout out to the kWh Analytics and other companies that are trying to create a mechanism to pull down that debt service coverage ratio. I think the newer the sector, the higher the coverage ratio. So, I think 1.4 is probably the low end of what innovative technology in another sector might be able to get 1.5, 1.7 is not even out of the question.

Bret Kugelmass
And then a target unlevered IRR that people will take a project very seriously, but not think it's astronomical, because of some subsidy applied - what are we looking at? Somewhere between 10 and 15%?

Kristian Hanelt
The range is so huge, in terms of what you see out there, and especially the more innovative the sector, and the less the track record of the sector, the higher the performance says it's going to be. We consider ourselves looking for higher than market infrastructure returns in terms of where renewable energy and where down the middle utility scale solar is clearing right now, we can't compete with that, that's gone to the pension funds and insurance companies at this point. Think about one or two concentric circles outside of that sector, maybe 10 to 15% returns, those are kind of where we look for things. Most of the projects we look at, when we first see them, they have returns much higher than that, right? And then you start applying contingencies, you start getting engineers to start designing things, the costs keep picking it up. And you end up kind of in that range anyway, isn't that amazing?

Bret Kugelmass
Across so many different technologies, so many different energy sources, always just kind of ends up there.

Kristian Hanelt
But that's a lot of what we do an Ultra, which is, we're not writing nine figure checks. So, a lot of where we are adding value is we're taking those projects from when the developer might think they're ready for notice to proceed and that they're construction ready, they're not at all construction ready. We'll come in and bring in the engineers, we'll bring in the bankable construction contracts, we'll do a lot of that stuff and package projects in a way that they're actually ready for deeper capital sources to come in and then that way, we create a lot of value for them.

Bret Kugelmass
That's amazing. And when you say bring in the engineers, what does that actually mean? Is it like EPC, engineering procurement construction firms that you like to work with in the past? Is it just people to check it over the project? What role do the engineers play?

Kristian Hanelt
It depends on the sector and kind of what's appropriate. When we first got into some of these RNG space, no firms were willing to do a turnkey engineering procurement construction contract where they're guaranteeing schedule, price and performance. And that's changed over the last handful of years, there are folks that are doing that now. But the best thing to do to ensure that you can deliver those projects for your own benefit is to spend - could be $200,000, could be $500,000 - but spending that engineering money to really go through and identify all the pieces of equipment that are going to go into that project, all the pipes, all the wires, and do what they call, maybe a FEL 30% sort of engineering work, which will then allow you to take that project and really feel like you're getting an accurate bid from the firms that are able to build it and make sure that you feel like you can deliver that project.

Bret Kugelmass
When you say FEL, that's the front-end loading schema for engineering project design?

Kristian Hanelt
That's right.

Bret Kugelmass
Okay, awesome. Oh, and then just on that engineering firm, do you always work with the same one? Or do you pick the firm by the type of technology?

Kristian Hanelt
It depends on the type of technology, and we do see more and more people coming into things all the time. Where we're focused, on one hand, we're working in some of the more innovative sectors where there are less robust construction firms that have less experience, and there's sort of a skill set for managing them. On the other hand, we're doing, large scale solar battery development or even rooftop solar development, and there, you can feel quite comfortable that there are dozens of firms, not hundreds, and then there are certainly some that aren't qualified, but there's a lot of firms that will sort of meet the requirements that we have around schedule, cost and performance.

Bret Kugelmass
So, we talked about some of these newer, innovative technologies. You mentioned solar plus storage, you mentioned renewable natural gas, what are some other technologies that you've looked at and are, either that one might not think of in the common discourse, but that you guys have invested in, or one that's just like, right outside what you feel comfortable investing in, but you're seriously considering it? What's on the breaking edge of innovative?

Kristian Hanelt
For me, the breaking edge is hydrogen. I've been in the industry for a long time, I know a lot of smart folks, and when I talked to my smart folks and friends about hydrogen, I get very passionate answers on both sides of the equation of what the potential for hydrogen is. A lot of people I respect are really taking very polarizing, dramatic positions on that backed by a lot of hard science. So, I just don't see me being an early adopter in that space of anything that I'm going to be looking at originating. To me, a lot of the innovation right now that's fascinating is really around market structure. We talked about California and PG&E earlier, but I'm very interested in the way that storage is going to - both the front of the meter and also behind the meter - is going to really start to impact how that the grid is operating. So, you're seeing companies doing things like the virtual power plant model, where they're aggregating behind the meter down to the residential storage unit. Electric transportation, we haven't talked about that, but it's another play on electricity there's going to free and values and capacity. So, you see in electric transportation, these are big batteries rolling around, you can drive them with free energy, but also store that energy from where it might be needed elsewhere. So, I'm really interested in a lot of that, how those kinds of sectors models, basically businesses, will evolve as the industry evolves.

Bret Kugelmass
And have you ever looked at anything international or is your domain strictly US?

Kristian Hanelt
We have plenty to keep us busy here domestically. The internationals got its own kind of unique challenges and opportunities.

Bret Kugelmass
Though, to me, it seems like you guys have learned a lot of the hard lessons here. A lot of countries in their entirety have to go through and learn those hard lessons as they start to implement more of the renewable technologies. It just seems like maybe there's like a knowledge opportunity there where you can come in and kind of spot things before the market corrects for it or that type of thing?

Kristian Hanelt
Well, some of them are fortunate, they don't have to unwind something that's been, as you know, established as it has been here. I mean, they don't have to shut down coal industry or anything else that's really going to be happening here, where a lot of that friction comes from. Again, my guess is that California is going to be where the rubber meets the road in terms of how, again, that customer and that utility relationship is going to change, and what's going to happen when you have tons of solar and tons of storage. How do you protect those low-income customers, at the same time create a model that allows the whole grid became cleaner and more efficient? It gets me pretty excited around here.

Bret Kugelmass
Well, I guess from your perspective, seeing how - you call it exciting - but really, what excites you are the challenges, right? What excites you is the fact that it's new, and it's hard and interesting, and there's problems to solve. But given that, and given just dependent, like the rate of penetration as it is today, and also, given how you have been on the cutting edge of this in the forefront of renewable implementation, since it really got ramped up are you optimistic or pessimistic about us being able to meet our climate goals overall? Both in this country and the world?

Kristian Hanelt
Well, I gotta be optimistic, right? Or else we don't get out of bed in the morning. I think it's gonna get pretty good. You have to have the friction to create the solution and I think the friction has not yet come anywhere close to peak. You're gonna see a lot of that friction that's going to be coming from that creating some pretty big movements. Because, honestly, that's such a difficult time, enacting anything right now, and, getting on the same page with any sort of decisions. You have to have the answer, clear as day out there, otherwise we're not going to get movement. I think things will find a way of working out, but there's going to be decades of dramatic change around here. And it's starting to be like, in infrastructure terms, 10 years is not a long amount of time, right? And so, 10 years from now, it'll be 2031, you're gonna see long duration storage really kicking out coal and then natural gas, I just think it's gonna be here before you know it, that this paradigm is gonna be really changing. It's a really exciting time to work in infrastructure and energy and project finance, because things are gonna start happening faster and faster. Last year, we got some bills done, but everything was a drag. And this year, it's just got a totally different climate, I feel like I've got a lot of investments in front of us and they're all going pretty smoothly, everybody's hungry. There's a lot of enthusiasm. Hopefully, that'll just kind of continue for the rest of the decade. We need to we need to step up our game a little bit.

Bret Kugelmass
Awesome. Well, I don't think we could end on a better note than that. Kristian, thank you so much for your time today. This has been an awesome conversation and look forward to many in the future.

Kristian Hanelt
All right, thanks, Bret. Take care.