Bridging the Valley of Death: First-of-a-kind fabrications

How government incentives can bridge the gap

This guest column was written by Camilla Roberts, CEO of SCALE IMPACT.

There is a known funding gap for first-of-a-kind (FOAK) manufacturing facilities in alternative protein production, which aim to prove the commercial feasibility of a technology that has so far only been used at a demonstration scale. We can bridge this valley with fast, flexible government packages, but doing so requires a model that is fit for purpose. From sitting in meetings with government officials, I have observed that too often renewable energy models are applied to novel foods, which is akin to fitting a square peg in a round hole. The characteristics of these industries are different, so naturally the funding model needs to be as well.

Government debt is the key

Government investment in bio-manufacturing for food is underway, but successfully funded fabrications remain virtually non-existent. The US’s Inflation Reduction Act, bipartisan CHIPS Act, and Executive Order on bio-manufacturing, have made $605b of proposed investment available. This has the potential to turbocharge funding across a host of advanced manufacturing and climate tech sectors in the U.S., but announcements of funding pools are a long way from executed contracts for facilities, and this is where many get stuck in the Valley of Death.

The scale of funding needed means that government grants are not enough and government equity may crowd out commercial investors, so government debt is a critical linchpin to solving the funding gap.

What’s the delay with government debt?

• Square peg, round hole: unfair application of renewable energy funding models to alternative proteins, because novel foods cannot meet the bar of 10-year offtakes, which is often possible for renewables. We need to find other mechanisms to reduce risk for the lender.
• The perception of specialised assets: if equipment is too specialised, the asset value risk, resale, and leaseback arrangements are a challenge.

How can we learn from successful models in renewables and chips?

Renewable energy and semiconductors have benefitted from a range of government funding models in their infancy. Both of these industries share the R&D intensity and heavier reliance on equity financing that bio-manufacturing and alternative proteins have.

Two instructive examples:

• In China, the government invested 30 – 40 percent of microchip manufacturers’ total cost of fabrication ownership, which covered the build costs plus 10 years of operational expenses. While that enormous support isn’t feasible for most governments, the packaging used is valuable for piecing together a new incentive package for novel food production facilities. China achieved this investment rate through a combination of grants, tax exemptions, rebates, debt and below-market rate input cost support (energy), asset leasebacks, and guaranteed offtake.
• Germany succeeded in commercialising wind turbine technology through incentives like the Federal Ministry for Research and Technology’s guaranteed offtake, by providing a power purchase agreement that offered 10 – 12 years of energy purchasing from wind farm development companies for the first 250 MW installed. The rate paid was much higher than the commercial rate for electricity and was based on the level needed to encourage wind farm development using German-made turbines.
  
  Germany didn’t need more power—this was an investment in greening the grid, accelerating the orderly phase-out of coal and nuclear power and, most importantly, encouraging a domestic German manufacturing industry. Andrew Garrad CBE, founder of wind turbine consulting company Garrad Hassan and later President of GL Garrad Hassan, which has 1,000 staff in 29 countries, commented “The [government’s] approach, which protected the German industry from foreign competition at the very early stages of development, was echoed in Denmark but not in the UK. The UK, German, and Danish technologies were similar at the time, but the lack of national protection at this sensitive juncture allowed the UK industry to fail whereas the Danish and German industries have continued and now dominate the western markets.”

So what’s feasible for alternative proteins?

Decreasing the loan size through packaging incentives spreads the risk to different areas of government, so it should make funding easier overall. Taking inspiration from aspects of China’s leaseback arrangements, in conjunction with even a partial guaranteed offtake similar to the German model, could unlock government debt for a FOAK facility.

Specifically, the leaseback arrangement could be on the assets (equipment) in the facility, where the government owns the assets for an agreed-upon period and leases them back to the alt protein company. Hesitation in exploring this may come from the government’s assumption that this new technology has highly specialised equipment that is difficult to sell or lease to others afterwards if the facility fails. If companies can establish that more capital-intensive pieces of equipment are fairly generic, then leaseback arrangements could be viable, especially if there’s expected to be a shortage of this equipment given the explosion in demand and the known capacity gap. For example, BCG predicts an additional 30 million tons of bioreactor capacity will be needed by 2035 to meet projected demand, so it’s fair to assume that fermentation equipment will be in shortage or very high demand and therefore have strong residual values to underpin leaseback arrangements.

The demand for alternative proteins and our inability to meet it with current production processes is known, but the industry could fail due to the FOAK funding gap unless we can find fast, flexible financing models for first-of-a-kind facilities. There are solutions to be found, and government packages that include debt, rebates, grants and other options like subsidised input costs (energy), leasing of assets, and partial guarantees on offtake may be key to unlocking a more secure food future in APAC.