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At ClimeFi, we aim to secure commitments from buyers, guaranteeing future carbon credit purchases for CDR suppliers through offtake agreements. This provides the annual revenue visibility needed to help them secure financing.
With these offtake agreements, CDR suppliers can then approach equity investors, commercial banks and other financiers to bridge the financing between the project start until the delivery of the carbon removal credits.
However, both the structuring of the offtake contract and the financing terms should be closely intertwined. Buyers need to collaborate with CDR suppliers to ensure they also provide them with terms that will unlock a successful equity or debt fundraise, ultimately ensuring the delivery of the carbon credits they are purchasing.
Establishing interoperable systems
The CDR contract capability is in the market, but there is a risk that each actor – suppliers, buyers, procurement partners, marketplaces, lenders – is developing and implementing these contracts in silos, without sufficient coordination or standardisation.
This fragmented approach can lead to inconsistencies in contract terms and a lack of interoperability between different systems. To fully realise the potential of CDR, it is crucial to foster collaboration and establish common frameworks that can be widely adopted, ensuring a more cohesive and effective market.
In particular, we often see medium-sized CDR suppliers face challenges meeting banks' minimum ticket size requirements. However, if banks are interested in financing CDR projects but require larger-scale investments, they could explore funding a portfolio of projects. This is where climate funds or impact funds have a role to play: by bundling projects together and fundraising large ticket size investments from institutional investors.
Unlocking capital for projects
Overall, CDR suppliers have numerous financing options available as they progress.
However, it is essential for them to establish a structure from the outset that is most conducive to financing by banks. Ideally, this involves mitigating project risks related to technology and other factors and establishing favourable terms in offtake agreements to make them “bankable” and facilitate financing.
In other words, if a project is considered ‘bankable’, it means it has been structured in a way that inspires confidence among financiers, making them willing to finance it. It is also important to note that higher creditworthiness in a buyer is advantageous. Companies rated as Investment Grade (S&P and Fitch: AAA to BBB-) are valuable buyers, demonstrating to financiers that the offtake agreement is reliable and bankable.
Download the full 'Bridging the Financing Gap: Strategies for Scaling Deployment' paper below.
