CEART PERSPECTIVES
The Three Gates of Clean-Energy Diligence
By Rich Deming
A good clean-energy project and a financeable transaction are not the same thing. A project may have sound technology, a credible operating plan, and a useful role in the energy system, yet struggle to reach financial close. Understanding the asset is essential. Understanding what the parties need in order to commit capital is a separate challenge.
I have experienced that distinction as a developer: diligence processes that consumed substantial time, money, and energy, only to fall apart, sometimes around projects that subsequently operated successfully for years. Those experiences left me less interested in how much diligence had been performed than in whether it had answered the questions that actually stood between the project and financing.
That perspective has also been informed by CEART’s work with clients. During our first twelve months of commercial activity, we analyzed 657,000 documents across client projects representing more than $8 billion in capital expenditures (if the projects were actually built). The observations that follow draw on that work and on my own experience developing and financing projects. They are practical lessons about how transactions progress, not a claim that every project follows the same path.
The central lesson is that keeping a pipeline moving is not simply a matter of reviewing more opportunities or reading documents faster. It is a matter of establishing clarity at three distinct decision points: pass or pursue, term-sheet negotiation, and term sheet to close. Each gate asks a different question, and each calls for a different depth of investigation.
Pass or pursue: decide where diligence is worth doing
The first gate is about attention. An opportunity arrives seeking development capital, construction financing, or a new owner. Before committing a team to a data room, the immediate questions are straightforward: Why is this opportunity available? What has already happened? What is missing?
The temptation is to treat screening as a smaller version of full diligence. But the purpose is different. Screening does not need to establish that the project should be financed; it needs to establish whether the next investment of time and expertise is justified.
That distinction matters when a pipeline contains more opportunities than a team can investigate properly. A substantial data room can create the appearance of readiness, while a thin one can obscure a worthwhile project. Neither document volume nor the polish of a presentation answers the investment question.
The useful first assessment separates what is supported by evidence, what is assumed, and what remains unknown. It identifies the uncertainties most likely to change the decision and the work needed to resolve them.
Consider a project with extensive engineering materials but unclear rights to use a critical site. That is an illustrative example, but the principle is practical: another week reviewing engineering detail may add little if the site question could determine whether the project can proceed at all.
The first gate should therefore produce a reasoned direction, not a premature verdict on the entire asset. Pursue because the opportunity merits further investigation, subject to specific questions. Or pass because the available evidence, strategic fit, or likely cost of resolving uncertainty does not support further work.
This is not a substitute for diligence. It is a way to decide where diligence is worth doing.
Term-sheet negotiation: agree on the project, not just the terms
The second gate is where enthusiasm needs to become a shared understanding. The investor needs enough conviction to commit resources. The developer needs a credible path to funding and may already have considerable time and money at risk. Both have reasons to move quickly.
Speed without shared understanding, however, can be expensive. A signed term sheet may establish agreement on price, structure, and process while concealing different assumptions about the project itself.
I have seen the exclusivity clock start before those differences become visible. What one side regards as a routine item for later confirmation, the other regards as fundamental to the investment case. The transaction is moving forward on paper, but the parties are not yet moving toward the same destination.
The answer is not to complete every diligence workstream before signing. It is to distinguish the issues that can reasonably remain open from those that must be understood before the proposed terms make sense.
For example, if a valuation depends on a particular commercial operation date, uncertainty about interconnection timing is not merely a technical question for later. It is also a question about the economics being negotiated. The assumption and the evidence supporting it belong in the same conversation.
Before terms are agreed, the parties should have a clear view of three things:
Material issues: What could change valuation, timing, transaction structure, or the willingness to proceed?
Risk treatment: What must be resolved, what can be mitigated, and what can credibly be allocated between the parties?
Conditions for commitment: What evidence or action will be required before capital can be committed or released?
Allocating a risk is not the same as making it disappear. A contractual obligation is only as useful as the ability to perform it and the remedies available if it is not performed.
My shorthand has long been that a fast no is better than a long maybe. That is not an argument for hasty rejection. It is an argument for getting material disagreements into the open before both sides spend months trying to make incompatible expectations fit the same transaction.
A useful term sheet does more than record commercial ambition. It establishes a credible basis for proceeding, including an explicit understanding of what remains unresolved.
Term sheet to close: turn findings into resolution
Once the term sheet is signed, the task changes again. Agreement in principle must become a transaction that can satisfy its financing and closing requirements. Sponsors, investors, lenders, lawyers, engineers, insurers, and accounting and tax advisers may all need different evidence from the same underlying project.
This is where an organized data room can be mistaken for an organized process. The documents may be available, yet the team may still lack a shared view of which issues matter most, who is responsible for resolving them, and what constitutes an acceptable answer.
I have watched the first weeks of a diligence window disappear into getting organized. Checklists circulate, requests multiply, and meetings become exercises in reconstructing what everyone else knows. Activity is not the same thing as progress.
The alternative is to begin with a prioritized list of issues. For each material question, identify the evidence required, the person responsible, the dependencies on other work, and the decision that will establish resolution.
“Review the permit” describes an activity. “Determine whether the permit supports the proposed operating configuration and identify the outstanding conditions” describes a question that can be answered. The difference is small in wording and substantial in execution.
The sequence matters, too. A financial model cannot be treated as settled while a technical assumption supporting it remains under review. Workstreams need to exchange conclusions and qualifications, not simply report that their individual checklists are complete.
Not every risk will be eliminated before closing. Some will be mitigated, allocated, or knowingly accepted. What matters is that the treatment is explicit and that the people making the commitment understand the remaining exposure.
Professional judgment remains indispensable. Better preparation gives specialists a clearer map of the questions ahead; it does not remove the need for their work.
Carry the reasoning from one gate to the next
The three gates only work if they remain connected. The investment thesis developed during screening should inform the term sheet. The assumptions underlying the term sheet should shape the closing work. Findings made along the way should remain available without being rediscovered by each new participant.
That continuity requires more than saving documents or preserving a final report. It requires retaining the relationship between a conclusion, the evidence supporting it, and the uncertainties still attached to it.
An initial assumption may be reasonable for screening and insufficient for funding. That does not make the earlier decision wrong; it means the standard of evidence should rise as the commitment becomes larger and harder to reverse. New information must also be capable of reopening an earlier decision.
This is a useful test for both a diligence process and the technology supporting it. Does it help the team understand what is known, what remains uncertain, and what needs to happen next? Faster document processing is valuable, but it is not, by itself, a better investment decision.
The objective is a better decision
The measure of a healthy pipeline is not simply how many projects advance. A well-supported decision to stop can be as valuable as a successful close, particularly when it preserves attention and capital for a more suitable opportunity.
At the first gate, decide where further investigation is justified. At the second, establish whether the parties can proceed on a shared understanding of the risks. At the third, turn that understanding into evidence, actions, and approvals sufficient to close.
The ambition is not to remove uncertainty from clean-energy investment. It is to stop carrying avoidable uncertainty further into a transaction than necessary.
The champagne can wait until the funding is in place. The work before that should give a good project a fair chance of getting there.