Capacity Credits & Availability Fees
Concept
Capacity Credits = Pre-paid production capacity ("surge insurance") Availability Fees = Readiness compensation for tooling, supply chain, personnel
Analogy: Reserved instances in cloud computing — pay for availability, not only for usage.
Why Needed?
Problem: Traditional Procurement
Scenario: Government buys 100 drones. Problem upon escalation: Supplier cannot scale quickly because:
- Tooling is deployed elsewhere (not idle available)
- Supply chain is optimised for peacetime volumes
- Personnel are deployed with other clients
- Result: 12+ months to 10x production
Solution: Capacity Credits
Scenario: Government buys capacity credits for 1000 drones. Benefit: Supplier keeps ready:
- Tooling (CNC, 3D printers, assembly lines)
- Supply chain agreements (Tier-1/Tier-2 commitments)
- Personnel capacity (hiring/training pipeline)
- Result: Time-to-surge: ≤ 6 weeks
Capacity Credits — Detailed Mechanics
Credit Purchase (Step 1)
Buyer (Government) purchases credits representing potential production.
Example:
Credit purchase: 1000 tactical drones
Unit cost (full production): €50K/drone
Credit cost: 15% × €50K = €7.5K/credit
Total credit investment: €7.5M
What buyer gets:
- Surge option — right to activate production within 6 weeks
- Guaranteed pricing — €50K/drone locked in
- Priority access — above non-credit clients
Credit Activation (Step 2)
Trigger: Escalation scenario (e.g., Baltic crisis)
Process:
- T+0: Government activates 1000 credits
- T+1 week: Supplier starts tooling, orders components
- T+6 weeks: First batch delivery (200 drones)
- T+12 weeks: Full 1000 drones delivered
Payment upon activation:
Credit already paid: €7.5M (15%)
Remaining payment: €42.5M (85%)
Total: €50M for 1000 drones
Credit Expiry & Rollover (Step 3)
Expiry: Credits expire after X years (e.g., 3 years) if not activated.
Options:
- Rollover: Renew credits (pay 15% again)
- Partial activation: Use credits for smaller orders
- Transfer: Sell credits to other JEF countries (secondary market)
Availability Fees — Detailed Mechanics
Availability Fee = Annual payment for readiness of systems/tooling.
What is Covered?
Tooling Maintenance:
- CNC machines idle but maintained
- 3D printers calibration
- Test equipment
Supply Chain Agreements:
- Tier-1 supplier commitments
- Pre-negotiated pricing
- Priority allocation clauses
Personnel Readiness:
- Hiring pipeline
- Training programmes
- On-call expertise
Facility Overhead:
- Cleanroom maintenance
- Security (export controls)
- Utilities
Pricing Formula
Availability Fee = (Total System Value × Availability Target × Fee Factor)
Where:
Total System Value = Full replacement cost
Availability Target = Required uptime % (e.g., 95%)
Fee Factor = 10-20% (depending on complexity)
Example: ISR System
Total System Value: €10M (sensors, platforms, ground stations)
Availability Target: 95%
Fee Factor: 15%
Availability Fee = €10M × 0.95 × 0.15 = €1.425M/year
Combined Model: Credits + Availability
Most contracts combine both:
| Component | Purpose | Payment |
|---|---|---|
| Capacity Credits | Surge insurance | 15% upfront, 85% upon activation |
| Availability Fee | Readiness operational systems | 10-20% annually |
| Usage Fee | Actual missions/effects | Per mission/hour |
Example: Baltic ISR + Surge
| Item | Cost |
|---|---|
| Capacity Credits (1000 drones) | €7.5M (15% of €50M) |
| Availability Fee (current 100 drones) | €1.425M/year |
| Usage Fee (ISR missions) | €50K/day × 365 = €18.25M/year |
| Total Annual | €27.175M |
Upon surge activation:
- Spend €7.5M credits
- Pay remaining €42.5M for 1000 drones
- New availability fee: €14.25M/year (10x more drones)
Multi-year Contract Structure
Year 1-3: Build-up Phase
Focus: Establish baseline capacity + credit reserves
| Year | Capacity Credits | Availability Fee | Usage |
|---|---|---|---|
| 1 | €7.5M (1000 drones) | €1.4M (100 drones) | €18.25M |
| 2 | €7.5M (rollover) | €1.4M | €18.25M |
| 3 | €7.5M (rollover) | €1.4M | €18.25M |
Year 4+: Steady State
Scenario 1 (Peacetime):
- Credits roll over, no activation
- Availability fees continue
- Usage fees for ongoing missions
Scenario 2 (Escalation):
- Credits activated → 1000 drones produced
- Availability fees increase (10x capacity)
- Usage fees increase (more missions)
Incentive Alignment
For Supplier
Benefits of capacity credits + availability fees:
- ✅ Predictable revenue (availability fees)
- ✅ Locked-in surge orders (credits)
- ✅ Cash flow for CAPEX (tooling investments)
- ✅ Risk mitigation (paid to be ready)
Obligations:
- ⚠️ Maintain tooling readiness
- ⚠️ Supply chain commitments
- ⚠️ Surge drill participation
- ⚠️ Transparency (audits)
For Buyer (Government)
Benefits:
- ✅ Guaranteed surge (within 6 weeks)
- ✅ Locked-in pricing (no price gouging)
- ✅ Flexibility (activate only when needed)
- ✅ Transparency (dashboards, audits)
Costs:
- ⚠️ Upfront credit investment (15%)
- ⚠️ Annual availability fees (10-20%)
- ⚠️ Potential credit expiry (if not activated)
Secondary Market for Credits
Concept: Credits can be traded between JEF countries.
Example:
Netherlands buys €50M credits (1000 drones)
After 2 years: no activation, credits expire soon
Finland has urgent need (Baltic escalation)
Transfer:
- Netherlands sells 500 credits to Finland for €4M (discount)
- Finland activates credits with Dutch supplier
- Netherlands keeps 500 credits + €4M liquidity
Benefits:
- Prevents credit expiry waste
- Improves JEF flexibility
- Creates liquidity
Governance:
- Export controls (ITAR, EU dual-use)
- Transfer approval (both countries + EU)
- Pricing transparency
Risk Management
For Supplier
Risks:
| Risk | Mitigation |
|---|---|
| Credits never activated | Availability fees cover overhead |
| Tech obsolescence | Iteration clauses (upgrade during contract) |
| Supply chain disruption | Tier-2 visibility, alternative suppliers |
| Regulatory change | Force majeure clauses |
For Buyer
Risks:
| Risk | Mitigation |
|---|---|
| Supplier bankruptcy | Escrow accounts, parent company guarantees |
| Surge drill failure | Quarterly tests, remediation plans |
| Overinvestment in credits | Secondary market, rollover options |
| Tech obsolescence | Upgrade paths, modular designs |
Capital Markets (Zuidas) Integration
Why investors like this model:
-
Recurring Revenue:
- Availability fees = predictable annual income
- Multi-year contracts (3-5 year visibility)
-
Balance Sheet Optimisation:
- Capacity credits = asset (future revenue)
- Availability fees = operating income
-
Growth Optionality:
- Credit activation = surge in revenue/production
- Dual-use = civilian + military markets
Investor pitch:
Base case (peacetime):
- €1.4M/year availability fees
- €18.25M/year usage fees
- Total: €19.65M/year
Surge case (wartime):
- Activate €50M credits
- New availability fees: €14.25M/year
- Increased usage: €50M+/year
- Total: €64.25M+/year