Rising demand for renewables will pressure debt financing, bankers say
- AuthorAllison Good
The increasing flow of renewable energy debt deals and larger transaction sizes spurred by the US Inflation Reduction Act (IRA) will stress the banking sector, industry experts said June 7 during a panel at the American Council on Renewable Energy’s New York City finance forum.
The debt market for renewables was about $30 billion in 2022 and 90% funded by banks, according to Alok Garg, head of sustainable finance advisory at Wells Fargo & Co.’s commercial banking services arm. At the same time, higher interest rates have contributed to a “sea change” in liquidity with debt costs impacted by at least 25 to 50 basis points, he said.
“This is the first time I’m seeing really a lack of liquidity where … our clients have to go and actually hunt for capital,” Garg said. “Deals are getting done, access to capital is still there, but is obviously more constrained than I think I’ve ever seen in the last 10-plus years.”
Borrowers are also more hesitant to transact with regional banks, particularly since the Silicon Valley Bank collapse in March.
“We closed a transaction earlier this year and the plan was just to bring lenders to the table,” Nomura Holdings Inc. infrastructure and power finance executive director Alain Halimi said. “In the past 17 years it was the first time we’re getting quizzed on, ‘OK, send me their balance sheets, explain to me how it’s going to work with them.'”
With emerging technologies like hydrogen and carbon capture becoming more financially viable due to federal tax credits — and creating a “step increase” in demand for tax equity — “it’s going to stress the entire banking system unless we start to bring in other investors,” Garg said.
Insurance companies and bondholders are interested in financing that debt, but they remain on the sidelines because banks have done most of the dealmaking, the experts noted.
New deal structures
Clients will also have to become more comfortable with less traditional debt structures to facilitate the market’s expansion.
As the nascent tax credit transfer market takes shape, for example, Claus Hertel, Rabobank project finance Americas managing director, said hybrid securities will be key to financing related credit facilities.
“What we’re seeing more is kind of a unique tranche where you have the energy side of the cash flows and then if you have the transferability structure you have the [production tax credit] transfer loan,” he said.
As of 2023, developers of solar, wind and other low-carbon energy technologies can convert tax credits into cash payments by selling the credits to unaffiliated corporate entities, opening the door for direct ownership and potentially creating extra income from unused credits if transfer markets materialize.
A unitranche structure that combines senior and more junior and riskier loans with a single interest rate, Hertel continued, can be an effective vehicle for financing tax credit transfers.
In terms of the security structure, “you’re in a much better position so you can allocate less capital towards it and hopefully get the same level of pricing or more,” Hertel said.
Warehouse loans, used to finance renewables projects on a short-term basis, have also become popular, according to Wells Fargo’s Garg.
In November 2022, the bank was one of 18 creditors that facilitated a $1.7 billion warehouse facility for AES Corp.’s clean energy business to provide funds for constructing 3 GW of solar, solar plus storage, wind and stand-alone battery storage projects, Garg noted.
Offtaker options
That financing flexibility has also extended to offtakers, who have been willing to renegotiate power purchase agreements (PPAs) when projects are delayed due to supply chain shortages.
“The PPA counterparty’s more than willing to renegotiate the PPA prices even higher because of all the inflation impacts,” Garg said.
Even corporates like Amazon.com Inc. have adapted to that environment, according to Rabobank’s Hertel.
“These guys can’t go around the corner to developer number two and say, ‘Give me the same price.’ Everyone’s sitting in the same boat and even the largest offtakers … they’re willing to negotiate 10%, 20%, 30%,” he said.
Some negotiations for large offshore wind projects, however, have been difficult.
The Massachusetts Department of Public Utilities in 2022 declined Avangrid Inc.’s request to dismiss and renegotiate contracts for its 1,232-MW Commonwealth Offshore Wind Project with the distribution utility subsidiaries of Eversource Energy, Unitil Corp. and National Grid PLC. In March, Massachusetts officials said they want to continue negotiations.
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