before it. For example, we project annual investments of European utilities to increase, on average, by 30% annually over the next three years, to about EUR 133bn on aggregate for all entities we rate. When they can materially influence creditworthiness, ESG credit factors are embedded in our forecasts, analysis and assessment of a project's construction and operations phases. Thats according to S&P Globals Andreas Kindahl and Michele Sindico. IEA (2019): Cost and performance characteristics of new generating technologies, in Annual Energy Outlook 2019, January 2019. by Facebook, AT&T and ExxonMobil. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance. 10 -15 years. Deals were also signed in Poland (for the first time), Denmark and Finland (second time) and several deals were signed in the UK. We see two main factors supporting a boost in project nance debt: VS: Do investors have different needs to assess project nance risks compared with risks associated with other asset classes? AK & MS: The global infrastructure team comprises around 130 analysts in 24 offices and covers over 1,200 ratings, of which about two-thirds are more corporate-like infrastructure entities, such as utilities and transportation infrastructure companies(airports, ports, etc), and one-third are transactions rated using project nance or project developer nancing techniques (across multiple asset classes, but mainly infrastructure related). The lenders look to the cash flow generated by the assets as the primary means for the debt to be serviced, and therefore are allowed to exercise considerable control on the operation of the project. For this research we have assumed a corporate PPA with a tenor of 10 years and senior project finance debt being sized on a 14 years tenor, i.e. Starn, J. Whereas in Spain corporate PPA prices generally fluctuate between 35 and 40 euros per MWh[6], corporate PPA prices in the Nordics are substantially lower, i.e.
for lenders or investors). There are three factors which negatively affect the debt-to-equity ratio: (i) lower corporate PPA prices as compared to subsidy regimes, (ii) contracting less than 100% of the electricity produced, and (iii) shorter PPA tenors as compared to subsidy regimes. The green energy transition and Europes need for energy security will likely trigger an investment supercycle, and project finance will play a key role. In other words, utilities are likely to develop large-scale renewables on the balance sheet but, when nished, will sell some of those assets to recycle capital and reinvest in new projects. By using cookies we ensure our website is safe and user-friendly. To support these large investments, we expect to see a signicant mobilisation of capital that will inevitably result in an increase in debt issuance, both through traditional corporate borrowing and project nancings. Heavy industry, e.g. In Europe, the Middle East and Asia, corporate PPAs amounting to 2.3 GW were concluded, mostly in the Nordics, e.g. AK & MS: Project nance is a non-recourse nancing technique typically affiliated with capital-intensive infrastructure assets, but that can be applied to most real assets with a long-term revenue prole., In a broad sense, we talk about a project in the instance whereby a limited purpose entity (or LPE), nancially and legally independent from its shareholders or sponsors, is tasked to build and/or operate a dened asset or a set of discrete assets for a nite period. Could you maybe inform us why you like this article? IRENA (2018a): Hydrogen from renewable power Technology Outlook for the Energy Transition, September 2018.
AK: I joined the Ratings division in 2000 and am now the Global Head of Infrastructure & Utility Ratings, as well as the Regional Head for the Nordics. According to the BloombergNEF 2019 Corporate Energy Market Outlook, in 2018 clean energy corporate PPAs were signed by 121 corporations in 21 different countries for a total of around 13.4 GW. This is where we come in. AK & MS: We believe the motive behind corporate sponsors' use of project nance structures is to be found in a cost-benet analysis that is unique to each company regardless of region. Under the plan, electrication would increase to 30% of the nal energy demand by 2030 and to 57% by 2050, from just 25% today. Andreas Kindahl(AK), Global Head of Infrastructure & Utility Ratings and Regional Head for the Nordics, andMichele Sindico(MS), Director and Lead Analyst in the EMEA Infrastructure team, fromS&P Globaltalk to Nordea Thematics Viktor Sonebck (VS) about the case for project nance, and how it differs from traditional corporate funding. According to BloombergNEF, capital expenditure for onshore wind projects in Germany will fall by ca. Renewable energy projects include wind, solar, battery storage, geothermal, fuel cells, waste-to-energy, waste-to-value and energy efficiency. Before investing in a project nance bond or loan, and to appreciate its credit risk, it is therefore essential to understand inside out the underlying cash-flow generating asset. The most important assumptions underlying the financial model are illustrated in Tables 1, 2 and 3 in the Appendix. AK & MS: Yes. Corporate PPA prices vary substantially between regions in Europe due to varying electricity market prices.
BloombergNEF (2018b): 2H 2018 Corporate Energy Market Outlook One for the books, August, 2018.
If you are a corporate client and want to access the full Nordea On Your Mind report, please contactviktor.soneback [at] nordea.com (Viktor Sonebck). A time-based flip tends to have a term length of around 5.5-6 years. The level of cookies and processing of personal information we apply is up to you. Energy procurement from renewable energy sources is both a way to lighten their footprint and to bring down or hedge against increasing energy costs. These cost reductions translate into reductions of LCOE: according to Bloomberg, LCOE of onshore wind will be almost 40% lower in 2050 than in 2020.
We offer innovative structures that are tailor-made for primarily renewable energy, but also for F&A projects. What part do credit ratings play in project nance globally today, and how does that differ from their role for other types of bond issuers? VS: Are there any regional differences in the extent to which corporates utilise project nance structures? There are two primary reasons why project nance analysis is somewhat more granular. Traditionally, capital markets' receptiveness for project nance debt has depended largely on the debt having an investment-grade rating and the price competitiveness of capital market issuance versus bank or private nancing. Investors will need to deal with the fact that lenders will provide less senior project finance debt on the back of a corporate PPA. Looking to expand your business horizons through renewable energy? [4]The levelized cost of energy, or LCOE, measures how much money must be made per unit of electricity (kWh, MWh etc. Projects which have been cleared in auctions more recently, but have not been financed, are not captured in the data. For the purpose of this research, we built a financial model to determine the expected debt-to-equity ratio for onshore wind and solar PV projects in 2020, 2030 and 2040. The assumed capacity factors, capital expenditure and operational expenditure amounts have been derived from the Bloomberg 1H 2019 LCOE Data Viewer Index. This will slowly change over time. Usually, a returned-based flips term length is around 5.5-7 years. The lenders' reliance on discrete assets over a materially longer time horizon than pure corporate debt requires also a granular approach to environmental, social and governance (ESG) factors. PPAs will provide greater visibility on future cash flows and be largely positive for project nance debt issuance. According to IRENA, the global weighted average of LCOE of utility-scale solar PV has fallen 73% since 2010. Additionally, project nance issuers are typically subject to limitations on what they can and cannot do, and generally aim to allocate risks and responsibilities between transaction participants. MS: And I am Lead Analyst in the EMEA Infrastructure team specialising in project nance transactions, and have a background in structured nance. They also mean we can inform you better. Any analysis therefore needs to critically consider whether, with the right maintenance, the asset can meet any operational and contractual obligations until full repayment of the debt. A business uses this structure to break up the tax credit and depreciation expense. Legacy? Subsidies versus corporate PPAs from a lenders perspective, Trends and drivers affecting the debt-to-equity ratio, Equity versus debt a quantitative model, 2018 ended as the second most expensive year of the Spanish electricity market history, Levelized costs of electricity renewable energy technologies, Cost and performance characteristics of new generating technologies, https://bvgassociates.com/wp-content/uploads/2017/11/InnoEnergy-Offshore-Wind-anticipated-innovations-impact-2017_A4.pdf, https://www.irena.org/publications/2017/Oct/Electricity-storage-and-renewables-costs-and-markets, Hydrogen from renewable power Technology Outlook for the Energy Transition, The European Power Sector in 2017 State of affairs and review of current developments, Power Worth less than zero spreads as green energy floods the grid wind and solar farms are glutting networks more frequently, prompting a market signal for coal plants to shut off.
Nevertheless, and in addition to accelerating renewable energy generation, this could lead to new investment opportunities in And even when contracts clearly set out roles and responsibilities with respect to immediate risks, such as delays in a project in construction, anyone performing the necessary contract analysis inevitably needs to make projections and forward-looking conclusions to determine the potential risk of a shift in responsibilities away from the relevant participant. Copyright 2022 Rabobank/RaboResearch, Utrecht. This rather comfortable situation is gradually starting to change in Europe. VS: Can you briefly describe your roles, and S&P Global's project nance rating business? The main differences in outcomes are expected to be the result of differences in average capacity factors[10], capital expenditure and operational expenditure and/or the corporate tax rates applied[11]. Power is the largest sector, making up 37% of the ratings, followed by social infrastructure at 28% and transport at 27%; oil and gas account for 7%, and the remainder is spread among industrial, desalination, and sporting team projects. Renewable project finance: Can corporate PPAs replace renewable energy subsidies? An inverted lease structure is appealing because it allows expense flexibility. Tenors far beyond 15 years seem possible only in the Nordics, where electricity market prices are stable as a result of abundant and established hydro energy capacity. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage. Assuming the other corporate PPAs terms and conditions are acceptable to the project finance lenders, the total amount of long-term project finance that debt lenders are willing to provide will be largely dependent on three factors: the (fixed) price level, the volume contracted and the term as applicable to the corporate PPA. The length of a partnership flip structure can vary. TIP! We have limited our research to Germany and the UK as these countries are the largest renewable energy markets in Europe. Such operating and proven assets would represent good candidates to be acquired and leveraged based on project nance techniques. Typically, the asset being sold is a high-cost fixed asset, such as renewable energy equipment for utility-scale projects. These percentages change during the post-flip period, as the managing member buys out the tax equity partner, resulting in 100% ownership. If the asset operates in a competitive environment, to assess its ability to service the debt, we like investors need to assess features and operating attributes that may differentiate the project and its assets from the rest of the pack. The generator and the buyer settle the difference between the variable market price and the fixed PPA price. [7] The reasons for the lower electricity market prices in the Nordics include a large share of (firm[8]) renewable generation capacity, especially hydro energy, and a very liquid electricity market. 
As a result of the huge demand for project equity and as equity investors will try to limit their exposure to market-price risk, a market for mezzanine project financing might develop during the transition period, i.e. [3]The Stimuleringsregeling duurzame energieproductie (SDE, later SDE+) is a Dutch scheme to incentivize sustainable energy production. January 24, 2020, by
The contract contains the commercial terms of the electricity sale: contract length, point of delivery, delivery date/times, volume, price and product. In the short-term corporate PPA will not be a perfect substitute for renewable energy subsidies in most western European countries. Demand for corporate PPAs is now mainly driven by the heavy industry and ICT sectors. The layout of the generated PDF may differ from the web page.
Companies can adopt different strategies to purchase renewable electricity which are generally distinguished as (i) on-site/near-site generation and (ii) off-site generation. Secondly, it may be beneficial for the project not to sell all the electricity produced, in particular for baseload structures (where the renewable energy generator is obliged to deliver a certain amount of electricity on an hourly, monthly or annual basis). This means high-risk projects are generally funded in the bank market or by state or multilateral lending institutions such as development banks or export credit institutions. Attention! First, project nancings are generally designed around, and dependent on, discrete assets. Onshore wind is seen as the most competitive source of new generation capacity. The electricity sold under a PPA can be from existing renewable energy supply or a newly built project. There are two common Corporate PPA structures: Sleeved or physical structureIf the renewable energy asset is on the same grid network as the company, the corporate buyer can enter into the Corporate PPA with the generator and appoint a utility to deliver electricity on its behalf. "megaprojects", such as LNG terminals, large-scale green hydrogen systems (renewable power combined with hydrogen electrolysers), new nuclear reactors, large battery storage units, etc. Thanks to lower costs, more businesses across the nation can begin the transition to renewable energy use., One important factor to understand before starting any clean energy project is renewable energy finance structures. Through the lease agreement, a business can continue to use an asset without the risks of owning the asset. IRENA (2018b): Renewable power generation costs in 2017, International Renewable Energy Agency, Abu Dhabi. Europe will need to add between 45 and 55 gigawatts (GW) of renewable capacity a year this decade (20-30 GW annually for solar and 25 GW for wind). This demand for equity might open up the possibility for mezzanine financing to fill the gap. While the European utility sector has a particularly strong capacity to attract capital, supported by solid growth prospects and the positive environmental impact of these investments, we expect a large degree of capital rotation in this area. The duration of a sale-leaseback can vary depending on the agreed-upon lease terms. Moreover, depending on the sponsor's standalone creditworthiness, it is possible for project nance debt to be rated higher than the sponsor itself.
Processing, storage, recycling, bio-waste-to-energy and cogeneration, $284 million Construction Loan Joint Lead Arranger, Lender, US$ 1.1 billion Term Loan A LC Facilities Joint Lead Arranger, LC Issuer Hedge Provider, $400-$500 million Construction Loan Joint Lead Arranger, Administrative Agent, Lender, $574 million Construction/Term Loan Working Capital Facility LC Facilities Mandated Lead Arranger, Lender. However, the current trend is toward shorter corporate PPA tenors, i.e. before it. This partnership allows flexibility by allowing project partners to share the projects economic returns. 
The unavoidable technical analysis may be complicated by the factthat the asset may at the time exist only as drawings and remains exposed to construction unknowns until nal completion. Conversely, a return-based flips term length is based on when the tax equity investor has turned their predetermined ROI. The owner or the developer is a managing member in a partnership flip structure. Their primary instrument of intervention is represented by the ability to enforce their security interest over the assets and the contracts that govern them.. 
A business that owns an asset will sell that asset. That compares with 30 GW added in 2020 (20 GW of solar and 10 GW of wind). VS: With Paris Agreement commitments to address climate change requiring massive investments in the green energy transition and related infrastructure, is there a role to play for project nance to help fund them? Corporate PPAs are therefore not one-on-one substitutes for feed-in tariffs in the short-term. Karolina Ryszka, Co-authors:Ruurd Immel, Marjella de Vries and Floris van Schade Westrum. This analysis suggests that a word of caution is needed for policymakers in their decision making on subsidy regimes in the future: it is debatable whether the impulse for renewable energy development that previously came from generous subsidy regimes can be sustained in the absence of substantial electricity price increases.
Equally important, unlike traditional corporate entities, which can hold onto any free cash flow and reinvest it in the business, the cash flow generated by a project nance structure flows directly from the project to creditors and can only be disbursed to the sponsors if the assets are performing well. Furthermore, when smaller and/or lower-rated corporates enter the corporate PPA markets, PPA tenors will shorten as equity and debt providers are unwilling to run counterparty risk on such corporate off-takers for a very long period of time. Exclude search terms by putting a "!" Finding the best renewable energy finance option will depend on the details of your project. The corporate buyer agrees a fixed PPA price and, potentially, a price for renewable certificates with the generator. An exception could be Germany, but only in high and very high electricity price scenarios: then the average renewable energy project would be able to raise enough senior project finance debt to make these projects sufficiently attractive to equity investors. The need to scrutinise and assess the quality of the construction phase is even more crucial because the tenor of project nance debt is generally longer than for most corporate nancings. More than 60% of PPAs were signed in the USA (8.5 GW), e.g. The electricity market in Spain, in contrast, is less liquid and Spain is more dependent on expensive LNG imports for its gas power plants. Bloomberg data is reflective of projects that were financed in the six months before the publication of the data or which were then under construction. Depending on the stability of future cash flow generation, project nance structures grant sponsors the possibility of achieving higher debt-to-equity ratios, which could, under certain conditions, result in lower cost of debt than for conventional corporate nancing. We expect the energy transition together with the European Commission's "Fit for 55" package will sharply increase growth in demand for electricity, primarily from 2030, which will likely support high power prices in the long run. During the pre-flip period, the managing member owns 1-5% of the project, while the tax equity partner owns 95-99%. Based on assumed reasonable electricity market prices, the debt-to-equity ratios will increase to around 50:50 and 70:30 in ten years from now. In this Special we ask whether corporate PPAs can replace the fading subsidy schemes. The renewable energy sector in Europe has been characterized by various subsidy regimes in the last two to three decades: Germany and the UK introduced feed-in-tariffs in 1991 and 2010 respectively, the Netherlands in 2003. About half of the 300 project nance ratings we maintain globally are in the low investment-grade category ("BBB-" or above), and the remainder are in the "BBB" category. This is one of the main conclusions from our analysis of how the debt-to-equity ratio of a renewable energy project will change as a consequence of fading subsidy regimes. The partnership flip is a beneficial renewable energy finance structure for projects that receive production tax credits. To tackle climate change, companies and corporations are looking to reduce their carbon footprint. We also developed a financial model for a quantitative assessment of how the debt-to-equity ratio will develop in the period 2020-2040 in a subsidy-free world and in the presence of corporate PPAs. [7]This information was retrieved from our expert interviews. revenues generated by selling electricity on the spot market, and a debt service cover ratio of 1.20x for revenues from electricity sold under the corporate PPA have been assumed. Synthetic, virtual or financial structureVirtual PPAs are more flexible the generator and off-taker do not have to be connected to the same network. The risk assessment of a project nance debt instrument requires a unique analytical mindset and set of tools relative to conventional corporate debt. As a result, the business could deal with each individually rather than taking them all on at once. For this study, we conducted interviews for a qualitative assessment of the trends and drivers related to corporate PPAs. Both for onshore wind and for solar PV, the availability of senior project financing is restricted in the short run (2020). VS: How does S&P dene project nance, and how do you view it compared with other types of nance, for example in terms of risk prole or specic benets or disadvantages? For other geographies and other technologies, e.g. [2] In the Netherlands, a tendering scheme is available under the support scheme (SDE+) for offshore wind.[3]. Since the average capacity factor in the Nordics would be higher, a higher gearing could be achieved in the Nordics than in our example. This includes the initial capital investment, maintenance costs, the cost of fuel for the system (if any), any operational costs and the discount rate applied (e.g. Exclude search terms by putting a "!" It is clear that a large amount of equity will be needed in the transition phase from 2020-2035. This means that completing project nance transactions in jurisdictions with weak legal frameworks and rule of law is more complex and could be commensurate with speculative-grade ratings (i.e., "BB+" and below)., In developed markets, and based on our experience, the size of the project matters, and even a corporate with a solid balance sheet may be more prone to adopt a project nance approach in the context of large-scale projects than small ones. Yet, as Figure 3 shows, PPAs are not perfect substitutes for subsidy regimes: they will affect the availability and/or the amount of long-term project finance debt that lenders are willing to provide to renewable energy projects. Although the levels of costs and expected cost decreases vary between regions (IRENA, 2018b; EIA, 2019), the trend is clear: both capital expenditure and operational expenditure of all renewable energy technologies are expected to fall substantially in the future. Nordea On Your Mindis the flagship publication of Nordea Investment Bankings Thematics team, which produces research for large corporate and institutional clients. [12]We have assumed the corporate PPA price to be 10% below the electricity spot market prices. 10 to 12 years. Naturally, each corporate entity will use the form of nancing that optimises its cost of nancing. AleaSoft Energy Forecasting (2019): 2018 ended as the second most expensive year of the Spanish electricity market history. Fraunhofer (2018): Levelized costs of electricity renewable energy technologies, Fraunhofer Institute for Solar Energy Systems ISE, March 2018. Going green has become more commonplace in the United States. 2020 2035 to 2040. Partner with the expert team at AVANA Capital and receive a personalized renewable energy finance solution. After the sale, the new owner will lease the asset back to the seller for a certain time. 
[10]The net capacity factor is the ratio of an actual electrical energy output over a given period of time to the maximum possible electrical energy output over that period.
project finance structures for renewable energy
