Could you maybe inform us why you do not like this article? Furthermore, a debt service coverage ratio (DSCR) of 1.50x for uncontracted revenues, i.e. 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. 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. The duration of a sale-leaseback can vary depending on the agreed-upon lease terms. 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? 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 level of cookies and processing of personal information we apply is up to you. There are two primary reasons why project nance analysis is somewhat more granular. 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. 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. Karolina Ryszka, Co-authors:Ruurd Immel, Marjella de Vries and Floris van Schade Westrum. At S&P Global Ratings, we have developed a granular framework to assess the risks that underpin project nancing, along with a set of sector-specic key credit factors that complement our analytical approach and aid the analysis of the assets we see being nanced via this technique. We anticipate that capital markets will gradually become more attractive for speculative-grade project nance transactions, as they have for corporate issuers. 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. [8]Firm energy sources are energy sources which can reliably generate energy whenever needed. 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. Use "AND" and/or "OR" to get better search results. [12]We have assumed the corporate PPA price to be 10% below the electricity spot market prices. However, the current trend is toward shorter corporate PPA tenors, i.e. Partner with the expert team at AVANA Capital and receive a personalized renewable energy finance solution. This rather comfortable situation is gradually starting to change in Europe. [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. by the aluminum producers Norsk Hydro and Alcoa Corp, but also by Facebook, Amazon and Google. This paper focuses on off-site generation, where the company purchases its electricity from an off-site renewable energy project via a corporate PPA. 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. VS: Can you briefly describe your roles, and S&P Global's project nance rating business? 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. 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. Long track record in financing renewable energy projects globally, with a large footprint in North America, Europe and Asia, Tailor-made project financings as an alternative in capital intensive sectors, Advise on effective ways for companies to achieve their sustainability & energy transition objectives. 25 to 30 euros per MWh, due to lower electricity market prices in that region. [7]This information was retrieved from our expert interviews. So far, the majority of the European corporate PPAs mature after 12 to 15 years. BloombergNEF (2019): Corporate Energy Market Outlook Double up, January 2019. 
Subject to electricity price developments in the coming decades, the currently observed debt-to-equity ratios of around 80:20 will not be reached until 2040. Could you maybe inform us why you like this article? The Nordics in our view represent a fertile region for project nancing, primarily in the power sector but less so for social infrastructure. 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. MS: And I am Lead Analyst in the EMEA Infrastructure team specialising in project nance transactions, and have a background in structured nance. More than 60% of PPAs were signed in the USA (8.5 GW), e.g. In the long-run, however, we expect the debt-to-equity ratio to rise again and the need for project equity to return to its current level of about 20%. With the exception of large and efficient wind or solar parks, renewable energy projects might need to be incentivized in the short- to medium-term. Renewable energy projects include wind, solar, battery storage, geothermal, fuel cells, waste-to-energy, waste-to-value and energy efficiency. Full List of Advisory Services & Products, Replacement of Benchmarks for Interest Rates. This will slowly change over time. around 10 years. The move away from subsidies will affect the level and stability of future cash flows of renewable energy projects since the market-price risk will increase for both equity and debt providers. A thorough understanding of who contractually bears the risk for which part of the project is paramount in assessing project nance risk. The feed-in-tariffs implied that both equity and debt providers were exposed only to performance risk and not to electricity market-price riskor only to a very limited extent (see Figure 2). 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. Onshore wind is seen as the most competitive source of new generation capacity. We offer innovative structures that are tailor-made for primarily renewable energy, but also for F&A projects. 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. The underlying assumption for lenders being comfortable with full exposure to market-price risk after expiry of the corporate PPA is that the project will be able to conclude a new corporate PPA after expiry of the initial corporate PPA. for lenders or investors). 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. AK & MS: Yes. before it. There are several reasons why, in most cases, not all the electricity produced is contracted under a corporate PPA. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance. 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. 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. Investors will need to deal with the fact that lenders will provide less senior project finance debt on the back of a corporate PPA. Most energy-intensive industries may seek to secure green energy sources to meet their own decarbonisation targets. 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. 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. Attention! The trend is similar for solar PV: despite the regional variations, especially due to different intensities of solar irradiance, capital and operational expenditure developments will result in declining LCOEs (Fraunhofer, 2018). [1] In Germany, the recent revision of the Renewable Energy Law aimed at a general system change, away from feed-in-tariffs to a competitive bidding process, which was already introduced for large-scale solar photovoltaic projects in 2014. Top decision makers at Nordeas large clients across the Nordic region receive Nordea On Your Mind around eight times per year. Since 2016, Rabobank Project Finance has participated in nine projects backed by corporate PPAs (1.9 GW) in Europe, mostly in the Nordics and in Spain. We expect that, for most projects, too much equity will be required to make non-recourse financing viable in the presence of a 10-year corporate PPA. The feed-in-tariffs were generally set above the electricity market prices with the goal of boosting renewable energy generation. The assumed capacity factors, capital expenditure and operational expenditure amounts have been derived from the Bloomberg 1H 2019 LCOE Data Viewer Index. Therefore, project nance lenders are more exposed than corporate lenders to unexpected events that could undermine the viability of the assets and key contracts. However, that owner could find an investor and form a partnership, which allows both parties to own the project.
A transition from feed-in-tariffs to regimes based on tenders is in full swing. We have limited our research to Germany and the UK as these countries are the largest renewable energy markets in Europe. The effect of these three factors is to decrease the amount of long-term debt project finance that lenders are willing to provide: whereas debt-to-equity ratios were generally around 80:20 under the feed-in tariff regimes, such high levels are no longer attainable. For this study, we conducted interviews for a qualitative assessment of the trends and drivers related to corporate PPAs. Projects which have been cleared in auctions more recently, but have not been financed, are not captured in the data. [4]The levelized cost of energy, or LCOE, measures how much money must be made per unit of electricity (kWh, MWh etc. During that time, a tax equity investor pays rent for assets, typically solar panel systems, to the developer. This is due to the downward trend in capital and operational expenditure: when electricity spot market prices and all other assumptions stay constant, lower capital and operational expenses result in higher debt-to-equity ratios. aluminium producers, traditionally hedges the price of part of its electricity consumption for long periods, i.e. Furthermore, we have assumed that the current corporate-tax-rate levels for Germany and the UK remain applicable. IRENA (2018a): Hydrogen from renewable power Technology Outlook for the Energy Transition, September 2018. Such operating and proven assets would represent good candidates to be acquired and leveraged based on project nance techniques. 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? A business that owns an asset will sell that asset. Figure 4 shows the debt-to-equity ratios for onshore wind and solar PV projects in 2020, 2030 and 2040 in Germany and the UK for expected electricity spot market prices. The electricity market in Spain, in contrast, is less liquid and Spain is more dependent on expensive LNG imports for its gas power plants. Sandbag & Agora (2018): The European Power Sector in 2017 State of affairs and review of current developments. Before we assign a rating to project nance debt, we examine all of these factors in detail. The corporate buyer receives continues to buy its power from the local utility at the market price which is hedged by the synthetic PPA. In the next section, we discuss the trends and drivers determining the long-term debt quantum for renewable energy projects on the back of a corporate PPA in more detail. AK & MS: Absolutely. We then discuss the quantitative model we built to predict the development of the debt-to-equity ratio for such projects in the mid-term future. Please note that after expiry of the corporate PPA (10 years) all electricity produced will be sold on the spot market. A clear example is Norsk Hydro which concluded several long-term corporate PPAs with tenors of 20 years and beyond. 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. 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. (2018, 6 August): 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, Bloomberg climate changed. 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]. Looking to expand your business horizons through renewable energy? 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. IRENA (2018b): Renewable power generation costs in 2017, International Renewable Energy Agency, Abu Dhabi. According to Deloittes renewable energy industry analysis, the cost of renewable energy continues to decrease. January 24, 2020, by Rodrigo Berasategui and David Diez (Watson, Farley & Williams). For a discussion on these amendments on the corporate PPA market see Bloomberg (2018a, 2018b, 2019). 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. Energy procurement from renewable energy sources is both a way to lighten their footprint and to bring down or hedge against increasing energy costs. 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. 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.
