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With environmental, social and corporate governance (ESG) investments a priority for capital of all types, the renewable energy marketplace is attracting significant attention from investors and institutional capital, as well as new lenders to the space. The renewable vanguards – wind and solar energy – are now joined by emerging technologies, which need the physical infrastructure and financing structures to support them.

At the recent Renewable Energy Finance Forum (REFF) Wall Street conference, KeyBanc Capital Markets’ (KBCM) Aaron Klein, Managing Director, Utility, Power & Renewable Energy, joined a panel of other leading bankers and investors focused on the renewable energy space to discuss deal flow and their strategies for merchant power, hydrogen, storage, community solar and other technologies.

State of the renewables market

To set the stage, the group discussed the current state of the market, noting some key trends influencing renewable financing strategies such as:

  • Offtake contracts are getting shorter, and in some cases, more complex, particularly as new corporate power purchase agreements (PPA) come into the market
  • Wholesale power prices are more volatile, dovetailing with the shorter contracts
  • Market capitalizations (caps) for green power companies have gone much higher

In light of these dynamics and ESG mandates for capital providers, volume and competition for renewable deals is “turbocharged” according to the panel.

“In a market that’s flush with liquidity, lenders have to compete on more than just price; you must offer structure, creativity and access to new markets and other types of capital,” said Klein. “We take a relationship-based approach to our coverage model. It’s about being meaningful to our client and going deeper with and for them.”

Expanding renewables offerings create a crowded marketplace

Both the volume of deals in the renewable space and what is considered renewable is expanding. As wind and solar energy have become widely used to support power grids in the U.S. and internationally, with preexisting infrastructure and operations to support them, they have become well-established and somewhat predictable renewable energy investments. Now the sector is expanding with storage, offshore wind, and hydrogen, and the market is moving more quickly and changing frequently. This accelerated environment is leaving every investor “thirsty for knowledge.”

In the traditional renewable space (wind and solar), the “name of the game” is finding the ability to put money to work, for both equity and debt investors, there’s been a move from asset to platform acquisition.

Most banks have a mandate to do renewables deals, and all types of debt and equity providers are also interested in the space.

“One thing we noticed through COVID was not only the resiliency of the renewable assets that were operating, but we saw the world wake up to ESG [investing],” said Klein. “We saw a maturation happen in the renewable space, and at the same time, we saw a compression in the cost of capital. It happened in senior debt, mezz debt, equity, everywhere except tax equity.”

He notes a supply-demand imbalance. With an estimated $35 trillion earmarked to ESG investments, and not enough space for it in available investments, the renewables market is becoming overcrowded, which is pushing pricing, when looking at some of the platforms that have gone public, valuations are “through the roof” according to the panelists.

Deal structures in renewables lending

Both banks and non-banks – including green bond programs, insurance companies, and ESG funds – are providing financing to renewable developers. The panelists agreed that more lenders are comfortable with taking on some merchant risk.

Banks tend to do shorter-term, mini-perm deals. In the U.S. there is structural support for five- to seven-year deals with the risk back-ended.

“We explore all avenues with our clients. Bank debt and structured finance are the first go-to products to help stand up an industry, and that’s done a good job of standing up renewables,” said Klein. “We’re at an inflection point with the maturity of the space starting to see competing buckets of capital. As more structures come up, you’re going to need access to different types of capital.”

Banks are designed to handle the shorter-term end of the market the best, including aggregation facilities, construction facilities, and then once assets reach completion, the institutional market can step in with long-term asset liability matching. In the U.S., while banks may have the ability to selectively do longer-term debt, it’s not cost effective. However, in Europe, the offshore wind market is dominated by long-tenor financing.

Perspectives on nonconventional renewables

The group talked about nonconventional renewables that were on the cusp of accelerating, including carbon capture & sequestration (CCS), hydrogen, geothermal, biofuels, and smart grids. The bottom line is that with newer technologies, investors will be focused on who the sponsor is first.

CCS is a process that captures carbon dioxide before it enters the atmosphere, transports and stores it (carbon sequestration) for hundreds of years. Because many industries have a goal of reaching “net zero” – or balancing the greenhouse gas emissions produced and the amount removed from the atmosphere – we’re seeing interesting deal flow in carbon capture storage with the U.S. in the lead. Some of these early deals will bridge into a tax equity funding structure that takes advantage of the carbon sequestration tax credit, or 45Q credit.1

Hydrogen has a larger presence in Europe and Asia, where government initiatives in Germany and the Netherlands are helping support it. While the market is still emerging, it shows a lot of potential, according to the panel, but more has to be learned about how widely this fuel source will be used.

Renewables will be a part of the sustainable financing future

In the current environment of supply-demand imbalances, labor shortages and logistics challenges, the near-term direction of the battery storage market is murky. What is clear is that a massive amount of education is needed to bring all market participants—or would-be participants—up to speed on the market evolution. The playing field varies from state to state, and regulatory and operational frameworks are still being created. In short, the next few years will likely be an interesting roller-coaster ride as the markets take shape.

KeyBanc Capital Markets Utilities, Power & Renewable Energy group is a leading financial advisor and lender in the North American marketplace. As one of the first investment banks to embrace renewable energy, we bring together deep experience in both traditional investor-owned utilities and the renewable energy sector that is powering the future. To learn more or to discuss renewable energy investment trends reach out to Aaron Klein or Andy Redinger.

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1

Carbon Capture Coalition: 45Q Tax Credit. https://carboncapturecoalition.org/45q-legislation/

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