Renewable energy is ready to shine for investors

Andy Redinger, Managing Director and Group Head, December 2022

<p>Renewable energy is ready to shine for investors</p>

Redinger shares KeyBanc Capital Market’s historic role in financing renewable energy projects, how he’s seen the sector evolve and his view on the impact of the Inflation Reduction Act (IRA).

Renewable energy’s share of U.S. electricity generation increased by 42% from 2010 to 20201, and now represents nearly 20% of utility-scale U.S. electricity generation, according to the Center for Climate and Energy Solutions. While the sector’s growth has not come without some missteps and setbacks, a growing sense of the inevitability of the energy transition, along with the emergence of mission-driven investing, has attracted an unprecedented wave of investment. Globally, new investment in renewable energy totaled $226 billion in the first half of 2022, an 11% increase over 1H 2021, according to BloombergNEF2.

At the recent RE+ 2022 conference, Andrew Redinger, managing director and group head of the Utilities, Power & Renewable Energy Group at KeyBanc Capital Markets, was interviewed by Nico Johnson, host of the SunCast Podcast. Redinger shared KeyBanc Capital Market’s historic role in financing renewable energy projects, how he’s seen the sector evolve and his view on the impact of the Inflation Reduction Act (IRA).

 

A first mover sees renewable energy transition from niche to mainstream

Redinger kicked off the conversation by explaining KeyBanc Capital Market’s position as the largest provider of renewables project financing in the country. He explained that the bank reached that pinnacle by establishing an early foothold in the industry.

“We bank most of North America’s investor-owned utility companies, and have been doing so since the late 1990s,” said Redinger. “In 2007, we saw that renewable energy was coming on like a freight train as an opportunity that could complement our core business.”

At the time, Redinger thought it would only take a few years for the renewables sector to converge with the bank’s existing base of utility companies, but that evolution has taken longer than he expected. “We were about 12 years off,” Redinger explained. “That convergence is just starting to happen now, accelerated by ESG and all of the new capital flowing into the space. In the last 24 months, this business has gone from niche to mainstream.”

One sign of financiers’ growing comfort level with renewables has been the increasing level of competition – and at earlier stages. “When we started, developers wouldn’t come to us until they were ready to put a shovel in the ground. Now, they’re coming to us months or even years before their project is ready to be constructed,” said Redinger. “That's just a natural maturation of the industry – as more capital has come in, capital providers have to be more aggressive to win deals, and that means lending earlier and earlier.”

 

Emerging from the shadow of yieldcos3

This isn’t the first time the renewables sector has been awash in capital, however. SunCast’s Johnson asked Redinger to compare the current rise of renewables with the “yieldco” era of the mid-2010s. Redinger explained that at that point, the sector was primed to take another step in its maturation but was held back by a lack of capital. One solution that emerged and caught on was a structure that allowed developers to put assets in a C Corp and then attract investors looking for a yielding product.

“It was wildly successful,” explained Redinger. “But when an industry grows that quickly, you don’t have time to go out and educate investors properly, so you end up attracting hedge funds.” Redinger added that, at a time when the industry needed buy-and-hold investors, the hedge funds were not long-term investors. “When clouds appeared on the horizon, the hedge funds sold and the market collapsed,” said Redinger.

This time around, as deals eventually come to market, Redinger expects a much better reaction from equity markets. “There are more investors interested in the space, and I think they’ve done their homework,” said Redinger. “This new batch of IPOs won’t be dividend-paying entities, they’ll be buying and holding renewable assets with a tremendous amount of growth potential. So, they’ll be growth vehicles versus yield vehicles.”

 

The Inflation Reduction Act: We’ll take it, but we didn’t need it

Touted as the most impactful legislation aimed at climate action in U.S. history, the Inflation Reduction Act (IRA) extends and expands existing tax credits, creates new tax credits, and bonuses, and makes credits transferable. The total investment in renewables included in the IRA amounts to around $370 billion. But with so much capital already flowing into the space, Redinger questioned the need for renewables incentives being incorporated into the new law. 

“Capital even before the IRA was wildly available, so the IRA is like throwing gasoline on a roaring bonfire,” said Redinger. “It’s throwing money at a problem that didn’t exist.”

Redinger conceded, however, that expanding the availability of tax credits and allowing developers to monetize them will help accelerate decarbonization by stimulating development of renewable projects. In fact, the renewable energy provisions in the IRA are forecast to double pre-IRA projections of U.S. wind and solar capacity in 20304.

“The legislation is ultimately going to do what it was supposed to do, which is increase the number of projects here to help decarbonize our environment,” said Redinger. “It's incented everybody to go out and figure out how to build solar projects.”

 

The rise of Term Loan B funding in renewables

Much of the financing for this wave of new renewable projects will come from sources of capital already available to the renewable energy space. One potential new source Redinger mentioned is the multi-trillion-dollar institutional term loan B (TLB) marketplace.

“As with most industries in their infancy, renewables have been financed on a project financing (PF) basis for the past 15 years,” explained Redinger. “The TLB market has not been interested in renewables up to now, but the industry is mature enough where it should start attracting TLB capital. That marketplace tends to lever these deals up more than banks, they tend to be less restrictive and, I think, that will end up being a better source of capital for renewables.”

 

Bumps in the road

The outlook for renewable energy is not entirely rosy, however. While the renewables industry has grown at a fever pitch over the past two decades, clean power installations are down 18% year-to-date compared to 2021, and deployment in the third quarter was down 22% year-on-year, according to the American Clean Power Association5 (ACP). The ACP’s report cites supply chain problems, anti-circumvention investigations, rising shipping costs, turmoil in China and power grid interconnection issues6 as the primary drags on development.

Still, based on his overview of the sector and KeyBanc Capital Markets leadership in renewables project financing, Redinger struck an optimistic tone as he concluded his discussion with Johnson.

“There is so much incentive now to go out and get these projects built and operating,” he said. “We may hit a couple of speed bumps here in the near term, but we're going to figure it out.”

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 and to discuss your next deal, reach out to Andy Redinger.

Visit www.key.com/energy

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp® and its subsidiaries, KeyBanc Capital Markets Inc., Member FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed.

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