The latest on Energetic and renewable energy trends.

Thoughtful collaboration between a developer, financier, offtaker, and insurance provider enabled the development and procurement of 603kW of clean, renewable, solar electricity for Arizona schools.

When it comes to education, every dollar counts. School funding constraints have been a part of the national discourse for years. The Atlantic recently elaborated on how the covid-19 pandemic has further strained the American school system – noting the decades-long decline in teacher relative pay and status, educator resignations, and more. It is critical to ensure that as much of the state funding that supports schools goes towards educational needs.

Utility costs for schools are not often discussed and rarely make headlines. With the rising costs of fuel, that may soon change as schools begin to feel the added financial strain. Fortunately, there are ways to mitigate these costs via electrification, energy efficiency, and renewable energy expansion.

Last year, Arizona charter schools, including The Daisy Education Corporation, saw the opportunity to procure clean energy while reducing costs. Steamboat Solar, a renewable energy developer, wanted to help.

“We knew that we could provide these schools with even more significant cost savings if we could access competitive financing rates.” - Stuart Kronick, Co-Founder of Steamboat Solar LLC

Steamboat reached out to Energetic Insurance with hopes that our policy could help them access debt capital for these schools which did not carry a public investment grade rating.

Energetic Insurance assessed the project, offtakers, and related risks and saw a promising opportunity. The charter schools at hand were competitive, highly rated, had long operational histories, growing enrollment, and were ranked among the top schools in Arizona (as measured by standardized test scores). Charter schools in the Daisy Education Corporation’s network provide a rigorous college-preparatory education focused on science, technology, engineering, and math (STEM).

Also appealing was the location and policy environment. Thanks to the Arizona’s net metering policies, utilities would acquire any energy generated above and beyond the school’s usage, increasing the utility’s renewable energy portfolio, contributing to state renewable energy targets, and ultimately providing benefits to the project developers. This has the added benefit of mitigating the risk of non-payment of project debt. Arizona’s strong commitment to solar is demonstrated by the favorable development environment it has curated. The state has provided solar tax incentives, including tax credits, solar equipment sales tax and equipment property tax exemptions, and offers net metering. According to the U.S. Energy Information Administration “In 2020, Arizona ranked fourth in the nation in solar-powered electricity generation at utility-scale and small-scale installations. Solar energy provided the state with more power than all of Arizona's other nonhydroelectric renewable energy sources combined.”

Live Oak Bank, an experienced renewable energy lender saw the value in this project.

"We knew the Steamboat team to be diligent and sophisticated. We were glad to help finance this project, even more as we were able to support educational institutions.” - Derek Welsh, Vice President and Head of Distributed Energy Finance at Live Oak Bank

With EneRate Credit Cover, Steamboat Solar was able to access affordable financing via Live Oak Bank. The project was enabled by smaller, regional O&M contractors, supporting local jobs, and further supporting the local economy.

Ultimately, Steamboat Solar was able to present an electricity procurement option that saves the schools tens of thousands of dollars relative to the regular utility rate over the lifetime of the system. Each dollar saved enables state and taxpayer dollars to go a bit further in directly contributing to childhood education.

If you are a developer seeking competitive project financing, reach out – we’re glad to discuss and make introductions to Live Oak. If you are a school seeking solar, contact our friends at Steamboat – they are there to help.

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About Participants

Energetic Insurance is a Managing General Underwriter (MGU) with a novel, data-driven approach to develop new risk management products to unlock exponential growth in the renewable energy industry. Their EneRate Credit Cover®, unlocks renewable and energy efficiency project financing for unrated and below investment grade counter parties by covering counterparty credit risk.

Steamboat Solar LLC (“Steamboat”) is a project developer and tax equity provider who works with sponsors, developers, and offtakers to structure, develop, finance, and manage commercial solar projects. Steamboat owns and operates solar projects and provides both tax equity and financing for developers. In addition to newly developed solar projects, Steamboat provides liquidity to legacy solar installation owners through the purchase of individual sites and bundles of projects. With a focus on schools, not for profits, and municipalities, Steamboat operates facilities in California, Arizona, and New Jersey. Steamboat was founded in 2018 and is headquartered in New York, New York

Live Oak Bank (“Live Oak”), a subsidiary of Live Oak Bancshares, Inc. (Nasdaq: LOB), is a digitally focused, FDIC-insured bank serving customers across the country. Live Oak puts a groundbreaking spin on service and technology to redefine banking. Our products help customers buy, build and expand their business, and we offer high-yield savings and CD products to grow their hard-earned money. To learn more, visit www.liveoakbank.com  

Scout Solar LLC (“Scout Solar”) and SunRenu Solar (“SunRenu”) will both provide engineering, procurement, construction services, and operation and maintenance. Scout Solar has installed and consulted on over 200 commercial systems that represent approximately 70MW. SunRenu has developed 29.6MW, constructed 22.8MW, and serviced 6.7MW.    

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This article does not constitute and is not intended by Energetic Insurance to constitute financial advice nor a solicitation for any insurance business.

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Media Contact: Kathryn Meng Elmes, Energetic Insurance, (617) 655-6492  

Alarm bells are ringing. Rates are rising. But what does that mean for renewable energy development?

Rates have been de minimis since 2010

According to SEIA, cumulative solar deployment in the United States surpassed 121 gigawatts in 2021.[1] 90%+ of this deployment occurred post The Great Recession. This means that a vast majority of the solar deployment to date occurred during a near-zero interest rate environment. So how may rising rates impact solar development?

Changes in rates are a reflection of economic conditions during a time period. In recent recessionary periods, short-term base rates (treasury rates, LIBOR/SOFR rates, FED Funds rates, saving interest rates) have fallen dramatically while credit spreads (the risk premium for an applicable credit risk) rise precipitously.

Consider a BB rated counterparty with a rate of 10YR Treasury + Credit Spread. In October 2020, the 10YR Treasury was 0.841% and the ICE BofA BB High Yield Index Spread was 3.85%. This implies that a BB rated counterparty’s cost of borrowing from a lender in October 2020 would’ve been estimated around 4.69%. Fast forward to March 2022, the 10YR Treasury is at 2.48% with the ICE BofA BB High Yield Index Spread at 2.37% implying a rate of 4.85%. So, while the base rate (10YR Treasury) rose significantly due to inflationary pressure, the credit spread has compressed, implying less concern in the markets regarding credit risk. In an environment where inflation persists (rising base rates) and economic activity becomes a concern, you could expect to see base rates and credit spreads move in the same direction.

Expected default is increasing

While bankruptcies in Q1 2022 were the lowest in 13 years, the market is signaling the expected 1-year probability of default has increased for most sectors throughout the U.S. according to an April 2022 report from S&P Global Market Intelligence. With future expected default rates rising, there is a degree of likelihood that credit spreads for sub-investment grade or unrated entities may widen.

Cheap Debt (< 4%) is increasingly rare

We continue to hear from our development partners and throughout the conference circuit that between rising EPC costs and rising interest rates, deals that were getting done on paper 6-12 months ago are no longer penciling in today’s environment. While rates are rising, the abundance of capital in the market remains, and developers who have strong banking relationships will be better positioned. Developers that signed PPA agreements 8-12+ months ago are having required, but difficult conversations with offtakers; they are amending prior contract terms to make projects viable. In an economic environment where The Federal Reserve has recently pledged to consider multiple 50bps+ hikes, and supply chain pressures impact small and medium businesses, financing may begin to tighten.

So what does this mean for solar development project finance?

Rising rates have the potential to significantly impact project finance economics. In an illustrative project below, we depict the sensitivity impact on levered IRR (L-IRR) of amortization and interest rate sensitivity for a 2MW project. Based on Energetic Insurance’s view of the market, a 20-year amortization is commonplace and only a 200bps rise in debt interest rates could result in up to a ~11.4% reduction in levered IRR for the developer in this example.

Energetic Insurance is actively working with asset owners and developers who seek to utilize the EneRate Credit Cover to proactively de-risk operating and new construction assets to compete for the best financing terms in a rising rate environment.

Questions? Pose them in the comments below or reach out here to learn more.

This does not constitute and is not intended by Energetic Insurance to constitute a solicitation for any insurance business.

[1] https://www.seia.org/solar-industry-research-data

Energetic Insurance has been featured in the MIT Sloan Sustainability Initiative’s 2021 Annual Report, recognized for its innovative contributions to the clean energy transition. As a Managing General Underwriter, Energetic Insurance is enabling exponential growth in renewable energy by addressing the financing challenges faced by solar projects. Through its data-driven risk management products, such as EneRate Credit Cover™, the company is helping unlock capital for unrated and below investment-grade counterparties, accelerating the shift toward a more sustainable future.

Read the full report to discover more about Energetic Insurance’s impact here.

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"High Energy" is the only phrase to describe Infocast's Solar + Wind Finance & Investment Summit. A conference that routinely draws 300-500 attendees (Solar + Wind combined in 2022) bolstered its attendance this year to more than 2,000! Below we share our key takeaways from conversations throughout the exceptional agenda.

The market continues to be very active, with an abundance of capital and strong interest in the sector.

The evolving world of "flexible capital" is bringing investors into all parts of the capital stack. Investors that previously deployed capital into project equity/debt structures are now moving into corporate equity/debt. Development platforms are raising capital from these investors at levels unseen just 6-12 months ago!

Competition, complexity, and capacity are challenging for developers and financiers alike.

The discussion on how to enable more commercial and industrial offtakers continues. The prevailing sentiment is still to dilute a small number of unrated offtakers into a larger (~80%) pool of investment-grade offtakers to achieve favorable financing packages.

Developers acknowledge that investment-grade offtaker deals remain the most competitive and are looking to move downstream to unrated C&I while maintaining competitive financing offers.

Large-scale utility deals continue to see margin compression and project scarcity due to EPC cost increases and scheduling delays.

Community solar remains a hot topic while developers and lenders struggle to deal with program complexity and high residential LMI requirements combined with often limited pools of subscribers. Some programs see delays and bottlenecks in recruitment as capacity grows.

Banks struggle to compete for the same set of deals and are looking for a more creative edge. Once considered esoteric, USDA loans are now "commonplace," as one banker describes. Even seasoned USDA lenders are seeking alternatives to increase the competitiveness of their financing offers.

Innovative risk management mechanisms were a focal point by panelists.

Innovative insurance products and risk management remain a focus for expanding markets. This was brought center stage during a panel with REsurety, Crayhill Renewables, and Brookfield Asset Management. On a separate panel, James Edmonds from HSBC mentioned kWh Analytics and Energetic Insurance as ways for banks to expand activity while managing risk.

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Two years ago, the Energetic team attended the last major Infocast conference. The opportunity to meet with in person, the many development and financier partners that, up until now, we've only been able to work with virtually was an experience we've been longing for. We were glad to see lots of new and familiar faces, and with a group this excited, it is clear that 2022 will be another great year for renewable deployment!

Thanks to Infocast, CohnReznick Capital, Silicon Valley Bank, and Keybanc Capital Markets for hosting impressive networking receptions.  

Capital, meet impactful Projects. Projects, meet our creative friend, Capital. We’ll let you connect from here, and know you’ll get along well.

Earlier this year, as Energetic Insurance was doing our annual retrospective, something dawned on us as we dug in on our bound policies; projects for which we facilitated introductions between developers and financiers had a stronger likelihood of actually reaching commercial operation.

A lot of deals fizzle out due to a lack of financing (this we knew), but when we dug in on key success indicators, we realized that facilitating introductions not only increased the likelihood of EneRate Credit Cover being used on projects, it also increased the likelihood that developers, financiers, and offtakers succeed in reaching their objectives.

Often, we work with project developers at the earlier stages of project development. This can be before the offtaker has signed a PPA and before a developer has identified their lender or financing structure.  

“Energetic not only helped us refinance a set of projects with some challenging underlying credit, they connected us with the bank that gave us the lowest cost of capital available in our survey of the market, who we had not known of previously.” - John Galante, Managing Partner at Woodfield Renewable Partners.

Conversely, we often talk to lenders even before they have a target loan opportunity to discuss because they ask us to introduce them to developers with projects that qualify for EneRate Credit Cover. Tax equity investors, development capital providers, and other financiers also call us looking for qualifying project leads.

As we find ourselves at this intersection, we want to share insights on what makes a good project-capital match.

Understanding counterparty interests, motivations, and styles can help you swipe right.

The developer and sponsor landscape is crowded. We focus on quality over quantity, and work with only the highest caliber developers and sponsors - most often medium to large companies. When we work with smaller developers and sponsors, it is often due to the presence of sophisticated founders, who have experience at larger companies and extensive background and experience in renewable energy project development.  

As part of our customer diligence, we review developer track records and experience. We focus on the best in the business – those who have demonstrated success in bringing projects to fruition. Anyone can punch a hole in a roof and install a panel. It takes something else to know where to site projects, how to secure project financing, and how to manage interconnection. Securing tax equity is often the most difficult part of the capital stack to secure; a leading indicator of developer strength is financial sophistication, as evidenced by the historical ability to secure tax equity and the presence of strong internal capital markets teams.

In a world where markets are still reeling from the covid-19 pandemic, we now learn about developer's supplier relationships. Since supply chain disruptions have delayed or put projects on hold, those with the strongest supplier relationships tend to get prioritized, and as a result are less impacted by supply chain hurdles.

On the financing side, we focus on variety, price, flexibility, creativity, and speed.

We make connections across the board and our network includes tax investors, bridge capital, development capital, construction financing, sponsor equity, aggregators, acquirers, debt lenders, syndicating/participating banks, and the list goes on...  

Of course, we like to have a good list of affordable financiers. Those who offer the best interest rates and most competitive cost of capital.

But the cost of capital isn't always the most important thing. For example, we noticed that certain lenders excel at the flexible, creative, outside-the-box thinking required for some of the highly complex portfolio deals we see. Those lenders are an excellent fit for these complex projects but may not always be the most affordable option. In scenarios like this, we caution against being penny wise and pound foolish; developers could go for the cheapest cost of capital, though doing so might put deal execution at risk. Ultimately, it’s better to get the deal done, even if it means paying the price for more flexible capital. This type of capital can include non-bank lenders and flexible debt.

“At X-Caliber, we realize that financier flexibility equates to opportunity. The market is awash with deals that just need someone to be more creative with financial structuring. Our personalized and collaborative approach allows us to find creative solutions that meet client needs.” - Jordan Blanchard, Co-Founder and Executive Manager, X-Caliber Capital.

We also look for financiers who understand the value of our insurance product, those with healthy motivations who know that EneRate Credit Cover provides downside protection, helping lenders gain confidence that they will be repaid. We avoid any financiers who see our policies as a “get-out-of-jail-free" card that allows them to take on bad risks. Aligned interests with financiers is key – they must want to protect the downside while remaining committed to selecting reasonable risks, gaining predictability in their margin.

Finally, we prioritize speed. Waiting on financing can have knock on effects and prove costly. We look for banks with teams who move fast and do what it takes to get a deal closed on time, all without sacrificing the quality of their diligence and underwriting process.

Do the above-mentioned market realities ring true to you?

If so, let us know - we're eager to learn from your experience so that we can continue to open the market to new types of projects and creative opportunities.

If you are in need of an introduction to a developer or financier to help bring deals to completion, reach out to us here.

We do this (pro bono!) because we want more renewable and energy efficiency project deployment, and often EneRate Credit Cover can help get projects over the line.

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This article does not constitute and is not intended by Energetic Insurance to constitute financial advice nor a solicitation for any insurance business.

Get ready for a wave of solar refinancing.

When you don’t have a crystal ball, data and certainties are a close second. Thanks to folks like kWh Analytics, SEIA, and Wood Mackenzie, we are well-equipped with both, and have our sights set on the imminent wave of refinancing about to hit the proverbial shores.

There are two primary drivers for refinances in the clean energy industry; expiring tax equity and rising interest rates.

Tax equity refers to dollars invested in third-party solar development projects that yield a tax benefit to the investor. According to Norton Rose Fulbright, typically, tax equity covers 35% of a solar project +/- 5%.[1] These tax equity structures come with a 5-year horizon, meaning that after 6 or 7 years, they are no longer eligible for tax recapture, making it the optimal moment for refinancing.

And what happened approximately 6 years ago? The solar industry saw an uptick in project development. As Richard Matsui flagged last year – 14GW of solar, or 15% of today’s installed base, was developed in 2016[2]. Matsui predicted a refinancing boom, and we think he’s spot on. Tax equity expiration drives the refinancing cycle, and now that the industry is more mature, more projects are ripe for refinancing.

Last year, Energetic Insurance supported Longroad Energy as they refinanced a C&I solar portfolio with a $24M term loan from Fifth Third Bank using EneRate Credit Cover. To learn more about this project, see this piece in Power Finance & Risk.

“The time was right for us to replace a more expensive and complex tax equity arrangement for a cheaper and simpler capital structure” said Tait Nielsen, VP of Project Finance at Longroad Energy.

Refinancing inevitably triggers a re-assessment of the original project, offtakers, and risks. A lot can happen over the course of 5-7 years; elections, macroeconomic shifts, and even global pandemics. It’s no surprise that the credit profiles of project offtakers can shift between project inception and tax equity expiration. Previously investment-grade offtakers might have become downgraded to sub-investment grade. This doesn’t mean these are bad energy project risks, it just means the underlying offtaker risk has changed, and should be taken into account when refinancing.

The second primary driver for refinances in the clean energy industry is rising interest rates. In case you have managed to avoid the news cycle – all eyes are on the Federal Reserve, and expectations are high that the Fed might raise interest rates in the near future. Rising interest rates mean a higher cost of capital, and no one likes added costs.

“Concerns about inflation abound. An interest rate hike is inevitable, and more than one hike is likely,” says Marko Papic, Partner and Chief Strategist at Clocktower Group. “We don’t know exactly when these hikes will happen, but we know that capital is likely to be more costly in the near-future, and won’t get less expensive any time soon.”

Forward-thinking developers are in a rush to refi, they see interest hikes coming, and don’t want to wait; they know that it is prudent to refinance now, rather than wait until later this year or next, when it will likely be more costly to do so.

Whether you are refinancing or financing for the first time, Energetic Insurance is here to help when project cash flows are exposed to weak underlying offtaker credit. Customers tell us that our policies typically help increase the advance rate or the loan to value, help sponsors get a lower cost of capital all in, improve loan sizing, and all of this ultimately improves levered IRR from the sponsor’s perspective.

With so many sponsors and developers looking to refinance, the opportunity for financiers is significant. For financiers actively looking to expand investments in renewable energy, our policies should help them improve cashflow projections, and enable them to consider support of portfolios that include non-investment grade risk. Harnessing our solutions might enable lenders to provide more competitive rates, helping them reel in deals and deploy more capital where it matters. If you are a financier reviewing projects with sub-IG offtakers, consider recommending to the developers you are working with to reach out to us.

Finally, regardless of interest rates, developers will need to refinance projects from time to time, for example, when:

• There is a mini-perm structure or a warehouse facility, the loan will end at a certain point, and there is the expectation of refinancing
• Projects are successfully aggregated. As developers pull together portfolios, they might have an initially high cost-of capital, however, as they hit a critical mass of projects, they should be able to get a lower all-in cost of capital
• A raw deal was reached and developers are regretting terms and financing facilities they want to get out of
• Developers want more cash from a larger loan amount
• Projects have generated a lot of cash and developers have paid down the principal balance on their loan; refinancing enables them to seek a greater loan amount

The short story: if you are a solar project sponsor or developer, you should consider refinancing sooner than you think. If refinancing is 1-3 years in the future, consider refinancing today to take advantage of a lower interest rates and to avoid more expensive capital in the future.

Interested in learning more? Reach out to us here, or meet with us at the Solar + Wind Finance & Investment Summit next month.

[1] https://www.projectfinance.law/publications/2021/december/solar-tax-equity-structures/#:~:text=Tax%20equity%20covers%2035%25%20of,terms%20of%20priority%20of%20repayment.

[2] https://www.forbes.com/sites/richardmatsui/2021/05/04/the-solar-industry-is-ripe-for-a-refinancing-boom-in-2021/?sh=2cb4e78c1bbf

This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.