As 2022 wrapped up, we caught up with our counterparties at development companies and financial institutions. Read on for the latest market insights and expectations.
All eyes remain on the Inflation Reduction Act (IRA)
As expected, the entire industry is still awaiting guidance on IRA implementation details. Most developers are budgeting a 30% investment tax credit (ITC) for all 2023 projects due to the IRA. Developers can surpass this by harnessing adders, but anything above that 30% is considered the proverbial cherry on top.
There is limited guidance on the approval process and required documentation for said adders. Consider project development on brownfields – certain paperwork, due diligence, surveys and more will be needed for successful implementation and credit receipt. Lenders and tax investors see promise in projects like these, but don't want to model projects presuming a higher ITC rate until they understand the process and are confident in their ability to deliver the requisite documentation.
Generally, the industry is viewing the IRA transferability provision as a last-case scenario for developers, suggesting that the first priority should always be to utilize tax equity as is done today.
Headwinds are top of mind
Module availability, permitting, and interconnection remain the most significant causes of project delays. The majority of developers and financiers we have spoken to recently have stated that much of their 2022 pipeline has been pushed into 2023 given market constraints.
Although some developers are pleased with the current sellers market, corporate buyers are struggling with renewable energy procurement, and developers see credit challenges manifesting, with a wave looming ahead. Commercial utility scale virtual power purchase agreements (VPPAs) are in high demand by large corporates. Demand significantly outweighs supply. Large investment-grade offtakers are competing for the limited real, near-term projects. VPPA developers, financiers, and investment bankers are already running into hurdles when these commercial offtakers procure via subsidiaries or energy holding companies. In these instances, the subsidiary entities are often unrated, inhibiting credit committee approval and prompting a need for alternative solutions like credit insurance.
The macroeconomic environment is exacerbating credit challenges
Concerns around a recession remain top of mind for financers. We’ve heard directly from bank contacts that credit committees are getting more stringent on counterparty credit quality.
Developers are interested in getting ahead of credit concerns and are seeking project underwriting support. Leading developers are seeking advanced project insights on market dynamics, loss mitigants and offtaker risk profiles.
New technologies require financing support
Stand-alone storage continues to be a hot topic among developers. Financiers are finding it difficult to finance stand-alone storage projects today due to lack of cash flow predictability as you would normally see in contracted, generating assets (e.g. solar). The stand-alone storage deals that are getting done are predominately on-balance sheet (equity) financing.
For the deals in the market that are contracted, the counterparties to these long-term tolling agreements tend to be trading firms with thinly capitalized balance sheets. We’ve heard from reputable industry advisors and investment bankers that although this approach satisfies lender requests for a contracted revenue agreement (as opposed to selling merchant or via energy arbitrage agreements), counterparty credit is a major concern.
Community solar has been a hot commodity in recent years. Some sponsors and financiers are expressing concerns regarding long-term market saturation for community solar in certain regions, others remain bullish. Sponsors are harnessing EneRate Credit Cover ® as an "Anchor Maker" facilitator. This allows a sponsor to use their investment-grade offtakers more efficiently (e.g. not overly concentrating IG into one portfolio to meet financing requirements) by enabling sub-investment grade offtakers to be their anchor offtake through coverage from the EneRate Credit Cover.
Siezing opportunity early in 2023
A new year brings refreshed budgets and renewed corporate goals and commitments. These goals are increasingly oriented towards ESG, climate disclosures, and renewable energy procurement commitments. Developers and financiers are ready to dive into 2023.
As 2023 progresses, the risks of recession, budget cuts, and corporate credit downgrades increases.
Those likely to lead and win in 2023 plan to be the early birds – sprinting to capture deals and fill pipelines in the first quarter of the year.
Have questions on how Energetic Insurance can enable competitive financing, successful project bids, reduce credit barriers, support cost-effective renewable energy development and procurement, and help support the greening of supply chains and reduction of scope 3 emissions? Reach out.
This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.