Last week the Energetic Insurance Team attended Projects & Money in New Orleans. Hosted by Infocast, Projects & Money attracts leading renewable energy project developers and financiers. It is a highly productive forum in which to connect, exchange market intelligence, and tee up deals for the year ahead.
After two years of virtual networking, it was great to see many familiar and new faces together at the conference, the Allen & Overy dinner (thanks to John Marciano & Sam Kamyans), and of course at the amazing live music venues on Frenchmen Street in beautiful New Orleans!
Our high level takeaway: We have high hopes for 2022 and expect it to be a big year in renewable energy finance in spite of headwinds on tax credit extension and solar supply chain challenges. Keep reading for more of our team's takeaways:
The energy transition is unstoppable - After 2020 disruption, project development, finance, and investment activity in support of the energy transition rebounded in 2021. If our conversations are any indication, significant investment will continue in 2022. Those who want to play in the space should move quickly to catch the best deals.
New entrants abound - We saw more new financiers, sponsors, and developers represented than previous events; a visible sign of the global momentum pushing ESG investments and renewable deployments. Several existing financiers in our industry are expanding their renewables teams and expanding their mandates in this space. All of this expansion and new entrants brought many new faces to the conference who we were excited to connect with for the first time.
Sub-IG and unrated offtakers remain underserved - Several panelists noted an increase in unrated offtakers in development pipelines, in particular on corporate PPA (and VPPA) transactions. Unrated and sub-IG offtakers continue to pose challenges for financiers due to the higher credit risk. EneRate Credit Cover can help developers and financiers push forward with these projects by insuring the offtaker PPA payment default risk, or in the case of VPPAs, reducing the Buyer's letter of credit requirements.
Deal timelines are lagging - Q4 deals are spilling into Q1/2. Interconnection is the most common cause, with interconnection queues at 6-12 months. It doesn't matter if you are a small or large developer - there is little to be done to influence this and accelerate the process. This issue is acutely felt in certain geographies, including California. Potentially this will also become an issue in PJM territory.
Supply chain issues persist, but are a lesser issue - Supply chain issues may be bottoming. Still, it is important to keep an eye on global supply chains and trade, as we have learned that federal officials are detaining panels suspected to be made with forced labor in China.
Cost increases are causing PPA cancellations and renegotiation - ~30% of PPAs are being canceled or renegotiated due to upward cost pressure (primarily due to rising labor and raw materials costs). True costs for EPCs will be 15-20% more than originally expected, making the deals not pencil. It was mentioned that many developers who won RFPs over 12 months ago are not moving forward; a 20% increase in costs means their 12-month old baked in costs are no longer supported, making their bids unviable.
Although interest rates are rising, demand for renewable assets is not waning - Rising interest rates may usually signal a waning in investment; that won't be the case for renewables in 2022. Demand for renewable assets is not slowing, signaling that these investments will persist, even if the cost of capital increases. We anticipate a wave of loan refinancings in advance of pending interest rate increases.
Financiers are finding ways to meet this growing demand - Financiers are innovating and becoming more open to lending against uncontracted (merchant) long-term cash flows. Tax equity participants continue to prefer (demand) long-term contracted revenue streams.
All in all - the industry is ripe with momentum and excitement. Financiers are eager to deploy capital and are searching for the most appealing projects. Developers want to meet the growing demand for renewables.
Here at Energetic, we are ready to get deals done and are better prepared than ever to help banks fund promising projects, help developers secure a lower cost of capital, and help asset managers refinance at compelling rates.
Looking forward to a successful 2022 for our industry and we hope to see many of the same and new people at RE+ Northeast Community Solar Power Forum in Boston later this month, and Infocast's Solar + Wind Finance & Investment Summit in Scottsdale the following month.