SPI’s RE+ conference was once again massively attended and showcased the remarkable growth of the renewable energy industry. Reports of attendee (and non-attendee) counts ranged from 32,000 to 45,000. Despite the event's sheer size, it was great to see so many industry friends together in one place. We gained some insight into the current market as we engaged in discussions with financiers and sponsors on the sector's Commercial and Industrial (C&I) side.
The core undeniable fact throughout RE+ 2023 was the considerable expansion of the renewable energy industry. Attendee counts underline how the industry has capitalized on governmental incentives, private funding, and consumer demand. Notably, this growth speaks to the Inflation Reduction Fund's benefits. We will have more people join the sector to meet the needs of consumers and strive to take advantage of government incentives, including tax credits and available grant funding. Public and private funds have succeeded in helping organizations scale their product, add additional resources, and deploy more renewable assets, especially within the C&I domain.
The Implications of Basel III on the Tax Equity Market
The impact of Basel III regulations is beginning to cast its shadow on the renewable energy sector. Financiers are closely monitoring the proposed capital requirements outlined in Basel III, which is already influencing their tax equity strategies. Specifically, these rules, set to be implemented by 2025, would quadruple the capital requirements for banks holding tax equity investments due to a new 400% risk weighting applied to non-publicly traded equity, up from the existing 100%. This significant shift in the regulatory landscape prompts financiers to reevaluate their investment decisions, potentially making such financings costlier and hindering national climate change objectives.
Need for Innovative Deal Structures
The middle market banking shake-up earlier in the year has left C&I sponsors feeling constrained on the financing side of the capital stack. The changing dynamics in the industry have made it imperative for private funding to provide creative solutions for C&I transaction stakeholders. To navigate these challenges successfully, C&I sponsors are seeking a diverse set of financial partners, exploring alternative financing structures, and considering solutions previously discarded (e.g., private credit funds that may be more flexible, but often have higher costs of capital).
A persistent challenge for financiers is the decline in commercial real estate tenants. Based on organizations either not renewing leases or breaking them, building owners and financiers are hungry for viable solutions to bridge the gap between interests. Fortunately, innovative structuring solutions are emerging to alleviate these constraints. Collaborative efforts between C&I developers, financiers, and other real estate stakeholders are essential in providing solutions to maintain the health of buildings and meet the demands of consumers.
Maui Fires and Uncertainty on the Liabilities Surrounding HECO
The Hawaiian Electric Company (HECO) has been under the spotlight due to pending lawsuits and concerns about potential liabilities from the Maui fire. While the outcome of these legal proceedings remains uncertain, HECO remains a larger offtaker on existing and planned PPAs so the renewable energy industry is closely monitoring these developments. The repercussions of any verdict will have a ripple effect on the industry, particularly as climate-related disasters continue to impact communities.
Revival of Community Choice Aggregators (CCAs)
Community Choice Aggregators (CCAs) are once again gaining prominence in the renewable energy landscape. Numerous sponsors have reported the launch or impending release of Request for Proposals (RFPs) for more renewable infrastructure. Predictably, these organizations lack credit ratings to secure adequate institutional funding. Energetic Capital has provided credit insurance to offset unrated/sub-investment counterparty credit risk since 2019. If this is you, reach out to us.
There's never been a more dynamic time in the renewable energy industry. As C&I developers and sponsors continue to pursue innovative financing solutions, Energetic Capital provides multiple transaction structures available to any stakeholder with an insurable interest.