Developers, sponsors, financiers, and industry experts recently gathered in Austin, Texas for the Proximo US Power and Renewables Finance 2022 conference. Market participants were aligned on one overarching topic; change is coming to the renewable energy industry.
Cautious optimism in a time of industry transition
Attendees and speakers alike conveyed long-term optimism, primarily driven by the passing of the Inflation Reduction Act (IRA) and continued commitments by governments and large corporations to transition to renewable energy. Given the previous lack of new incentive legislation, the IRA was heralded for providing more certainty in the 10-year development horizon. Expanded and new incentives will yield continued and magnified investment in project development. Government incentives for renewable energy have attracted new capital to the sector, bringing with it the need for investor education, along with the unique problem of finding a way to efficiently deploy the influx of funds.
Positive tailwinds driving the industry forward were met with short-term questions around the impact of the broader macroeconomic environment, and what the interplay between the two opposing forces may yield. Heard throughout the event was the affirmation that projects set to close in 2022 should remain on track, subject to minor repricing. More emphasis was placed on forecasts around the 2023 funding market. Despite the aforementioned influx of capital into the energy transition, the short-term availability of capital could get tighter. However, the expectation is that market liquidity will still be available in 2023.
There seems to be an expectation that the renewable industry will see multiple operating entities aim to acquire funding via the public equity markets. This shift in funding sources may impact how developers weigh the benefits of retaining ownership of sites themselves, as opposed to building to sell. Interestingly, there is a belief that these deals will be viewed by the broader equity markets as growth investments rather than traditional dividend paying entities. Along with many other financial markets, the IPO market will likely remain dormant through the end of the year. But be on the lookout for deals to come into the public eye early to mid 2023.
How will projects be impacted?
Inflation concerns continue to be top of mind for those worried about the cost of debt and cost of materials. It would be hard to find a developer who did not have their own set of concerns regarding supply chains and the potential impact on existing projects. Fortunately, the resounding consensus was that the worst case was comprised of delays and repricing, not outright cancelation. Most industry experts expect the IRA to fundamentally alter the industry supply chain, but the specifics of how that will occur have yet to be fully fleshed out. The expectation is that domestic manufacturing will increase. However, the timing, scope, and magnitude of domestic manufacturing investments are yet to be determined.
Distributed generation (DG) was a key focal point. Multiple panelists either alluded to, or forecasted outright, an increase in the flexibility of DG structures and a move away from flat power purchase agreement (PPA) prices to a more dynamic way to limit basis risk in these deals.
This prognostication for increased complexity naturally comes with an increase in the level of forecasting and underwriting difficulty. The ratings agencies represented implied comfort with the harnessing of multiple methodologies for risk quantification. There still remains a gap between project developers’ view of risk and the methodologies used to underwrite distributed generation offtake at lending institutions. It is also expected to take time for new investors and sources of capital to become familiar with the renewable energy sector and the inherent risk/return dynamics.
The impacts of credit quality and role of insurance
Investors in the energy transition, new and longstanding, share the desire to mitigate investment risk. Risk drivers and risk mitigants are increasingly a topic of conversation. Developers and investors want to ensure viable project economics, long-term project performance, and reliable offtake demand.
Energetic’s own Jim Bowen took to the stage with others from the insurance industry to discuss the multiple avenues project participants can harness to get deals done more efficiently. Alongside Jim, Jeffrey Abramson, CFA of AXA XL, Jamie Brache of Vantage Risk Companies, Eric Popien of Atlantic Global Risk, Martin Bernstein of LBBW, and Donnie DiCarlo of BPL Global, discussed how insurance should be thought of as a financial product to improve funding terms and distribute risk. They explained why insurance should not be viewed as a mandatory boiler plate product needed to get a deal done, but a way to beneficially spread and share risk.
Panelists emphasized the level of customization involved in each deal and the value clients can gain from a relationship with an insurer. Insurers can get involved earlier in the project lifecycle to help creatively structure deals to make them work for all stakeholders, as opposed to buying and selling vanilla products in the open market.
Have questions on how Energetic Insurance can help improve project economics? Contact us here.
This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.