Georges Romano, Regional Head of Export and Agency Finance Latin America and Valentino Gallo, Global Head of Export and Agency Finance at Citi talk global renewable energy projects and the financing that is needed to support them.
The imperatives posed by climate change, when combined with superior economic rationale for green projects, have prompted policymakers to enact sweeping energy reforms in almost all markets. Bold targets have been set for the deployment of renewable energy projects in many markets, including the US, China, Japan, India, Germany, Brazil, Chile, Mexico, South Africa, Morocco, Turkey, Egypt and Pakistan. Accelerating improvements in efficiency and declining capital costs have allowed many solar and wind farms to reach grid parity, becoming the energy solution of choice for governments and energy investors alike.
While the industry has been strengthening and companies have been expanding their focus outside their domestic markets, renewable energy companies have not been immune to risks and volatility caused by rapid technological shifts and the downside of high leverage. Large development pipelines relying on debt financing of technology combined with ambitious acquisition plans have significantly stressed the financial position of key players.
More than ever, a balanced portfolio of projects and technologies supported by a well-diversified financing plan will be critical to achieve sustainable long-term growth. Although recent improvements in technology have reduced the costs of renewable energy development, investments face numerous barriers and risks. One of the primary barriers is capital availability. The challenges inherent in financing renewable energy projects, including large upfront investments and drawn out repayment periods, make agencies a crucial source
of financing. Export credit agencies (ECAs) have been a key source of debt funding for renewable energy investments. Many agencies express a desire to support such investments in order to meet corporate social responsibility objectives.
The OECD consensus arrangement on export credit contains a specific “sector understanding” outlining how ECAs can provide support by way of financing in the renewable energy sector. This flexibility allows ECAs to offer loans or loan guarantees for tenors up to 18 years, versus the standard term of 10 years for other types of exports, which enables the financing to match the frequently longer investment horizons of renewable energy projects. Also, whereas for ordinary exports ECAs require principal repayments to be in equal instalments, for renewable projects ECAs allow interest payments to be combined with principal in calculating the equated instalments, thus lessening the upfront burden of repayments.
Many ECAs consider renewable energy as a focus area, but almost all support is only through credit lines tied to domestic exports or to investments made by local companies in the foreign geography. Only the Japan Bank for International Co-operation (JBIC) and, to some extent, Nippon Export and Investment Insurance (NEXI) offer untied support to renewable energy projects by way of untied “green” lending programmes. Figure 1 includes a list of the ECAs that have been active in the renewable energy space. Some of the ECAs have special focus or specific programme for renewable energy.
Multilaterals and Development Financial Institutions
Support from Multilaterals and DFIs for renewable energy projects is driven by institution-specific mandates, typically to promote investment and development in emerging markets. Most agencies have particular interest in renewable energy due to institutional or government mandates.
In recent years such institutions have supported large projects based on new technologies such as offshore wind farms or geothermal power, which have some “demonstrative” effect to encourage additional private investment into the sector. They have also played a critical role in helping to deploy renewable technologies to address large generation deficits in regions such as Africa.
Notably, the Power Africa initiative – a US government-launched initiative to bring together the private sector and governments to work in partnership to increase access to power in Africa – is being driven in large part by the involvement of DFIs from the US and other countries. The agencies’ focus on renewables in these contexts has played
a role in incentivising the development of renewables over traditional technologies.
In addition to the DFIs, in some cases, government agencies that do not typically engage in lending activities have nevertheless established programmes focused on the renewable sector in order to carry out a specific programme or mandate. The US Department of Energy has established a number of programmes to provide loans and loan guarantees for renewable projects, and has successfully supported a number of large investments together with commercial banks like Citi.
Agency activity in the renewable space
According to data from Dealogic, during the past seven years (through Q3 2015) agencies have supported a total of 83 deals in renewable energy with a value of US$22.4bn. Note that league tables understate the extent of the financing activities of official agencies because it only includes data on commercially-syndicated loans supported by ECAs, and typically does not include comprehensive data on multilateral or direct or bilateral loans. However, the trends highlighted by the data can be demonstrative.
Of the total agency support to renewable energy projects during this timeframe, wind projects contributed 67% of all volume and solar contributed 11%. Regionally, the Europe, Middle East and Africa region leads with 61% of all agency-supported loan volume, followed by Asia Pacific with 29%. Perhaps more notably, according to Dealogic, during the past three years only 2-4% of annual agency loan value is attributable to renewable projects, compared to 21-32% for oil and gas projects and 17-23% for transportation projects. This mainly reflects the difference in the scale of investment going into these sectors, but also suggests that despite the presence of many agencies willing to support renewable energy investments, there is room for agencies to significantly grow their support to the sector.
Renewable energy development continues to grow with increasing cost efficiency and spreading local government support, but project developers face technology risks and excessive and over-leverage.
Many ECAs have programmes that support investments in renewable energy, but almost all of these programmes are linked to domestic exports or to investments by local companies in a foreign geography.
The sector understanding under the OECD consensus provides flexibility to the ECAs to extend loans with tenors up to 18 years for projects in renewable energy as against generally acceptable terms of 10 years. It also provides some flexibility in the terms of repayment.
DFIs also have programmes for renewable energy and have been actively seeking projects to support in the sector. An analysis of the historical deals suggests an inclination by these agencies to finance landmark projectsin new technology sectors as proof of concept.