After more than a decade, the era of cheap money has finally come to an end. Rising interest rates and inflation have created a more challenging environment for renewable energy finance. Developers, investors and the offshore wind supply chain will need to navigate a new economic climate. How they can rise to that challenge was a key topic of conversation at the recent Legal & Finance conference organised by RenewableUK.
The conference was dominated by five key themes:
- Investment structures for emerging technologies. The creation of new financial instruments for emerging technologies is unlikely. The existing long-term project finance strategies are more suit to deal with the inherent risk and high capital requirements for new technologies such as green hydrogen, power-to-X and energy storage. Compounding that inherent risk with additional risk from innovative financial products would make positive returns near impossible.
- Floating offshore wind. As a still relatively unproven technology, requiring substantial infrastructure investment (not least in ports), floating technologies will become more investor friendly only when the market matures. About 13 out of the 20 ScotWind projects are expected to be floating, so those that progress first should be useful exemplars of the commercial viability of floating offshore wind. Challenges with port infrastructure will still need to be overcome, especially as floating will compete against other industries for port investment that may present more proven business cases.
- The UK’s Review of Electricity Market Arrangements (REMA). REMA is step in the right direction but a complete overhaul of market regulation may hurt the UK’s reputation as safe, stable and investible leader in the renewables market. For example, locational pricing could fragment the already small UK electricity market. Policy solutions rather than market reform would provide a more effective approach to address current and future challenges.
- Maintaining returns on renewable assets. Despite higher interest rates, interest in renewables and project financing has not significantly slowed (at least in the UK). Renewables have experienced a general shift in investor appetite away from emerging technologies and early project stage investment towards mature technology and investment during operations. Inflation, however, has led some investors to be more interested in the higher returns required from the riskier emerging technologies.
- Power purchase agreements (PPAs). As more and more projects involve the use of co-located assets, such as battery or hydrogen storage solutions integrated into renewable generation projects, PPAs are becoming increasingly complex. PPAs are still very much a seller’s market except to a few large and influential corporations. The decision of the UK Government to hold annual contract for difference (CfD) auctions will also influence future PPAs. Since CfDs serve as a proxy for PPA price, holding annual auctions may drive prices too low for PPAs to be viable. Companies however, may still seek PPA arrangements at a premium to strengthen their ESG scores and gain exposure to renewables.
Overall, the interest in renewables is still strong despite recent setbacks. Even in these difficult times for renewable energy finance, markets are voicing demand for cleaner energy and a healthier planet.