Renewable Energy Project Finance Trends for 2022

Image: U.S. Department of Energy, Office of Energy Efficiency & Renewable Energy

Last month, we outlined the clean energy technology trends for 2022, and here we discuss the challenges in project finance and the questions lenders will ask in response. Expected challenges in project finance include:

Growing installation costs, because of inflationary pressures and supply-chain constraints.
Long interconnection queues, especially in the PJM market.
Tax finance deadlines and phase-outs, especially in solar and wind.

Finance Challenges

Inflation measured by the U.S. Department of Labor's consumer price index (CPI) ended 2021 at 7.0 percent over the previous 12 months. The CPI will fall, but there is disagreement about how much and when. The recent surge in prices has been due to production bottlenecks and supply-chain constraints. These factors are translating to higher clean energy project costs and making lenders require equipment contracts or shorter project timelines to ensure loans are repaid.

Adding large numbers of new renewable energy capacity has meant more high-voltage transmission lines to connect projects to population load centers. Developers in PJM are especially frustrated and asking for purchase power agreement termination rights if a project does not receive its interconnection or permit approvals. Developers in other markets are reporting that they are paying for most grid upgrades, even though these upgrades benefit all ratepayers.

Finally, current tax phase outs have enormous implications for clean energy project finance. Solar projects that began in 2020, 2021, or 2022 will qualify for a 26 percent investment tax credit; projects that begin in 2023 will qualify for a 23 percent tax credit.

The combination of all these factors - inflation, supply-chain constraints, transmission upgrades, and tax credits - means more project risk for developers and lenders alike. Corporate demand for renewable energy is strong, but the supply of good projects is also limited.

Project Finance Questions

Dealing with these project constraints, lenders consider the following:

Is there a significant level of technology risk? Project lenders may not want to be the first to finance an untested technology. Demonstrated successful use will help secure project financing and assure the lender there is a future project owner willing to invest long-term in the project, once de-risked and fully developed.
Does the project have contractual relationships with reputable companies (e.g., offtake for the project's output, or an agreement to purchase the project once certain milestones are achieved)? Is there a "Plan B" with respect to interest in the project's output or targeted buyers?
Will there be physical assets sufficient to ensure lender repayment in case of foreclosure including firm, binding agreements for site control and other project contracts? Can the developer secure the loan with assets outside of just the projects? How will the lender share development risk with the developer?
Does the lender expect control and ownership at the company level or solely with recourse to the projects? How will this play out as the development landscape changes and evolves due to changing market conditions, like Interconnection delays and supply-chain issues?
Do the developer and other interested parties have ESG (Environmental, Social, and Governance) or JEDI (Justice, Equity, Diversity, and Inclusion) goals and practices? Are non-financial metrics considered in the projects and processes the company considers?

Leyline Renewable Capital considers all of these questions in its lending portfolio to invest in promising renewable energy projects nationwide. We deploy creative financing solutions at crucial early stages in the process of bringing large-scale projects online - everything from community-scale solar arrays to anaerobic digesters to energy storage facilities.

Contact us today for more information on how we can help you get your renewable energy project off the ground.