The Power Market is Shifting: Key Takeaways from Emerging Trends in Power Project Finance

Written By: Jen Neville
December 5, 2018

project finance

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The power market is shifting: Key Takeaways from Emerging Trends in Power Project Finance 


What’s most notable is the swap between coal and natural gas. A good portion of the market shift has been a result of natural gas replacing coal. Renewables are growing steadily. And hydro and nuclear is pretty stable. That’s important when it comes to new asset development and gaps that’ll need to be filled as some of these assets are decommissioned.

Construction financing took a breather last year, but capacity price for gas construction gas looks good again. If you compare it to the volumes that we're seeing in thermal, it explains why the price gets driven down so much when renewable deals come to market. It’s because everybody wants to do a renewable deal even if it's merchant.

Generation by fuel

Natural gas is becoming the transition fuel as far as generation goes. It’s a massive part of the story and will continue to be, primarily because there's a lot of it. In terms of base-load capacity, it's the one that is most scalable at this point. Now we're starting to see offshore wind, solar, some battery, recip. engines, and nat. gas, but not much coal, hydro, or nuclear on the horizon.

Long term utility BPAs are starting to wane. And the natural gas-fired market has not been relying on long term BPAs. Merchant market exposure will remain and may grow. And we're starting to see more portfolios of consumer middle-market and corporate credits. So distributed portfolios and different counter-parties have ramifications in the market. The scale is still small right now for a lot of these emerging areas in the market. If you do want to get in, get in early on a smaller transaction in order to be ahead of the curve.

We’re starting to see new technologies making their way into the market. Distributed resources are going to be a bigger part of the mix and that will flow through a smarter grid. Technology has definitely evolved to the point where control systems and aggregation of load is becoming more feasible and more efficient. So it's an enabler and it's a new trend.

Emerging project characterists and risk profiles

New applications

There's nothing new with wind and solar, but there are new applications emerging through storage. These transactions, from a projects and finance perspective, are fairly small, but there’s great potential. Distributed gen is a business model that’s emerging. Other technologies underlying it are quite viable. Energy efficiency is definitely a technology play. The ability to achieve efficiencies plus aggregate demand response and load are more feasible now than ever. So that's an area to watch. And beyond that, mobility has enormous potential. Although, from a project finance standpoint, it's very early days. The mix of financing solutions is going to be broader and there’s more risk associated with it, but it’s still an area to focus on.

Emerging Solar and their associated issues

With residential solar, it's a question of whether it’s project financed or asset-backed, like an ABS type of deal. The challenge when syndicating these deals is the type of collateral, since they’re comprised of 40,000 to 50,000 rooftop homes. Your counterparty is a homeowner instead of a business or utility. Pricing has been coming down over the last three or four years. Structures are getting more advanced and people are willing to leverage these assets higher. So that's becoming increasingly mainstream.

Community solar is also very financeable. It’s almost like a one-sided contract. These are solar farms located in an area where they sell the capacity or the exact PPAs within the local neighborhood. The problem for lenders is that people move meaning that contract rates may drop as homes are sold. This changes cash flows for the lender, so this needs to be considered when structuring these deals.

CCA is like a community solar asset. Instead of signing directly with a homeowner, you're signing with a marketer, an entity that doesn’t have a rating. That makes it a little more complicated. So you have to build in some kind of structural triggers to get a bank comfortable. So these financings are very complicated.

Emerging Wind

A major areas of new activity is emerging wind offshore generation. This is expected to grow over the next five years or so. One of the issues around offshore — it's been very successful in Europe, but hasn't been done on a large scale in the US, but it’s starting to emerge. Many European developers are interested in this market. There's a lot of experience coming in. We do have issues like the Jones Act that we have to figure out because there isn't a lot of infrastructure to support that bill. That also opens up opportunities around resources that support wind development. In the US, the issues are regulatory. The spreads on the bank debt financing are continuing to tighten to almost mainstream levels for Europe, so it’s certainly an area to follow.

In reference to price, people are looking at utility rate credits and high rate credits. They’re looking for a little yield but still want to be in renewables. The main areas to focus on are offshore wind development as well as non-utility and merchant wind development and financing.


Storage has a role to play, especially with the growth of renewable assets, intermittency and the grid. There is enabling legislation, and specific initiatives that are being rolled out. So it's certainly a hot area of focus and there's good reason — it will play a role in the grid. The primary focus is on lithium-ion because it has the most potential in the short term. That doesn't negate flow batteries, hydro and other sources of storage. They will have a role to play too. At the moment, lithium-ion just seems to have the upper hand. There’re a variety of remedy models, and that's going to be the key.

With lithium ion you still have to get comfortable around their warranties. It all comes down to revenue model. Pure battery storage deals have a capacity contract. If your revenue model relies on ancillary revenues, it requires some creative structuring to make it financeable. One of the key factors that will be relevant is getting the markets' heads around the CNI risk unrated credits. Residential has a role to play there as well. That'll be a large portion of market.

A key factor is battery costs. Lithium ion is currently the short-term choice. If you're either acquiring, or retaining an asset, storage is on the horizon and is a competing resource. It will be and has to be factored into the conversation.

Distributed Generation

Distributed gen can be a lot of different asset types such as small fuel cells, solar or wind farms or even tiny gas plants. There’s a greater ability to aggregate load than ever before. So these are starting to be large-scale acquisitions plus strategic and private equity interest in this space. This suggests that the grid will become more distributed and some of these technologies have a significant role to play. Because each asset is so small, the ideal financing solution is similar to a credit card so they can be financed one at a time and then rolled up into one lump sum portfolio financier.

Efficiency Projects

Whether it's distributed gen or efficiency, where the individual projects are even smaller, companies are starting to build credit capabilities internally. That simplifies lending here. HVAC swaps, lighting retrofits and very large-scale build outs must be viewed as portfolios since it's not practical to review every individual project. There’s growth in efficiency projects like HVAC swaps due to old infrastructure nationwide. So there is a fundamental need for the host that can do it efficiently.


There’s a need to build out support infrastructure when public transport, fleets and entities have multiple vehicles they need to charge. That’s a more traditional project type deal with a counter-party that needs assets to service a fleet. It's still fairly early now, but if you look forward to about 2025, that's the projection where there's parity in the automotive market in terms of gasoline versus EV. Then work backwards to figure out when the build back will start and where the mass market starts are to adopt. There’s going to be more of a switch over to electric vehicles. To make that happen, of gas stations in the US need to put in the EV infrastructure for charging stations. So this is an area of focus.

How the financing market adapts

Of these emerging asset classes, there’s something for everybody. You have various players that focus on different areas and who want differing balances of risk versus yield. High-grade infrastructure is going to be your safest. That’s going to be your cheapest cost of capital. The middle tier, energy and energy transition, is going to be for more aggressive banks or debt funds who are willing to add some leverage by taking on a higher risk profile to get paid for that yield. And it continues all the way down to equity. The more proven the technology, the more stable the revenues. It doesn’t have to be just one asset type. You can layer on one, two or three of these levels of leverage. That’s the message for everyone who’s looking to potentially finance these assets. Bottom line – the industry is going to have to adapt. In terms of liquidity, there’s plenty. It’s just what flavor does it come in and how do you fit against the structure?

Read the full Q&A Transcript from Emerging Trends in Power Project Finance here

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