Renewable energy: moving to a subsidy-free environment

Expert's view

by Stéphane Dubos, Power & Renewables Infrastructure Industry Group, Natixis

The renewable energy sector is moving to a subsidy-free environment putting pressure on developers and financiers to find innovative solutions to win tenders, mitigate merchant risk, and keep offering an attractive risk-reward profile to investors and bankable projects to lenders.

More than ever, growing competition for renewable auctions means that bidders need to optimize their offers. This implies lowering their cost of capital (i) by teaming up with competitive equity providers such as pension funds and strategic investors; or (ii) by accepting to take refinancing risk by shortening debt maturity (via soft & hard mini-perms) to reduce financing costs. Site-specific partnerships with proven suppliers and O&M providers is also key – particularly in the wind sectors – to gaining a competitive edge and properly assessing site conditions.

In many markets, maturing technologies has led to grid parity and the disappearance of subsidies, exposing new projects to merchant power prices. In some cases, this risk can be addressed by corporate PPAs or capital markets-based derivatives offering revenue downside protection. Nevertheless, risk assessment by banks has not changed and Natixis continues to focus on markets offering sound and stable regulatory environments and projects with some level of contracted or regulated revenues. To assess the acceptability of the remaining merchant exposure, Natixis will run breakeven scenarios to gauge a project’s robustness to price volatility and deviations from the initial base case.

These evolution create a new environment for financing and investing in the renewables energy sector, where players have to adjust their approach through adequate financing and/or industrial mitigants.

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