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11 November 2022

Proximo Weekly: Plugging US power into bankability

The Inflation Reduction Act (IRA) had won itself a lot of fans among bankers and developers at Proximo’s US Power & Renewables Finance event in Austin last week. Nevertheless, getting a US power project to financial close is still getting more challenging.

“The hard part of getting transmission projects done is not financing them, that’s the easy bit, it’s permitting them.” So said a long-departed banker at Societe Generale when asked to provide an overview of the 2007 financing of the Neptune RTS subsea transmission cable that runs between New York and New Jersey.

The observation was fair – to a point. Obtaining permits for a transmission project between two US states, let alone two countries, can indeed be exquisitely painful. Two sets of federal regulations, two sets of state regulations. Almost the least challenging part is creating two project companies for one project.

But it is becoming less clear that financing any US power and renewables project could ever be described as “easy”. Blackstone’s bank financing for the $6 billion Champlain-Hudson Power Express project is a case in point.

Proximo will be bringing you more on this landmark project in the coming weeks. But it’s clear that placing large amounts of debt – not to mention associated swaps – for a project with even the most robust fundamentals now requires extreme skill, perfect timing and nerves of steel. With funding benchmarks and swap costs moving rapidly, a project’s affordability – and a sponsor’s return on equity – can gyrate wildly from day to day.

US renewables developers flit between giddy optimism about the goodies contained in the Inflation Reduction Act (IRA), and nervousness that those goodies will be eaten up by higher construction costs. Tighter debt markets might even leave them worse off.

Among the observations from bankers at Proximo’s US Power & Renewables Finance event in Austin last week: 

  • Capital is getting more scarce and the era of 6-7x oversubscriptions is probably over. 
  • Banks dropping out of bank groups is becoming more common
  • There is not yet a consensus about whether the dislocation in interest rates is temporary.
  • The 144A market is still very weak, but Term B loans, particularly for brownfield assets, look promising
  • Projects are experiencing delays and price inflation is creeping into power purchase agreements
  • Equity returns have not yet crept up to keep pace with debt costs
  • Listed equity players are interested in the sector, but primarily for its growth and technology characteristics, and not necessarily for cashflow reasons. Unlevered buyers are becoming increasingly important.
  • The IRA has ungummed the market, but some structural innovation will be required to use its most generous benefits.

The above represents the perspective of lenders, who are sometimes struggling to contain their glee at an uptick in margins. Overheard on one panel (Proximo’s Deal or no Deal), where we ask lenders to opine on hypothetical financings: “I quite like the credit, but no way am I doing it for 250bp”.

But it’s clear that bankers are going to justify their arranging fees, whether through wrapping their heads around the intricacies of placing deal contingent swaps, or working to accommodate new types of tax equity. Bankers hope that the tax equity providers are more reasonable and less expensive than the traditional providers. But with more and more solar generators looking to qualify for the volume-dependent production tax credit, rather than the cost-based investment tax credit, the IRA might yet even strengthen the hand of old-school tax equity.

Bankers might grumble, with very good reason, about the tax equity market, but it’s rare to hear such unanimous and fulsome praise for an act of Congress. For something that arrived with little fanfare, and was widely regarded as an awkward compromise between various factions in the Senate, the incentives are generally viewed as well targeted.

As mentioned earlier, there is some lingering nervousness, and the tales of backlogs in the battery and, increasingly, hydrogen electrolyzer markets are real causes for concern. But the market still has a spring in its step, as the size of the crowd in Austin demonstrated.  

Selected news articles from Proximo last week


RFQ issued for Kentucky expo PPP

Kentucky’s Somerset-Pulaski Economic Development Authority (SPEDA) has issued a Request for Qualifications (RfQ) for an agricultural expo and entertainment centre project. 


EC proposes temporary regulation to accelerate renewable permitting

The European Commission is proposing a new temporary emergency regulation to accelerate the deployment of renewable energy sources.


Pilbara Minerals secures ECA financing for Pilgangoora expansion

Lithium producer Pilbara Minerals has secured a ten-year debt facility from the Australian government to support the expansion of its Pilgangoora Operation in the Pilbara region of Western Australia.


Masdar and Infinity plan 10GW Egyptian wind project

UAE energy major Masdar and Egyptian renewable energy developer Infinity are planning to develop a 10GW onshore wind project in Egypt.


Acquisition financing in progress for Enel transmission assets

The acquisition financing for the purchase of Enel's Chilean electricity transmission assets by Sociedad Transmisora Metropolitana (STM) - which is controlled by Inversiones Grupo Saesa - is progressing.

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