Current± talks to Conrad Purcell, partner at law firm Bird & Bird about the difficulties of financing renewable energy projects, how to secure long-term revenue and the rise of the corporate club PPA.
What are the trends you’re seeing in the financing of renewable energy projects?
What’s clear is that it’s very much a borrower’s market at the moment. There are huge amounts of liquidity within the banking markets and the situation around Brexit has potentially caused some issues. The willingness of lenders who lend in the UK has been affected by Brexit and they’re waiting for the outcome of the process before committing to lending more in the UK.
But even without those market participants, there is plenty of funding available for projects. Lenders and funders these days include banks and institutional lenders, meaning there’s a huge amount of lending to projects within the infrastructure space that is coming from pension funds and life insurers. There’s certainly a large amount of funding available, the issue and the complaint that we hear from the lenders and funders is that there are too few projects.
I think the reason we’re seeing that is because the constraints for renewables relate to policy factors. For planning consent for a wind farm, as an example, it’s virtually impossible. Even if a developer decides to build the farm in Scotland where the government is encouraging, they are still stuck with the economics associated with where to sell the power. If a developer has built a 100MW wind farm, they then have the issue of securing a utility PPA with a utility that will not offer a long term 15 or 20 year PPA with a floor price in it that’s sufficiently high.
If a developer requires long term contracted revenues, its best bet is to try and find a corporate offtaker. This also has difficulties as there are only so many corporate offtakers that want to buy the power from wind farms in Scotland. This is where the pinch points are.
If you could unlock some of the barriers, for instance the planning restrictions that exist in some parts of England and the difficultly around the economics of the PPAs then there is evidence through economic modelling to say that it in most scenarios it would be cost neutral for energy consumers.
If revenues and the potential volatility resulting in low prices for short periods of time could be smoothed, for instance through the Contracts for Difference (CfD) scheme, then the net benefit over a longer period of time to consumers is enormous. They end up with cheaper, greener power.
Would you then say the allowance of pot one technologies - solar and onshore wind - into the CfDs could be a way forward?
The fact offshore wind is now reaching prices of around £40/MWh means that you’ve got to quite seriously question where the difference lies between pot one and pot two technologies.
That’s something we’re going to hear more about over the next couple of years. I think there is a lot to be said for a system in which pot one and two technologies can bid for CfDs. The presence of the CfD would help to make those projects infinitely more bankable. It removes the risk for lenders of there being a dip in pricing, in terms of the prices that are available for the power that an onshore wind farm, for instance, sells.
However, we’re still only a relatively short period into the transition to renewables. All of those early projects that were built between 10 and 15 years ago are going to reach the end of their life sometime in the next five years. This then results in those projects requiring extension of life, repowering or replacing with new technologies.
To replace those projects, which benefited from the ROCs and other subsidies, in an environment where pot one technologies don’t qualify for CfDs, is going to be really difficult. It means you need to find a corporate offtake to give you a PPA or you need a utility PPA with a floor price in it to make it bankable. But that’s not something that’s readily available at a level of pricing which developers are currently able to work with given the cost of the technology, and the cost associated with building a renewable energy generator.
How much of a barrier is the availability of PPAs to new generators?
PPAs are a huge issue in terms of how we deal with renewable energy projects. PPAs across Europe have changed shape because of the removal of subsidies, resulting in a rapid growth in the use of corporate PPAs.
Corporate PPAs themselves are changing. The novelty that we’ve seen in recent times in corporate PPAs is the change in structure. Typically, there are four big players in this market, however that isn’t the whole story. The way in which that’s changed, and where we’re seeing innovation in that space, is the growth of club PPAs.
In a club PPA, multiple corporate offtakers that by themselves wouldn’t be willing to contract for a substantional period of time to take all the power of a generator will agree to take a percentage of the power being generated. For instance, five corporates with sufficient balance sheets might each agree to take 20% of the power.
Historically, that’s been quite a hard model to do as multiple corporate offtakers that were willing to enter into a PPA had to be found. Those corporates are then unlikely to be operating in the electricity market and their core function is not the negotiation of PPAs and understanding the interplay, or their obligations to buy power when the wind farm is operating and the inevitable contractual structures that go with that.