The latest on Energetic and renewable energy trends.

Get ready for a wave of solar refinancing.

When you don’t have a crystal ball, data and certainties are a close second. Thanks to folks like kWh Analytics, SEIA, and Wood Mackenzie, we are well-equipped with both, and have our sights set on the imminent wave of refinancing about to hit the proverbial shores.

There are two primary drivers for refinances in the clean energy industry; expiring tax equity and rising interest rates.

Tax equity refers to dollars invested in third-party solar development projects that yield a tax benefit to the investor. According to Norton Rose Fulbright, typically, tax equity covers 35% of a solar project +/- 5%.[1] These tax equity structures come with a 5-year horizon, meaning that after 6 or 7 years, they are no longer eligible for tax recapture, making it the optimal moment for refinancing.

And what happened approximately 6 years ago? The solar industry saw an uptick in project development. As Richard Matsui flagged last year – 14GW of solar, or 15% of today’s installed base, was developed in 2016[2]. Matsui predicted a refinancing boom, and we think he’s spot on. Tax equity expiration drives the refinancing cycle, and now that the industry is more mature, more projects are ripe for refinancing.

Last year, Energetic Insurance supported Longroad Energy as they refinanced a C&I solar portfolio with a $24M term loan from Fifth Third Bank using EneRate Credit Cover. To learn more about this project, see this piece in Power Finance & Risk.

“The time was right for us to replace a more expensive and complex tax equity arrangement for a cheaper and simpler capital structure” said Tait Nielsen, VP of Project Finance at Longroad Energy.

Refinancing inevitably triggers a re-assessment of the original project, offtakers, and risks. A lot can happen over the course of 5-7 years; elections, macroeconomic shifts, and even global pandemics. It’s no surprise that the credit profiles of project offtakers can shift between project inception and tax equity expiration. Previously investment-grade offtakers might have become downgraded to sub-investment grade. This doesn’t mean these are bad energy project risks, it just means the underlying offtaker risk has changed, and should be taken into account when refinancing.

The second primary driver for refinances in the clean energy industry is rising interest rates. In case you have managed to avoid the news cycle – all eyes are on the Federal Reserve, and expectations are high that the Fed might raise interest rates in the near future. Rising interest rates mean a higher cost of capital, and no one likes added costs.

“Concerns about inflation abound. An interest rate hike is inevitable, and more than one hike is likely,” says Marko Papic, Partner and Chief Strategist at Clocktower Group. “We don’t know exactly when these hikes will happen, but we know that capital is likely to be more costly in the near-future, and won’t get less expensive any time soon.”

Forward-thinking developers are in a rush to refi, they see interest hikes coming, and don’t want to wait; they know that it is prudent to refinance now, rather than wait until later this year or next, when it will likely be more costly to do so.

Whether you are refinancing or financing for the first time, Energetic Insurance is here to help when project cash flows are exposed to weak underlying offtaker credit. Customers tell us that our policies typically help increase the advance rate or the loan to value, help sponsors get a lower cost of capital all in, improve loan sizing, and all of this ultimately improves levered IRR from the sponsor’s perspective.

With so many sponsors and developers looking to refinance, the opportunity for financiers is significant. For financiers actively looking to expand investments in renewable energy, our policies should help them improve cashflow projections, and enable them to consider support of portfolios that include non-investment grade risk. Harnessing our solutions might enable lenders to provide more competitive rates, helping them reel in deals and deploy more capital where it matters. If you are a financier reviewing projects with sub-IG offtakers, consider recommending to the developers you are working with to reach out to us.

Finally, regardless of interest rates, developers will need to refinance projects from time to time, for example, when:

• There is a mini-perm structure or a warehouse facility, the loan will end at a certain point, and there is the expectation of refinancing
• Projects are successfully aggregated. As developers pull together portfolios, they might have an initially high cost-of capital, however, as they hit a critical mass of projects, they should be able to get a lower all-in cost of capital
• A raw deal was reached and developers are regretting terms and financing facilities they want to get out of
• Developers want more cash from a larger loan amount
• Projects have generated a lot of cash and developers have paid down the principal balance on their loan; refinancing enables them to seek a greater loan amount

The short story: if you are a solar project sponsor or developer, you should consider refinancing sooner than you think. If refinancing is 1-3 years in the future, consider refinancing today to take advantage of a lower interest rates and to avoid more expensive capital in the future.

Interested in learning more? Reach out to us here, or meet with us at the Solar + Wind Finance & Investment Summit next month.

[1] https://www.projectfinance.law/publications/2021/december/solar-tax-equity-structures/#:~:text=Tax%20equity%20covers%2035%25%20of,terms%20of%20priority%20of%20repayment.

[2] https://www.forbes.com/sites/richardmatsui/2021/05/04/the-solar-industry-is-ripe-for-a-refinancing-boom-in-2021/?sh=2cb4e78c1bbf

This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.

“What if insurance, yes, insurance, could be a powerful ally in decarbonizing the economy, really helping us to actually get to scale a little bit faster on deploying … climate tech?” -Lara Pierpont

Spoiler alert: it can. It’s all about deciphering complex risks and harnessing risk transfer to coordinate an appropriate risk profile.

Our Co-Founder, Jeff McAulay sat down with Lara Pierpont for Shayle Kann’s Catalyst podcast, and discussed how insurance can actually help usher in climate mitigation solutions, in addition to playing a role in the climate response side of the equation.

Often, when people think about climate tech, naturally weather and natural disasters are the first risks that come to mind. After all, climate-related risks are growing rapidly. SwissRe estimates “that climate risks will grow the global property risk pool by 33-41%.... by 2040.”[1] The risks and costs of global climate change are significant; we must focus as much as possible on mitigating these risks and costs.

When we shift to thinking about mitigation, decarbonization and deployment of renewable energy, there are a different set of risks to be managed.  

As Jeff notes, “there are a lot of businesses buying solar electricity, but many of them who would like to have solar or other renewables are unrated or below investment grade. Because of those challenges, they have a hard time getting financing, even though solar would save them money in the long run.”

We’re talking tens of thousands of large C&I prospective energy customers who are blocked from procuring renewables due to their inability to access project finance markets.

At Energetic Insurance, we are trying to solve for deployment hurdles, not only for solar and renewables, also for energy efficiency, storage, and other cleantech solutions. We realize it is not technology risk that is holding back deployment, it is something else; offtaker credit risk. Credit risk relates to the likelihood that any given offtaker will continue to pay for the electricity generated, thus enabling ongoing debt repayment. PPA terms are long, often ~20-years. There is always the risk that a business cannot meet all payment obligations. This is sometimes exasperated by single events, as we recently witnessed during the global pandemic, especially as businesses needed to halt certain operations.

We further realized that insurance, specifically insurance that covers offtaker PPA payment default risk, can mitigate the financing hurdle and allow for more confidence and predictability of cash flows at the project-level. This is done by developing and harnessing innovative risk transfer models and mechanisms that de-risk the project for developers and financiers. These tools allow us to decipher and transfer risk efficiently, potentially unlocking capital for projects that otherwise might be overlooked by financiers and/or enabling a lower cost of capital.  

Consider a solar project that involves sponsor equity, tax equity, and debt. For project developers and sponsors, the overall metric of success is their levered IRR – it is critical that they get the best terms of debt possible. This is essential for end user C&I companies as well, as the LCOE, or levelized cost of energy, associated with the project will be directly linked to the cost of the debt capital which is a partial driver of the ultimate PPA pricing – the more costly the capital, the higher the LCOE and the higher the PPA price offered to the end user.

Ultimately, we allocate risk efficiently between the offtaker, developer, financier, and insurance provider. Shifting some risks to an insurance balance sheet may allow the total cost of capital to fall for the project, and that directly impacts LCOE, expands the market, potentially lowers costs, and accelerates deployment.

What is the result?

Insurance can actually enable and encourage transitions to climate-saving, resilient infrastructure.  

So, is the solution adding more insurance? Creating new insurance products is not easy. The complexity and diversity of the projects and location-based regulations at hand present a barrier for investment selection. Uncertainty on the short and long-term impacts of emerging regulations abounds in such areas as net metering, RECs, or community solar programs. This can spur increased costs; the more complicated an opportunity is, the higher the perceived risk, and the more investors expect to get paid for putting their money at risk. Allocating risks efficiently is no easy feat given the heterogenous market and the lack of standardized risk profiles and packages.

We collaborate with developers and financiers to determine the most efficient way to cover the risks and to unlock the overall lowest cost of capital, enabling projects to be done quickly and efficiently at scale.

We are confident that insurance already is, and will increasingly be, an enabler of deployment and resiliency. The insurance industry is well poised to send (pricing) signals that encourage climate adaptation behavioral change. If risks are reduced, lower insurance premiums might be available, and if insurance can't be procured on a cost-effective basis, dollars will flow to lower-risk opportunities.

The market for our product in solar remains sizable. We are ready to help deployment in other high-impact areas, including areas like energy efficiency, in which technology is proven, but financial and other risk-related barriers are holding back deployment.

Interested in others addressing risk management in renewable energy? Have a look at our friends at REsurety and Omnidian who are addressing asset performance and weather risk, and at New Energy Risk, addressing early-stage technology risk.

Thanks to Lara Pierpont, Shayle Kann, Post Script Media, Canary Media, and the Catalyst podcast team for helping to demystify the role insurance can play in clean energy deployment.

In a recent Catalyst podcast episode, Jeff McAulay, Co-Founder of Energetic Insurance, discusses how insurance is an often-overlooked yet vital tool for scaling climatetech solutions. While insurance is essential in many industries, climatetech has lacked tailored coverage—until now. McAulay explains how Energetic Insurance is addressing risks in solar and other emerging technologies like heat pumps, fuel cells, and geothermal, unlocking new capital and enabling broader deployment. The conversation also touches on the evolving role of private insurance and government in mitigating climate risks.

Listen to the full episode here to learn more!

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At Dynamo’s event, co-hosted with NYSERDA, industry leaders explored how climate change is reshaping the insurance landscape. The discussion emphasized the critical role of insurance in mitigating climate risks and enabling the clean energy transition. Speakers, including Jeff McAulay of Energetic Insurance, highlighted how insurance products, such as climate risk models and credit enhancements, can unlock capital for renewable energy projects and support technological innovation. The event underscored the need for public-private partnerships to address climate challenges and ensure equitable solutions for vulnerable communities.

Watch the full event recording here.

Last week the Energetic Insurance Team attended Projects & Money in New Orleans. Hosted by Infocast, Projects & Money attracts leading renewable energy project developers and financiers. It is a highly productive forum in which to connect, exchange market intelligence, and tee up deals for the year ahead.

After two years of virtual networking, it was great to see many familiar and new faces together at the conference, the Allen & Overy dinner (thanks to John Marciano & Sam Kamyans), and of course at the amazing live music venues on Frenchmen Street in beautiful New Orleans!

Our high level takeaway: We have high hopes for 2022 and expect it to be a big year in renewable energy finance in spite of headwinds on tax credit extension and solar supply chain challenges. Keep reading for more of our team's takeaways:

1. The energy transition is unstoppable - After 2020 disruption, project development, finance, and investment activity in support of the energy transition rebounded in 2021. If our conversations are any indication, significant investment will continue in 2022. Those who want to play in the space should move quickly to catch the best deals.
2. New entrants abound - We saw more new financiers, sponsors, and developers represented than previous events; a visible sign of the global momentum pushing ESG investments and renewable deployments. Several existing financiers in our industry are expanding their renewables teams and expanding their mandates in this space. All of this expansion and new entrants brought many new faces to the conference who we were excited to connect with for the first time.
3. Sub-IG and unrated offtakers remain underserved - Several panelists noted an increase in unrated offtakers in development pipelines, in particular on corporate PPA (and VPPA) transactions. Unrated and sub-IG offtakers continue to pose challenges for financiers due to the higher credit risk. EneRate Credit Cover can help developers and financiers push forward with these projects by insuring the offtaker PPA payment default risk, or in the case of VPPAs, reducing the Buyer's letter of credit requirements.
4. Deal timelines are lagging - Q4 deals are spilling into Q1/2. Interconnection is the most common cause, with interconnection queues at 6-12 months. It doesn't matter if you are a small or large developer - there is little to be done to influence this and accelerate the process. This issue is acutely felt in certain geographies, including California. Potentially this will also become an issue in PJM territory.
5. Supply chain issues persist, but are a lesser issue - Supply chain issues may be bottoming. Still, it is important to keep an eye on global supply chains and trade, as we have learned that federal officials are detaining panels suspected to be made with forced labor in China.
6. Cost increases are causing PPA cancellations and renegotiation - ~30% of PPAs are being canceled or renegotiated due to upward cost pressure (primarily due to rising labor and raw materials costs). True costs for EPCs will be 15-20% more than originally expected, making the deals not pencil. It was mentioned that many developers who won RFPs over 12 months ago are not moving forward; a 20% increase in costs means their 12-month old baked in costs are no longer supported, making their bids unviable.
7. Although interest rates are rising, demand for renewable assets is not waning - Rising interest rates may usually signal a waning in investment; that won't be the case for renewables in 2022. Demand for renewable assets is not slowing, signaling that these investments will persist, even if the cost of capital increases. We anticipate a wave of loan refinancings in advance of pending interest rate increases.
8. Financiers are finding ways to meet this growing demand - Financiers are innovating and becoming more open to lending against uncontracted (merchant) long-term cash flows. Tax equity participants continue to prefer (demand) long-term contracted revenue streams.

All in all - the industry is ripe with momentum and excitement. Financiers are eager to deploy capital and are searching for the most appealing projects. Developers want to meet the growing demand for renewables.

Here at Energetic, we are ready to get deals done and are better prepared than ever to help banks fund promising projects, help developers secure a lower cost of capital, and help asset managers refinance at compelling rates.

Looking forward to a successful 2022 for our industry and we hope to see many of the same and new people at RE+ Northeast Community Solar Power Forum in Boston later this month, and Infocast's Solar + Wind Finance & Investment Summit in Scottsdale the following month.

In the report Targeting Zero: Cleantech Solutions Accelerating a Sustainable Future, innovative companies are featured for their role in driving the global shift toward clean energy. Energetic Insurance is highlighted for its groundbreaking product, EneRate Credit Cover™, which enables renewable and distributed energy projects to access financing by mitigating counterparty credit risk. This cleantech innovation is unlocking capital for underserved sectors, accelerating the deployment of renewable energy solutions needed to meet global net-zero goals.

Read the full report here to learn more about cleantech solutions shaping a sustainable future.

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