INTERVIEW - Aussie renewables financing evolves with growth in corporate PPAs, merchant projects
Taralga wind farm in NSW. Image by Planum Partners.
More renewable energy investors in Australia are turning to corporate power purchase agreements (PPAs) or even “going merchant” and this is changing the way financing in the sector is done.
In the last couple of years, major Australian corporates have been looking to secure their power costs by backing renewable energy projects. PPAs have been signed by Australia's largest telecommunications company Telstra, and also by two major banks – National Australia Bank (NAB) and the Australia and New Zealand Banking Group (ANZ), by Mars, Carlton Brewery and Coles, and by manufacturing companies and universities.
Last month, Australian renewable energy company Pacific Hydro secured the funds it needed to build the 80-MW Crowlands wind farm in Victoria. That project will become a reality thanks to Australia’s first bulk buy PPA that saw a consortium of 14 organisations band together to purchase the power. According to Planum Partners, which assisted in the financing for Crowlands, such deals for renewable energy are likely to become a trend in Australia, as they allow for a mix of corporates to get involved in renewable energy projects and safeguard their power costs.
Planum expects more and more PPAs with corporations, instead of direct sale to retailers. However, it notes that with the rise of new offtake arrangements, new challenges have arisen for projects seeking finance.
“The emergence of alternative offtake arrangements has increased the need for projects to spend more time addressing bankability and structuring considerations during the initial stages of contract negotiation. This is particularly important for corporate PPA’s from smaller counterparties seeking to hedge power costs across shorter time horizons than traditional offtakes,” Shaun Newing, Managing Director at Planum Partners, said.
Planum explains that, aside from project specific factors, a number of offtake structural considerations will influence the final debt-to-equity ratio in financing arrangements, including the counterparty credit strength and key terms such as price, volume and tenor of the offtake.
“We are witnessing a recent trend for corporate PPAs to be struck with shorter tenors than the earlier retailer and government PPAs. This is a function of both the appetite among project developers and shorter-term hedging needs of corporate customers. This has created a greater level of merchant risk in the projects which in many cases has reduced the overall amount of debt that banks are willing to lend. This has been offset to some degree by the credit strength of the corporate offtake. A large number of these PPAs have been offered by large corporate customers with strong balance sheets that underpin their offtake obligations and support overall bankability of the contracts.”
Browsing news about renewable energy financings in Australia it appears that local -- Australian and Asian -- banks are more often involved in the financing of projects with corporate PPAs. Planum provides an explanation of that, saying that Australian and Asian banks tend to focus on short-term (mini-perm) finance. This is because their internal funding profiles generally result in a cost of capital advantage for short-term tenors. International banks, which are active in the Australian renewable market, have increasingly been providing finance on a long-term basis.
“While long-term finance can be beneficial for reducing a project’s refinancing risk it requires increased certainty on long-term project cashflows (and by consequence longer term offtakes). The shorter tenor observed on recent corporate PPAs has in turn resulted in increased competitiveness of short-term financing offers against long-term alternatives,” Newing said.
Asked whether adding energy storage capacity can get better terms, Planum said there is a growing interest in the opportunity for large-scale storage, but the firm is not aware of increased appetite from commercial lenders or equity for such projects. For now, the uptake of storage is mainly supported by the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation (CEFC).
Wirsol Energy in December 2017 said it has reached financial close for two solar projects in Victoria and Queensland with a combined capacity of 199 MWp, which are being financed on a fully merchant basis. Australia's Clean Energy Finance Corporation (CEFC) is the sole debt financier, committing AUD 207 million, while equity is provided from Wirsol's parent, Germany-based Wircon.
China’s Risen Energy acquired the 121-MW Yarranlea solar project in Queensland early this year and said it planned to develop, build, own and operate the project on a merchant basis, without relying on a PPA.
In March, Australian firm Carnegie Clean Energy started construction of a 10-MW merchant solar energy project. It is partnering with Indigenous Business Australia (IBA) and Perth Noongar Foundation (PNF) as co-equity investors.
Planum Partners tells Renewables Now that renewable energy developers are looking to build merchant plants to get more return on investment as PPAs have come down a lot in price. Australian investors are likely to take on more merchant risk to respond to the needs of the industry.
“Banks are cautious when it comes to merchant renewable projects, due to Australia’s volatile energy market over the last 15 years. However, as this desire to build merchant plants grows and the availability of PPAs reduces, developers and their project advisors will need to find new structures to help banks work through the risks associated with merchant financings,” says Shaun Newing.
Planum is already observing increased appetite from both commercial and non-bank lenders to provide loans to projects with merchant risk. Several financings have closed over the 2017/2018 period. These tend to be structured with increased lender protections (such as cash sharing) and sized on lower leverage levels than contracted assets.