INTERVIEW - New forms of finance to aid merchant renewable energy projects

Offshore wind farm. Image Source: Equinor

April 2 (Renewables Now) – Moving to a subsidy-free environment will in most cases put pressure on renewable energy developers and financiers to turn to new forms of off-take and innovative financial instruments to hedge the merchant risk exposure, Stephane Dubos, Executive Director, Power & Renewables Infrastructure Industry Group at Natixis tells Renewables Now in an exclusive interview.


While there are other means than auctions accessible to developers to deploy renewables capacities, winning the game of tenders, so to say, pretty much boils down to having the cheapest capital cost. The latter is actually achieved through a complex mix of partnerships with finance providers and equity providers, Dubos says.

"Looking at the renewables sector today, I guess, the cheapest cost of capital means partnering with pension funds and strategic investors as equity capital providers, Dubos says.

From an industrial standpoint, site-specific partnerships with proven suppliers and O&M providers early enough in advance is also as important as knowing the site conditions well generally provides a strong competitive advantage to the bidder, particularly in the wind sector, he adds.

Last, but very much not least, specific project finance structures, for example - the soft mini-perms, can certainly help auction bidders, including for the forthcoming offshore wind tenders in Europe, put up their best possible price offer.

“We can draw on experience from the past renewable energy tenders in the Middle East, Dubos says. That's a market where most bidders implemented soft mini-perm structures to enhance their bid while accepting to shift the refinance risk at the sponsor level. The sponsor and the various bidders make their own assumptions of the refinancing conditions that would be applicable at the time when the cash sweep kicks in the soft mini-perm structure.”

In general, soft mini-perm structures allow for the provision of very competitive terms of financing during the first few years of a project which can be reflected of course in the ultimate price bid, Dubos concludes.


The next challenge from a strategic standpoint in the renewable energy sector stems from the fact that mature technologies like wind and solar are reaching grid-parity in a number of markets, creating an increasing number of merchant exposed projects (even in contexts of underlying support regime like Contracts-for-Differences, or regulated “floors” in Spain). When close to grid-parity, the non-negligible weight of post-PPA merchant vs. incentivized remuneration is also increasingly leading to merchant exposures for both debt and equity providers.

This, in turn, creates a market for new forms of risk mitigation financial instruments like various structures of corporate power purchase agreements (PPAs) or derivative hedge products like proxy revenue swaps. At the same time, key bankability requirements have not changed much, despite the steadily increasing number of subsidy-free projects.

"Typically, we need a sound and stable regulatory framework and this requirement will not change," Dubos notes.

"When we look into a new market, we look at stability of regulations for those renewables still benefiting from some kind of government support and we certainly want to avoid looking at situations where the cost of the power offtake is not fully passed down to end consumers."

Raising non-recourse finance in the new world of grid-parity environment where renewables projects face an increasing amount of merchant risk is another story.

In this situation, Natixis is evaluating how and to what extent over time the project's exposure to that merchant risk is being hedged for.

"At least a certain volume of the power output needs to be contracted with an acceptable and sound off-taker counterpart or in certain cases, hedged with derivative instruments such as proxy revenue swaps."

"We would also like to see a contracted price that is "in the money". "In other words, the price makes sense and would not lead to situations where the off-take counterpart will be weakened because the contract will no longer be in the money.”

“It is also important that the contract offers adequate protection clauses in case of premature termination.”

“If all this is present, whatever is left of the merchant risk exposure, we will need to look at a satisfactory price break-even analysis and a satisfactory back up route to electricity markets. On a broader perspective, this means looking into electricity markets that are sound and stable and provide a non-discriminatory access to independent producers.”

This game of grid-parity renewables generally leads to a new balance to be found for the gearing and leverage alike on each project specific situation.

“We are no longer in a situation where the only parameters affecting gearing and leverage were the energy yield volatility and performance risks. Electricity price volatility is now an increasingly important factor for assessing the financial health of each project. The share of merchant exposure needs to be dealt with via various new forms of off-takes to provide contracted cash-flows for a share of production which allows a satisfactory break-even ratio for the lender, and via adequate financial mitigants in case of electricity price downturns as compared to initial projections .


Infrastructure finance remains so to say the root market for Natixis where it strives to be flexible to adjust to the sector's constant evolution, betting on the Originate-to-Distribute finance model to further expand its lending business in Europe.

Outside pure project finance, Natixis is looking to engage in renewables infra M&A deals, investment banking, equity and debt capital market deals in support of companies in the sector.

In this capacity, Natixis recently acted as a joint global coordinator and joint bookrunner for the initial public offering (IPO) of French renewables developer Neoen.

The bank generally wants to maintain a broad global footprint in the renewables sector, building on a historically strong presence in Europe. Natixis naturally has a solid market share in France. It is also strongly present in Italy and now back in business in the Spanish market with strong activity on the finance side but also closely monitoring equity developments of renewables assets there. In the UK, Natixis is particularly active in the offshore wind business.

Outside Europe, the bank has developed a particularly strong franchise in the Middle East with а recent flagship arrangement for ACWA Power's 300-MW Sakaka photovoltaic (PV) project in Saudi Arabia.

LATAM is also on the radar with four key markets, namely Mexico, Chile, Peru and Colombia.

Last week, French renewable energy projects developer Neoen said it obtained USD 280 million (EUR 247.5m) in senior debt to support its 375-MW El Llano solar project in the central Mexican state of Aguascalientes. Natixis was one of the three banks that arranged the finance.

In Asia- Pacific, Natixis has been active in Australia and expects to play a major role in South-East Asia (particularly in Taïwan).

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Browse all articles from Mariyana Yaneva

Mariyana is a founding member of the Renewables Now team. With nine years of professional experience in renewables she has built strong expertise in the wind industry and French-speaking markets.

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