Kathryn Meng Elmes
How to Link Renewable Energy Projects and Capital
Capital, meet impactful Projects. Projects, meet our creative friend, Capital. We’ll let you connect from here, and know you’ll get along well.
Earlier this year, as Energetic Insurance was doing our annual retrospective, something dawned on us as we dug in on our bound policies; projects for which we facilitated introductions between developers and financiers had a stronger likelihood of actually reaching commercial operation.
A lot of deals fizzle out due to a lack of financing (this we knew), but when we dug in on key success indicators, we realized that facilitating introductions not only increased the likelihood of EneRate Credit Cover being used on projects, it also increased the likelihood that developers, financiers, and offtakers succeed in reaching their objectives.
Often, we work with project developers at the earlier stages of project development. This can be before the offtaker has signed a PPA and before a developer has identified their lender or financing structure.
“Energetic not only helped us refinance a set of projects with some challenging underlying credit, they connected us with the bank that gave us the lowest cost of capital available in our survey of the market, who we had not known of previously.” - John Galante, Managing Partner at Woodfield Renewable Partners.
Conversely, we often talk to lenders even before they have a target loan opportunity to discuss because they ask us to introduce them to developers with projects that qualify for EneRate Credit Cover. Tax equity investors, development capital providers, and other financiers also call us looking for qualifying project leads.
As we find ourselves at this intersection, we want to share insights on what makes a good project-capital match.
Understanding counterparty interests, motivations, and styles can help you swipe right.
The developer and sponsor landscape is crowded. We focus on quality over quantity, and work with only the highest caliber developers and sponsors - most often medium to large companies. When we work with smaller developers and sponsors, it is often due to the presence of sophisticated founders, who have experience at larger companies and extensive background and experience in renewable energy project development.
As part of our customer diligence, we review developer track records and experience. We focus on the best in the business – those who have demonstrated success in bringing projects to fruition. Anyone can punch a hole in a roof and install a panel. It takes something else to know where to site projects, how to secure project financing, and how to manage interconnection. Securing tax equity is often the most difficult part of the capital stack to secure; a leading indicator of developer strength is financial sophistication, as evidenced by the historical ability to secure tax equity and the presence of strong internal capital markets teams.
In a world where markets are still reeling from the covid-19 pandemic, we now learn about developer's supplier relationships. Since supply chain disruptions have delayed or put projects on hold, those with the strongest supplier relationships tend to get prioritized, and as a result are less impacted by supply chain hurdles.
On the financing side, we focus on variety, price, flexibility, creativity, and speed.
We make connections across the board and our network includes tax investors, bridge capital, development capital, construction financing, sponsor equity, aggregators, acquirers, debt lenders, syndicating/participating banks, and the list goes on...
Of course, we like to have a good list of affordable financiers. Those who offer the best interest rates and most competitive cost of capital.
But the cost of capital isn't always the most important thing. For example, we noticed that certain lenders excel at the flexible, creative, outside-the-box thinking required for some of the highly complex portfolio deals we see. Those lenders are an excellent fit for these complex projects but may not always be the most affordable option. In scenarios like this, we caution against being penny wise and pound foolish; developers could go for the cheapest cost of capital, though doing so might put deal execution at risk. Ultimately, it’s better to get the deal done, even if it means paying the price for more flexible capital. This type of capital can include non-bank lenders and flexible debt.
“At X-Caliber, we realize that financier flexibility equates to opportunity. The market is awash with deals that just need someone to be more creative with financial structuring. Our personalized and collaborative approach allows us to find creative solutions that meet client needs.” - Jordan Blanchard, Co-Founder and Executive Manager, X-Caliber Capital.
We also look for financiers who understand the value of our insurance product, those with healthy motivations who know that EneRate Credit Cover provides downside protection, helping lenders gain confidence that they will be repaid. We avoid any financiers who see our policies as a “get-out-of-jail-free" card that allows them to take on bad risks. Aligned interests with financiers is key – they must want to protect the downside while remaining committed to selecting reasonable risks, gaining predictability in their margin.
Finally, we prioritize speed. Waiting on financing can have knock on effects and prove costly. We look for banks with teams who move fast and do what it takes to get a deal closed on time, all without sacrificing the quality of their diligence and underwriting process.
Do the above-mentioned market realities ring true to you?
If so, let us know - we're eager to learn from your experience so that we can continue to open the market to new types of projects and creative opportunities.
If you are in need of an introduction to a developer or financier to help bring deals to completion, reach out to us here.
We do this (pro bono!) because we want more renewable and energy efficiency project deployment, and often EneRate Credit Cover can help get projects over the line.
This article does not constitute and is not intended by Energetic Insurance to constitute financial advice nor a solicitation for any insurance business.