Investment in clean energy projects is at full throttle – so it pays to brake for risk, says MUFG banker Rob Ward.
From level 26 above Sydney’s Circular Quay the mud-caked boots of the Australia’s clean energy workers are an abstract concept. Instead, it’s the dollars that pay the wages and buy the blades and panels and lease the cranes that are of concrete concern.
To build projects, you have to borrow money. And when it’s a lot of money you need, you might find yourself facing Rob Ward, managing director and head of advisory of the Australian structured finance office of MUFG Bank, the largest lender to the renewables sector globally and one of the largest lenders to the sector in Australia.
“There is not one investor profile, or investment profile, represented by the renewables space,” Ward tells EcoGeneration. “There is a variety of different risk levels and people will naturally gravitate to what suits their profile.”
Generally, Ward advises clients on the best way to raise capital for renewables projects, on a “product- and provider-agnostic basis”, but sometimes the bank will invest directly.
An example is MUFG’s work for Singapore-based Vena Energy on the 108MW Tailem Bend solar farm. The 108MW-capacity plant has a 22-year offtake agreement with Snow Hydro but exports have been capped at 95MW as the result of new rules passed down by AEMO to stabilise voltage in the local grid.
That deal was financed by four banks, including MUFG. The bank has lent to more than 20 projects in Australia over the past two years, Ward says, and in 2018 it advised on the financing of four clean energy projects: one new wind farm, one new solar and refinancing of two wind assets. This year is predicted to be new record for investment in renewables and Ward hinted he has three projects on his desktop at present.
The risk list
According to the Clean Energy Council 89 projects are currently under construction around the country, costing more than $24 billion. It’s a market in full acceleration. What could go wrong? Ward goes through a list of the key concerns.
Merchant risk is the first off the rank, where uncertainty about the direction of wholesale spot prices throws up a flag about long-term prospects. “Increasingly we’re seeing people take market risk,” he says. “A lot of people are in that bucket and they haven’t got price protection.” This is a concern also shared to a lesser extent by projects that may have secured offtake agreements or power purchase agreements with government, corporate clients or electricity retailers, who may be wondering what will happen when those contracts expire.
“There’s an increasing amount of that risk being borne, because people are keen to invest in the renewables space, but there are only so many robust contracts to go around,” he says. Some will take on merchant risk, others will take a more conservative approach. A lift in appetite for merchant risk is a positive indicator for the project pipeline, but who knows how it will work out down the line.
Marginal no more
A second major concern for Ward is the marginal loss factor variable wielded by AEMO, where data released in early March sent a shiver through the industry as the gaps between energy generated and energy delivered to consumers widened dramatically for many projects. “That’s a risk that perhaps people underestimated,” Ward says of the AEMO numbers, which named curtailment levels affecting individual projects and – by association – advisors and financiers.
“[Marginal loss factors are] talked about every day, but if I go back 18 months it wasn’t the daily conversation it is now.”
What changed? It’s a bit hard to say. When developers are focused on bringing their own new capacity to market it is easy for them to lose sight of what it means for all the other solar and wind plants looking to be absorbed into the grid in what may be close geographic proximity. AEMO’s announcement on marginal loss factors hurt some more than others. “Overall there’s been an underestimation of that risk,” Ward says. “We’re now seeing people deal with that.”
Bad news on marginal loss factors would have compounded woes of projects already juggling other problems. “We’ll see some projects struggle in the short to medium term.”
Marginal loss factors will change as the grid is modified to suit widely distributed energy resources such as wind and solar plants rather than a small club of centralised power plants. The question remains, however: who is responsible for losses? “There is clearly a loss borne in some areas … and the grid is a regulated asset. That grey area between regulated asset base and project-specific infrastructure is still being sorted out.”
Frothy market
The renewables sector is “extremely prospective and buoyant”, Ward says. But bust can quickly follow boom, and the sudden collapse of engineering services company RCR Tomlinson last year was an ugly surprise. There’s a fine line between buoyancy and “frothiness”, he says, and we’re somewhere between the two at the moment.
As a guy whose reputation hinges on the success of the projects he backs, Ward knows it’s best to stay away from the edges. There are well-structured projects with appropriate risk allocation, he says, which will always be successful. “But at the margin there will be riskier approaches that sometimes pay off and sometimes don’t. That’s the case in most sectors but in renewables there’s a heightened risk.”
When pushed for a checklist of what constitutes an attractive project, Ward nominates experienced parties, robust contractual structure including a strong PPA and offtake partnerships, stable contractual delivery for construction and keen attention to grid connection and local network factors that could contribute to marginal loss factors.
“Our job in raising money for a project is to look at the entirety of the project and make sure it’s bankable and investable,” he says.
Asked how much a lender would charge for a clean energy project, he says debt for a greenfields project with secure offtake agreements would be priced about 1.5-1.75% above the bank bill swap rate, or about 3.5% overall. At the other end of the scale, a project which assumes 100% merchant risk is “very hard to finance with anything other than equity”.
Who wants to chip in
Investors range between developers, renewable energy owner operators, institutional investors such as superannuation funds and specialist investors and funds. “Every project has different risk characteristics and every investor has a different risk appetite and return appetite, so people are finding their different place to play in the renewables space,” he says.
“For the seasoned well-structured assets there is the battle to appeal, generally speaking, to the institutional investors, who are more stable and will hold infrastructure.
“Developer equity will inevitably take some of the risk, because they’re taking the risk that the project gets off the ground – they have a higher risk appetite but also a higher return requirement.”
He expects consolidation over time as investments are combined in portfolios, where the risk of a blend of assets is lower than risk levels of the constituent assets.
As for trends that may be coming through the pipeline, he says projects are definitely thinking about storage as a means to smoothing generation profile, but expense is “clearly the primary barrier”.
There is one worry for utility-scale projects that will never go away. Utility-scale clean energy projects are entering the market to replace existing coal-fired power plants as they slowly retire to the great grey cloud in the sky, but in the meantime Australians have shown themselves to be mad keen on residential solar – and rooftop installations are picking up fast on commercial and industrial sites around the country.
Another threat, then, to large-scale renewables is small-scale renewables. This is where estimates of the effects of varying growth rates of rooftop solar on projects are modelled to predict sensitivity to changes in load and impact on the grid in the local region. “It’s a hard one to predict with accuracy,” Ward says.