Subsidy-Free Renewables and Offshore Wind 2021 Summit: SFR key takeouts

Day one of inspiratia's Subsidy-Free Renewables and Offshore Wind Summit on 28 October brought together key figures from the industry in fruitful discussions which highlighted several key themes that will play out over the coming years 

Last week, in partnership with our sponsors DLA Piper, NordLB, Pexapark, BayWa r.e., AFRY, Galileo Green Energy and K2 Management, inspiratia's flagship renewables conference returned in full force for an eventful two-day event.

Over the course of the first day inspiratia hosted five panel discussions on topics including subsidy-free development on the road to Net-Zero in the UK, the shifting landscape of corporate PPAs, and how private financing will meet the challenges posed by a subsidy-free world. 

Throughout the event, several recurring themes for the sector emerged which we expect to play out over the coming years. In this article we will outline the key takeouts from the day, including perspectives from developers, lenders and advisors on major deals, as well as inspiratia's own view on how the world of subsidy-free renewables will look.

The key takeouts from the event can be summarised into four major themes:

• Capital is widely available for renewables development at present but financing will have to adapt to market volatility.
• There is growing demand for corporate PPAs, but as the market develops deals are becoming more complex and there will be a limit to suitable offtakers.
• Colocation and use of battery storage will be an important solution to ensure supply and price stability of renewables.
• Greater government support in terms of permitting and administration, as well as investment in grid infrastructure, is required for successful renewables development.

Adapting financing to a subsidy-free landscape

One area of consensus among our panellists was that financing availability for renewables has never been better, with banks, institutional investors and corporates all willing to commit funds to projects amid a growing focus on the climate crisis and meeting Net Zero emissions targets. Combined with low interest rates and favourable monetary policy environments in developed markets, this means that capital is readily available to be deployed into renewables development.    

In addition, an important shift has taken place as the renewables market has matured and lenders have gained experience in the sector. Stefan Rattensperger, Senior Director at Investec, claims that "the big shift is that banks and institutionals are far better educated now about power markets". In particular, credit committees have a deeper understanding and more nuanced view of power markets and financing, creating sustained support for lending to renewables projects.

Lenders also appear more willing than ever to fund renewables projects on merchant risk as the cost of renewable power has become more competitive. According to Santander's Bart White, Managing Director and Head of Structured Finance, "the number one reason why we're seeing more merchant financing is that the cost of building renewables generation has dropped such that the projects don't need as much subsidy in order to be economic".

That said, the financing landscape will have to adapt to subsidy-free projects, and this will force lenders and developers to work out new funding structures. Mehul Bhimjiyani, Partner at Ager Capital Partners, noted that "all types of independent projects require a range of different capital structures and flows. And so having more entrants in the market, having different forms of financing, is going to be critical to financing the wide variety of solutions that are needed for the implementation of renewable energy".

Most panellists agreed that lenders are hesitant to accept full merchant risk for renewables, and that some form of price certainty will be required. As a result, suggested Dr. Peer Piske, Managing Director of Alantra, standardised processes and financing methods such as PPAs and the UK's Contracts for Difference (CfD) scheme may be needed to build out renewables without subsidies.

One potential option, offered by Caroline Lytton, Managing Director at SMBC, was that a hybrid system could come into play for renewables development, with some subsidies for a portion of projects allowing banks to provide financing at lower cost. Agreeing with this point, Enrico Ambrosini, European PPA Lead at Green Investment Group, claimed that a mixed subsidy and subsidy-free financing model could be successfully replicated.

However, Barney Coles, Managing Director at Capital Dynamics, said that while methods of financing may arise whereby developers can borrow against a portion of projects or against a wider portfolio, "that's not a thesis for building up gigawatts of new capacity over the next few years, ultimately that is going to require some degree of price certainty". As a result, auctions will likely remain an important and simple route to market as they offer more stability and government guarantees.

In any case, it is clear that the current financing environment will not last forever, and some panellists sounded a note of caution for the future. Ager Capital's Bhimjiyani, for example, warned that "when financing does become a problem and when liquidity does become tight, either because governments are withdrawing money or because it's been allocated in different ways, I think then we're going to have a different discussion and everything changes".

Navigating the shifting environment for corporate PPAs

One of the most vibrant topics of discussion throughout the event was the role of PPAs, and particularly corporate PPAs, in subsidy-free renewables development. PPAs have been an increasingly popular financing method for renewables, offering price stability and guaranteed supply for offtakers. Nevertheless, there are limits to the potential uses of PPAs, which our panels explored at length.

Clearly stating his view on the role of corporate PPAs was Simon Kornek, Vice President Southern European Origination at Statkraft, who claimed that "corporate PPAs have become mainstream". What's more, said Kornek, "we need even further demand, in my view. We need to unleash the demand of the entire sector…we have to keep in mind 60% of corporate PPAs are still signed by big tech and large industry. Not everyone has an investment grade".

This view was supported by Natasha Luther-Jones, Co-Chair of Energy and Natural Resources, International Co-Head, Sustainability and ESG at DLA Piper, and echoed throughout the day by other panellists. The consensus was that PPAs in general are in high demand, with Luther-Jones emphasising that corporates offtakers are leading the way in the last 18 months – not just tech companies but also pharmaceuticals, public sector, and professional services companies.

Other panellists were more cautious on the prospects for corporate PPAs, however. Caroline Lytton acknowledged that PPAs can play a role in addressing risks but there are still challenges and very different risk appetites among offtakers. Meanwhile, Heiko Ludwig, Global Head of Structured Finance at Nord/LB, warned that corporate PPAs are more complicated financing structures and there is a need for better understanding and risk management for them to succeed.

The importance of co-location and battery storage

The potential for increased market volatility as the share of renewables in the power mix increases was a key area for discussion throughout the day, with many panellists coming back to the need for colocation and battery storage in order to provide stability to the power market.

Hannah Staab, Head of Advisory – Europe at Natural Power, highlighted the fact that market volatility is here to stay, so batteries and hydrogen storage will be important to guaranteeing the stability of the power supply. According to Staab, having "the kind of short-term flexibility that lithium-ion batteries can provide as well as thinking about longer duration" will be key. In addition, "we're starting to see people co-locate wind and solar on the same site to really maximize the use of grid connection and smooth out that generation profile", she claimed.

In order for renewables generation to provide reliable baseload power, energy storage facilities will need to become an integral part of new renewables projects and grid infrastructure. Staab would ideally like to see more government support for battery storage development, whether as part of CfD schemes or in other ways, and claims that this will be necessary particularly for the longer-duration storage that is required.

In addition, PPAs are also evolving to include battery storage elements. Karin Schramm, Sector Head Renewable Energy at Bayern LB, says that increasing volatility in the market highlights the need for battery or hydrogen storage to form part of PPA financing.

Indeed, there is a growing trend of corporate PPAs featuring battery technologies. In the UK PPAs have a floor price, with a capacity payment of 50% which makes it possible to finance hybrid projects with storage capacity. That said, structuring the financing remains complex and still relies on a credible optimiser in the battery.

Government support still needed to achieve subsidy-free success

Many panellists argued that changes to government policy and upgrades to supporting infrastructure were needed in order to ensure that renewables projects can succeed in a subsidy-free environment. Speaking during the first panel of the day, Caroline Lytton laid down a marker for the event by claiming that there has to be a role for government in supporting renewables development to baseload level, whether that's through subsidies, incentives or legislation.

This view was echoed later in the day by Victor Weisberg, Investment Director at Glennmont Partners, who said that in order to develop renewables installations on the scale required to meet Net Zero targets, "there's a tremendous amount of support that's going to be needed from government".

This was not necessarily a view supported by all panellists, with Matt Brown, Vice President Energy, Management Consulting at AFRY expressing some doubts over how involved governments should be in the energy market – noting that Spain's recent royal decree on energy prices is an example of "ill-thought-out legislation" which has "put a block on people signing deals".

Nevertheless, most panellists agreed that even if subsidies aren't the answer, at the very least favourable government policy will be required to ensure successful renewables development. In particular, bureaucratic reform which results in streamlining of permitting procedures is considered a key area for reform.

During the conference's second panel, Ingmar Wilhelm, CEO of Galileo Green Energy, claimed that permitting and administrative processes were holding the industry back. Citing the problems with developing renewables in Italy's Puglia region, which is attractive from a resource perspective, Wilhelm said "what I really hope is that the permitting conditions get streamlined where possible".  

At the same time, Wilhelm also highlighted that a clear plan for grid infrastructure upgrades is required to give certainty to developers and investors that the power market can absorb additional renewables capacity. Gallanti agreed with this point, saying that the current grid system is not designed to handle the planned capacity additions and clarity from governments on grid infrastructure upgrades is therefore essential.

Later in the day, Will Shead, Director of Analysis and Due Diligence at K2 Management, expanded on these areas of concern and tied up the constraints remaining for the renewables industry. Shead noted that supply chain issues also need resolving in order to expedite the project pipeline. "I think there's a huge number of projects that need to be built and a still relatively small supply chain which is already quite constrained. So I think getting equipment onto projects is going to be difficult", he said.

Many unknowns in the future of subsidy-free renewables 

While these themes all touch on important points for industry players to consider, inspiratia notes that several questions remain unanswered in the future of subsidy-free renewables. In particular, corporate PPAs are too complicated and bespoke, and it remains to be seen whether a standardised marketplace can develop which would allow greater scale. Furthermore, it is clear that there is a limit to growth potential in corporate PPAs, which are only suitable for larger organisations, and are restricted currently by location and resource availability.

There also remains a lack of focus on energy storage from a policy perspective, and huge advances in storage technologies are required over coming years to ensure that renewables can provide stable baseload capacity. Overall, it seems that even if we are entering a nominally 'subsidy-free' world, various forms of government support will still be required to facilitate the development of renewables.  

The full Subsidy-free Renewables & Offshore Wind 2021 Summit agenda is available here.