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Addressing Grid Delays: The Urgent Need for Innovative Development-Stage Financing
The renewables market has seen a glut of platform-level investments into developers over recent years, both as a means for investors to secure sizeable project pipelines and for the sellers to either keep some skin in the game or capitalise on the portfolios they’ve assembled.
Those transactions have provided a large funnel of cash into earlier-stage projects as the new owners or part-owners of those platforms bid to get pipelines shovel-ready or built.
A desire by developers to not have to rely on full project disposals at ready-to-build (RTB) has also been a driver, as they seek to bridge the gap between pure developer and IPP models by securing the equity required to help finance those projects.
But, for some of the less deep-pocketed developers, even getting to RTB can be a challenge, particularly for those experiencing planning or permitting delays and appeals, high grid costs and far-flung connection dates.
For these companies, access to finance at this stage is still scarce, and ultimately is potentially acting as a brake on the energy transition across Europe as a whole.
“The most limiting issue when it comes to build-out in Europe is delays in permitting, but the second most limiting is there is not enough pre-RTB financing,” says one senior finance professional with experience of closing these kinds of deals.
Accordingly, a small but noticeable – and anecdotally growing – part of the market has sprung up to serve developers in need of early-stage capital, which will allow them to keep ownership of their projects for longer by reducing equity requirements, as well as creating the conditions to meet unforeseen costs and to ultimately earn higher development premia.
The trend was if not begun by Austrian infrastructure lender Kommunalkredit then arguably normalised by the group with its so-called borrowing base facilities.
The bank most recently in May 2024 issued a EUR 20m facility to Ireland-based developer WElink for use on the development and acquisition costs for a pre-ready-to-build 1.6 GW battery storage pipeline in Italy.
But their partnership on these kinds of deals goes back several years, with a similar transaction signed in mid-2021 for a 472 MW early-stage Italian solar portfolio.
Meanwhile, Kommunalkredit has conducted more recent deals with Clean Capital Energy and Enernovum in late 2021, as well as Renalfa in summer 2023, among others.
The Austrian lender’s borrowing base facilities covers stages of project development which are typically considered too early for most banks to get involved with and requires the company to lend against the strength of the developer’s pipeline rather than individual project fundamentals. This can sometimes be compared to debt deals for oil and gas exploration, where some of the wells will not ultimately yield any product but the portfolio as a whole helps to iron out the outliers.
The typical approach involves calculating a cash flow forecast for when the projects will hit RTB, lending only a conservative portion of that figure – such as 50% – and then chunking the debt into staged drawdowns at specific milestones, such as securing land, receiving a grid connection offer or planning approval.
However, approaches like this – although it is not known whether Kommunalkredit’s transactions work in this way, to be clear – can sometimes result in merely delaying the stresses placed on developers from earlier in project life cycles to later on as they are pressured to flip projects out of development-stage debt deals either through sales or refinancings.
This, once again, is because cash is often in short supply and because the pricing on pre-RTB finance facilities is naturally higher than construction-stage project finance.
While, as one contact pointed out, the cost of early-stage debt is better than the alternatives of having no pipeline at all or giving up substantial dilution of equity, developers would rather not be on the hook for average pricing of 6%-10% for too long, with this figure depending on the quality and make-up of pipeline.
Flipping projects onwards was fine in a hot equity market with shorter waiting times for grid connections and cheap debt, as was the case until a couple of years back, but can be more difficult nowadays.
Other lenders are now also getting in on the act, with groups like Mitsubishi HC Capital-backed Novuna, Triple Point and Thrive Renewables concluding loans in the UK, while others including MEAG have closed deals in continental Europe, such the latter’s financing of a 480 MW Portuguese pipeline financing with US-based investor APL in late 2023.
However, this remains an area limited to a select group of participants.
“There is a huge demand for development capital for renewable projects in the UK, however commercial banks still do not have an appetite to take development risks,” says Shifali Aggarwal, director – energy transition M&A and debt at Mazars.
“[However] there is an interesting set of lenders emerging in the market who provide short-term development finance / construction bridge, which helps developers with equity constraints and meet grid bonding requirements,” she adds.
Another financing contact was more direct in their appraisal of the landscape, calling it a market failure which requires action from multilaterals and development banks, such as the EIB or KfW, to provide funds to support pre-RTB transactions.
Meanwhile, another financial advisory source suggested the traditional banks might only be interested if developers lined up PPAs for their assets at a very early stage – naturally difficult without planning or grid approval – in a chicken-and-egg-style conundrum.
However, there are hopes that other names will soon join the fray in a meaningful way, with groups such as Berenberg, and other junior debt providers, seen as an ideal candidate, by one source contacted for this article, to eventually become a seasoned operator in the pre-RTB debt market.
Berenberg has actually already participated in the space with its mid-2021 deal with Elgin Energy to support the development of a near 1.4 GW UK and Irish solar pipeline, and the fund manager is understood to be mulling engaging in other similar opportunities.
The pre-RTB finance space does seem to be steadily, if not spectacularly, growing. It should also be noted however that this comes at a time when equity seems to be withdrawing from individual project acquisitions at RTB, especially among the larger funds, reducing the options for releasing projects from development-stage finance facilities.
This is sometimes because it can take a buyer a similar amount of time to make a smaller transaction as a much larger one, like a platform-level investment, therefore making the latter approach a far better use of time.
But clogged up grids and the consequence that many pipeline projects will therefore not connect until the late 2020s or beyond, is also a factor.
"At asset level, buyers are being more selective. They don’t want to deploy into an asset with grid connections beyond 2026 as there is little value in securing the site today if one cannot build it,” says Aggarwal.
That is not to say that these deals no longer get done – there is clearly a strong mid-market funds space in Europe – only that a portion of the market has retreated from the action here.