A key component of meeting global carbon reduction targets will be the strong development of the renewables sector. But with it comes huge capital requirements. As financiers seek alternative financing models that ease issuers’ access to capital, Trevor D’Olier-Lees, senior director, global infrastructure ratings, S&P Global Ratings, believes the growing use of “bundling” will be part of the solution particularly with respect to distributed generation
There’s a global need for more renewable energy sources, driven mostly by their favourable economics but, in part, following the Paris Climate Agreement’s (COP21) ratification, which requires countries to limit their carbon output. Although this has inadvertently created investment demands in the region of US$1 trillion a year for renewable projects globally, finding ways to tackle this huge sum is a monumental task – especially when projects that are otherwise financeable may not gain interest on account of their smaller size. After all, a US$5 million wind farm deal is unlikely to gain the attention of the larger investors.
On the bright side, we have observed that infrastructure financiers and issuers have already found ways to increase asset financing volumes via more inventive financing arrangements. Notably, the aggregation of portfolio assets, known as “bundling”, has become increasingly recognised as a potential investment vehicle for infrastructure finance, but it has found its sweet spot in renewables financing.
Bundling: a result of requirement
Traditionally considered a staple for mortgage securitisation, bundling works by an issuer grouping similar assets (such as rooftop solar) into a single unit in order to sell to investors. This allows issuers to transform smaller asset financings into a larger tranche of debt that can attract the interest of institution investors – a reason why it is particularly apt for the renewables sector.
This trend has manifested for various reasons but the key factor is the challenge of trying to balance the interests of multiple parties. Indeed, the issuer’s need for value for money can often be misaligned to the investors’ requirement to maximise returns while minimising risk. And opportunities to match these requirements are not easily met via single asset financings that command relatively low transaction values.
The increasing prevalence of bundling, however, presents additional financing options for institutional investors to connect with the vibrant pipeline of planned renewables assets. By combining assets, each party’s priorities can be harmonised more easily and this can, therefore, lead to greater interest from capital markets.
The rise of bundling in renewables
It must be stressed that bundling is not new for certain types of renewables such as project financing of larger utility scale on-shore wind assets. Yet, infrastructure financiers are increasingly looking to bundle smaller sized assets, including smaller commercial and rooftop solar installations – with strong interest in bundled deals being seen across Europe and Asia.
In this respect, we’ve seen various financing models in the renewables sector come to the fore and their application is dependent on the issuer’s preferences. First, corporate vehicles – such as the Brookfield Renewables Partners L.P. (BEP), which boasts a well-diversified portfolio comprising mostly hydropower plants – can ensure more stable cash flows by securing lower operating costs on account of their larger scale, and long-term contracts backed by investment-grade counterparties. And in BEP’s case, with assets on 82 river systems in three continents, the transfer of asset risk is more readily achieved.
Another option we’ve observed is a bundled project financing structure. In 2016, for instance, Vela Energy ensured the refinancing of bank loans used to construct a group of 42 solar photovoltaic (PV) parks, located across Spain, with an aggregated gross generation capacity of approximately 87.7 megawatts (MW).
Given that these systems can be made up of hundreds (even thousands) of individual panels, bundling of similar assets can lead to lower technical review costs in those instances where a more systematic approach can be taken to evaluating overall asset quality.
Lastly, institutional investors can explore the use of securitisation structures – most commonly associated with mortgages – whereby illiquid infrastructure loans or debt are converted into tradable securities. A key feature is the creation of tranches which allows investors to select a profile suitable to their risk appetite.
Ultimately, what these methods have in common is the ability to create scale – a crucial factor in appeasing all parties’ interests. While it cannot be considered a magic bullet for the financing gap, bundling could help produce win-win scenarios for all involved counterparties. With this in mind, we expect bundling’s application in renewable energy financing to continue.
Trevor D’Olier-Lees is senior director, global infrastructure ratings, at S&P Global Ratings
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