How refinancing can cut renewables’ costs

The availability of cheap credit sets prices across the world’s economies.
And wherever there’s credit, risk dictates rates.

For renewables projects, that risk – and hence those rates – can mean the difference between a viable project, or no project at all.

With the increased pressures of a subsidy-free landscape, how can green energy developers cut costs and release the equity needed to build out a pipeline of projects?

Andrew Smith, former head of the Scottish Investment Bank’s £103m Renewable Energy Investment Fund, explains how refinancing can help:

“Each renewable energy development goes through a number of phases early in its life – planning, construction, optimisation, operation.

“Because the risks are higher in the earlier stages, debt - if it is available at all - is expensive.

“When a project is built out, that risk decreases, and so does the availability and cost of debt.

“Refinancing is the key way in which developers can take advantage of that decrease in risk, realise value and replenish their funds to go and develop more projects.”

Often, the constant income stream that a scheme provides is of less use to a renewables developer than cash to develop their next project.

And that’s where refinancing comes in.

Andrew continues:

“Refinancing, in its simplest form, means replacing expensive debt and/or the demands of equity with cheaper, long-term debt, freeing up money to use on other projects.

“Increasingly, however, refinancing is also being seen as a way to bring risk-averse money into the industry. That’s money which hasn’t been comfortable investing higher up the risk profile, for example when a project is being developed, but which can come in later on and provide a new source of financing for renewables.

“That kind of money is what developers are going to need if they’re to build out projects with very little or no subsidy, and it’s access to a new group of funders with different appetites for risk which is going to enable them to access that money.”

A CPD-accredited Scottish Renewables seminar at Glasgow Caledonian University on November 21 will explore these issues and more.

As the programme says:

“With fewer active players in the non-recourse finance space and increasing interest from institutional investors, now may be an opportune time to revisit the terms of your project.”

Andrew is speaking, as is Triodos Bank’s Norrie Cruickshank and Chris Morris of Local Energy Scotland.

Their session will look at how to make projects attractive to lenders, as well as some of the pitfalls it’s key to avoid.

The event is sponsored by TLT LLP, and will also hear from Partner Gary Roscoe on the legal and commercial challenges that can come with refinancing projects.

In truth, though, there’s plenty of good news for renewables finance right now.

At an event held by the Green Investment Group – formerly the UK Green Investment Bank – on November 1, the mood music was upbeat.

To quote a blog by Scottish Renewables Chief Executive Claire Mack, who attended:

Successes for renewables in the UK to date were obvious: the appearance of multi-investor deals and a greater understanding of green and low-carbon among the investor community were highlighted, as well as the announcement of a third CfD round.

Speakers from GIG pointed to a recent step-change which has seen investors and markets actively seeking information and accountability on the climate change impacts of investments.

This isn’t about regulatory sticks. It’s about organisations willingly injecting transparency, and then using that information to track their transition to low-carbon.
Andrew Smith, now a Consultant at Deja Blue, adds to that list of positives:

“There’s still a large amount of interest in investing in renewables projects, as the Green Investment Group event showed.

“The corporate PPA market is yet to take off, and banks will be keen to help out in that space if they think that model could replace the certainty offered by the RO or CfD and assist them in deploying more capital safely.

“The draft Scottish Energy Strategy shows that the country is going to need more renewables generation, and developing it at the lowest cost will mean using every tactic.

“Refinancing is one weapon in that armoury, but it’s one which will be increasingly crucial to the future of large-scale deployment in the renewables industry.”