Episode 6

PPA’s and Financing Renewable Developments

The Energy Transition series is comprised of one hour panel sessions involving executives and industry experts dedicated to improving awareness on various elements of the energy transition, as well as identifying investment opportunities for corporate and institutional investors.

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By John Musk, Fernando Garcia and guest speakers
Published October 15, 2021 | 2 min watch
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Key Points

  • Financing of renewable assets in areas such as PPA market dynamics, structure of PPA contracts, impact of merchant power prices
  • Trends in project financing and gearing levels across renewable assets

To help accelerate the energy transition, focusing on the financing of renewables developments and the increasing role of Power Purchase Agreement (“PPAs”) is key. To discuss this topic, RBC Capital Markets invited Kim Keats, Director of Strategy Consulting, Ekon, Nikolaus Brost, Director, Our New Energy, and Mark Saar, Managing Director & Head, Project Advisory & Finance.


Three Key Takeaways:  

Project developers and debt financing are key in financing renewables developments

Project developers represent close to half of investments in renewables. In parallel, debt financing has overtaken equity as a source of funding renewables development in 2015 (CPI data). For project developers, securing contracted revenues/pricing provides debt financing at attractive rates, and PPA is an increasingly popular way to do it: the corporate PPA market has grown from 0.1GW in 2010 to 23.7GW in 2020. Mid-term, Nikolaus Brost expects a combination of renewable projects reaching the market via merchant options, support schemes and long-term priced PPAs.

Corporate PPAs - from 0.1GW to 23.7GW over 2010-20

A PPA is a contract between a power producer and a buyer/offtaker to purchase energy (solar PV, wind and/ or storage/ hydrogen) or its market worth at a pre-agreed price, for a period typically ranging 1-20 years. Whilst PPAs traditionally secured against one technology (or asset), multi-technology PPAs are now more common. There are two common corporate PPA structures: sleeved or physical structures, where the renewable asset and the company need to be on the same grid; or synthetic, virtual or financial structure, where the buyer and the generator then settle the difference between the market price and the fixed PPA price. “PPA pricing is relative to energy price expectations over the duration of the contract which in the long-term tends to trend towards the levelized cost of energy (LCOE),” Kim Keats comments. In most European countries, PPA prices for 10-years are in the €40-50/MWh range.

Financing costs back to pre-pandemic lows

The cost of capital for renewables projects has decreased, due to increased gearing and reduced borrowing costs. Renewables projects recently secured funding at LIBOR + 125bps, whilst merchant pricing was around Libor + 350bps in North America. After spiking in the pandemic, credit spreads are now quite low by historical standards, Mark Saar notes.

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