Bright outlook for renewables project debt

28 Apr 2017

Pension funds and insurers are increasingly financing European renewable energy projects, filling a gap left by banks as they scale back lending operations in the sector.

Macquarie estimates that institutional investors now account for more than 10 per cent of total debt issued by renewable energy projects in Europe, up from close to zero five years ago.

In some sectors and markets, they are taking on an even bigger role, with institutional funding estimated to account for half of UK solar project debt, and a growing percentage of UK wind energy projects.

It’s a trend which looks set to continue as the cost of technology falls and governments continue to support low carbon initiatives.

The growth of the renewables lending market

Tom van Rijsewijk, Associate Director at Macquarie Infrastructure Debt Investment Solutions (MIDIS), estimates that the renewables lending market has more than doubled in the last five years, to over €25 billion in 2016.

Last year’s funding levels are likely to continue, he says.

"You are seeing a stable rollout of projects create a very strong pipeline for the next few years," says van Rijsewijk. "Falling costs will act as a game changer, making it easier for governments to support projects – if they have to support them financially at all."

Tailor made for institutional investors

While banks still provide the majority of the financing for these projects, they are increasingly retreating from long-term lending amid regulatory constraints.

Now is a very interesting time as institutional investors have the opportunity to step in and replace their government bonds or corporate bonds with direct lending into renewables projects."

By contrast, infrastructure projects are ideally suited to the liability matching requirements of pension funds and insurers.

They offer institutional investors access to high quality, low risk debt investments with high yields and long duration. Investors also earn an illiquidity premium above corporate bonds throughout the holding period, in addition to gaining portfolio diversification.

Projects are typically simply-structured businesses with a protected market, low operating costs and negligible management risk.

They offer investors high cash flow visibility, with revenues including subsidies that are fixed or regulated by law over periods of 15 years or more.

Record low yields in traditional markets such as corporate bonds has further strengthened the relative appeal of infrastructure debt.

Offshore wind and solar projects ahead

Offshore wind is a particularly attractive investment area among renewables because of the size of the projects and declining costs for the technology.

"These are big, capital-intensive projects," says van Rijsewijk. "Scale is attractive for investors because they can leverage their fixed due diligence costs, that are common to all projects, regardless of their size."

Meanwhile, some solar plants in southern Europe are now generating energy at a profit excluding subsidies. This may ease lingering concerns about the industry that date back to 2010, when the Spanish government retroactively cut subsidies for existing solar developers amid the economic crisis.

In time, efficient, subsidy free solar energy may also be produced in northern European countries. Elsewhere in Europe, the World’s first tidal lagoon power plant is being developed in Swansea, Wales, with private funds. Germany and the Netherlands are planning new offshore wind parks and Nordic countries continue to boost wind and hydroelectric power.

"Now is a very interesting time as institutional investors have the opportunity to step in and replace their government bonds or corporate bonds with direct lending into renewables projects," says van Rijsewijk.

Find out more about Macquarie’s capabilities in renewable energy