- The tax credits in the Inflation Reduction Act have bolstered the long-term economics of the renewable energy industry, but rising interest rates and instability in the banking sector are causing concerns for project financing, three banking executives said at a conference Wednesday.
- The renewables industry is experiencing a gold rush from developers hoping to take advantage of IRA tax credits, but Alok Garg, head of renewables and asset finance at Wells Fargo, said capital markets haven’t yet embraced the “less mature industry,” leaving the vast majority of project debt to be taken on by banks.
- “That's kind of what our main thesis is – ‘look, we need to diversify the sources of capital for the industry’, whether it's [asset-backed securities], debt private placement, traditional bonds,” Garg said. “So we think that capital markets are going to be very important in the future.”
Wells Fargo’s renewables division has a “book that is growing, doubling, tripling,” Garg said during a session of the American Council on Renewable Energy’s annual Finance Forum. “To finance those types of numbers, I think it's going to stress the entire banking system, unless we start to bring in other investors like insurance companies and other bondholders into the mix.”
Those investors are “very interested” in financing the energy transition, but have remained out so far due to the dominance of banks, he said.
While the IRA is a “game changer” for the renewables industry, the stressors faced by banks and the recent rise in interest rates have caused a “sea change” in project funding, Garg said.
Renewable resources have previously “always been a pretty well-supplied market” and benefited from liquidity, he said.
“I think this is the first time I'm seeing a lack of liquidity where, as someone who leads deals, and our clients have to go and actually hunt for capital, the pricing clearly has gone up,” Garg said.
Wells Fargo has a strong base of customer deposits to pull from, he said. But banks that rely on wholesale borrowing or have seen their deposit base dwindle are having a difficult time competing as funders.
“This is a real issue, because our market is about 50-plus banks, and we really need all of them to scale this,” he said.
The shutdown of Silicon Valley Bank, which financed many renewables startups and projects, in particular residential and community solar, kicked off the most recent banking crisis. The federal government ensured all of the banks’ depositors were made whole after it shut the bank down, but developers who had partnered with the bank to fund projects were left to find funding elsewhere.
Garg said another aspect of IRA implementation that he believes the industry should worry about is ballooning tax incentives while transmission buildout remains stalled, with more than 1,350 GW of generation waiting in interconnection queues as of 2022. Most of that capacity comes from renewables projects.
“Is there a worry that unless you have a true transmission build, that some of these markets become more of a tax play versus true cash play?” Garg said. “We’ve seen that in the past, where solar and wind generate just because they get the [production tax credits,] though prices get negative.”
As a result, he said there is a “meta-risk around some of these markets breaking” due to the amount of capital expenditure they are expected to receive.
Alain Halimi, managing director of Japanese investment bank Nomura, said he’s noticed several trends emerge in the market as a result of the IRA: accelerated transactions, deal sizes increasing and requiring more capital and complexities resulting from the IRS not yet having provided guidance on some aspects of the law.
In addition, developers have been looking for more bespoke structures for financing and approaching banks with specific plans regarding project aspects like equipment and interconnection, Halimi said.
“It’s not one size fits all, these are very bespoke structures,” agreed Rabobank managing director Claus Hertel. “And one thing we look at when we do these deals is, who's backing the developer? Because it takes a ton of money to develop. So who’s the private equity firm, or the asset manager behind them? And what's their wherewithal to support this client over the next couple of years?”