Luis Garcia, WSJ NEW YORK
EnergiesNet.com 11 10 2023
Rising financing costs and prices for equipment make it harder to develop clean-energy projects as industry investors increasingly weigh the risks of providing capital against the benefits of reducing carbon emissions, investment firm executives say.
“The irrational exuberance, all the excitement about clean energy is clearly getting squeezed out” of a market that can no longer afford it, said David Foley, a senior managing director at who leads the asset manager’s energy group. He joined other financiers in discussing the topic at the SuperReturn Energy conference in New York this week.
He pointed to significant drops in stock indexes tracking clean energy as well as the shares of companies in various industry subsectors over the past 12 months through October. Rising costs partly stem from interest rates that have surged over the past 18 months to the highest level in a generation, pushing up financing costs.
“It’s definitely a much more challenging capital-raising environment for both public and private [clean-energy] companies,” Foley said.
Developers of wind and solar plants are finding it more difficult to secure financing than at any time in the past decade, Himanshu Saxena, chairman and chief executive at Lotus Infrastructure Partners, said during a separate panel. Greenwich, Conn.-based Lotus invests in both traditional and clean-energy infrastructure.
But he and other financiers said the difficulties facing developers go beyond higher interest rates on debt.
Investors in renewable-power projects often predicate their commitments on developers signing long-term power supply contracts with electricity consumers. But factors such as inflation and supply-chain bottlenecks that drive equipment costs higher make such contracts riskier, Saxena said.
He cited offshore wind projects in the U.S. whose developers have walked away from contracts that no longer cover mounting costs, ending agreements despite facing millions of dollars in termination fees.
“Especially for projects that are going through long-dated development cycles, it is starting to be very hard to manage your costs,” Saxena said.
Project developers can mitigate risks by getting customers to agree to paying higher prices if costs rise, he added. As an example, he mentioned a wind-power plant that Lotus built in Ohio with under contract to buy the power.
“In the second phase [of the project], the cost was 50% higher than building the first phase, and that happened over a four-year period,” Saxena said. General Motors agreed to pay a higher price for the plant’s power.
“In almost every contract that we are signing at the moment, we are looking for inflation protection,” he said.
But not all buyers on the other side of power-supply agreements are willing to pay higher prices for renewable energy to help reduce carbon-dioxide emissions, said John Moon, a managing director at . He oversees the investment bank’s private-equity deals in the energy industry.
“There are customers who are willing to pay substantially more to internalize the negative [effects] of CO2 emissions into the power price,” Moon said. “The problem is there are a lot more people who say yes, they are [willing], and then when you get to the table they are unwilling to do it.”
Electricity-price volatility also presents an increasingly common hurdle for developers of renewable-energy projects as weather-dependent wind and solar sources account for a rising portion of power supplies, Saxena and Moon said. That also could hurt developers of other types of clean-energy projects, such as hydrogen-fuel producers, that don’t generate their own renewable power, as electricity represents a large share of production costs, according to Saxena.
“Investors and developers that have the purview of the [clean-energy] food chain are going to be better placed to reduce inefficiencies in the system than people just taking one distinct piece,” such as those who want only to be a hydrogen developer, Saxena said. “That business is going to get harder because you need to be able to control more pieces to make the numbers work.”
Higher project costs force government agencies and commercial consumers to recognize the reality—largely masked during a prolonged period of historically low interest rates—that output prices must generate returns for investors in the green-energy infrastructure they are financing, the panelists said.
“Cost of equity is going up. It’s effectively raising the price [of electricity] for the customers. If the customers don’t want to bear it, the pace of the energy transition will slow down,” Saxena said. “People are not going to do deals where they lose money.”
Write to Luis Garcia at firstname.lastname@example.org
Appeared in the November 11, 2023, print edition as ‘Rising Costs Present New Hurdles for Clean Energy’.