CohnReznick, Green Banks highlight new financing trends for renewables

During a conference hosted by the Maryland Clean Energy Center on Oct. 5, moderator Jason Schwartzberg, President of MD Energy Advisors, issued a live poll asking respondents about the biggest obstacle they faced in project development. The highest answer with 43 percent of the vote probably comes as little shock: access to financing.

Despite strong year-over-year market growth from lenders and investors, some project developers, particularly those in specific markets, are still having trouble penciling projects. The conference panel, led by Joel Cohn of CohnReznick sought to break down where the new money in the market is coming from, where it’s going, and what options are on the table for developers having trouble getting projects in the ground.

Private Market Activity

Right now, Cohn says he’s seeing a lot of capital chasing renewable projects with large check sizes. Over the past year, CohnReznick has been particularly busy in states like New Jersey, California, Texas and Illinois where NPM is tracking roughly 400 GW of renewable projects in the queue, but Cohn says this trend is not limited to just these high traffic states.

“We’re seeing a lot of investment coming in from long-term pension funds and insurance companies, both at home and from around the world,” Cohn said. “Companies outside the US are seeing opportunity in the sustained growth of the US market.”

On the home front, Cohn says increasingly corporates like retailers and tech companies are finding they can achieve direct ESG goals through substantial investments in the space. This has been the case for some time, but what is notable is the way these companies are choosing to invest.

“Increasingly we’re seeing a mission-oriented investment approach rather than profit-driven motives, which is resulting in higher investments than what would otherwise be typical,” Cohn said. “These corporates are particularly looking for diversity in electricity vendors, which is encouraging.”

However, while this is causing the VPPA market to boom for larger project sizes, Cohn says a lot of this money isn’t trickling down to the distributed and C&I sectors, which rely on bundling projects into portfolios to make them more attractive for investors. Even then, Cohn says, these sectors don’t see as much interest as they should thanks to easier options on the table for financiers.

“Financiers would rather work less than more and there’s a lot more underwriting effort in financing portfolios,” Cohn said. “So, DG has always been a challenge with availability of capital.”

Tax exempt organizations are also having a harder time engaging in the market since they receive no tax benefits and must rely almost singularly on PPAs. However, Cohn notes that the direct pay provision currently proposed in the federal infrastructure bill would open the door for these organizations to own facilities and begin participating in earnest. However, Cohn is still not convinced that key provisions like direct pay will make it into the final legislation.

“Obviously we all watch the news and know there is some debate about what provisions will survive,” Cohn said. “We still have a few months before we see how this all plays out. And even if passed, a lot of these provisions will need additional clarifications.”

Beyond Private Financing Solutions

To encourage market participation from some of these more challenging stakeholders, the rise of green banks, particularly in the Northeast, is becoming more common. Connecticut Green Bank (CGB) stands out of a particularly successful example; the organization, which focuses on attracting private investment and putting that cash into challenging projects.

It has already made USD 300m in investments resulting in 500 MW of renewable capacity across the state. CGB has been so successful, in fact, that a national arm called Inclusive Prosperity Capital (IPC) has spun out to bring in local lenders like credit unions, and engage with customers and projects that are harder to finance in other states like Texas.

Kerry O’Neill, the CEO of IPC says the current sweet spot loan size for her organization ranges from USD 50,000 to USD 2m. With an average loan size of USD 300,000, the firm focuses on individual projects within the community solar and C&I space that otherwise may need to be bundled into a portfolio to finance. According to O’Neill, the firm’s interest rates range from 5.79% at seven years up to 6.99% at 20 years.

A major limitation for IPC is its trouble working with corporates, which typically target USD 25m to USD 50m deals.

“That is hard if your focus, like ours, is underserved markets where deal sizes are smaller,” O’Neill said.

PACE loans, which allow providers of finance and governments to offer loans for energy efficiency products like solar, are also on the rise. While Abigail Johnson, owner, and president of Abacus Property Solutions, says it’s unlikely to find PACE loans making up more than a piece of the capital stack, they can significantly reduce the amount of upfront equity required and can be used in projects that private equity partners may not touch.

With interest rates in the upper 5% to lower 6% range, PACE loans can be viewed as pricey, but they do have the advantage of providing non-recourse debt at a fixed rate.

Johnson says she has seen a big rise of PACE loans over the course of the COVID era on projects that may not otherwise have made it to ground. Typically, Johnson says, these loans range from USD 2 to USD 10m, though they can get much larger in certain situations. The highest PACE loan Johnson has seen so far is a USD 89m loan in New York.

Bryan Garcia, President and CEO of CGB says he is eyeing yet another solution: green bonds. Earlier this year, his green bank announced the Green Liberty Bond issuance, offered in USD 1,000 increments, to support the renewable activity in the state, which Garcia says has been a huge success so far.

This is the second time CGB has issued a green bond; its Green Liberty Bond issued in July 2020 raised nearly USD 17m from retail and institutional investors from across the country. Demand was so strong, the supply of bonds could not meet the interest of those looking to invest.

“We were very pleased by the response to our 2020 issuance of Green Liberty Bonds in the midst of a global pandemic with so much uncertainty,” Garcia said. “I’d like to see bond markets supported by retail investors across the country just like we saw with war bonds in the 1940s.”