Developers pairing up with private capital providers push to become IPPs and bigger exit paydays

The massive amount of deal flow for renewable developers over the past six months has highlighted an ambitious trend: developers becoming independent power producers (IPPs).

While the IPP model had negative connotations over two decades ago, institutional investors are increasingly interested in backing companies who both develop and own renewable generation assets. The path is lucrative since predictable EBITDA and cash flow means private investors may explore taking the developer public to monetize their investment as valuations balloon.

This is a far cry from as recently as a few years ago, where renewable generation developers took projects through pre-construction challenges such as winning utility-led RFPs, permitting issues and securing construction financing before selling de-risked assets to larger strategic or institutional investors. Utilities have also contracted with renewable developers under design-build-transfer agreements where they take possession of the project once completed.

Earlier this month, Ares Management struck a deal to acquire Apex Clean Energy, while DIF Capital Partners agreed to acquire a majority stake in German-based developer ib vogt GmbH. Sponsors specifically trumpeted the conversion of each developer into an IPP amongst their goals. Separately, EQT also closed out its buyout of Cypress Creek Renewables; a platform with both operating assets and a development pipeline. This was among a massive slate of deals which took place over the course of this year.

“Transforming a business towards a more asset ownership/clean IPP business model (as opposed to a pure play developer business model) allows for recapitalization of balance sheet with lower cost of capital,” said Dennis Tsesarsky, Managing Partner of renewables boutique investment bank Onpeak Capital.

The end goal may be to get to the necessary scale/optimal cash flow profile for an initial public offering (IPO) exit down the road in the next three-to-five years, added Tsesarsky, who advised Origis Energy on the recent sale of a majority stake in its business to Antin Infrastructure.

“In the current market, we have consistently seen private market capital being more constructive for renewable energy developer transactions. However, both private and public market appetite for renewables will continue to evolve.”

Both Apex and Savion Energy (which is presently on the auction block) have massive development pipelines, which lead to questions around what the developer chooses to keep or sell as part of any transaction. Interest from sponsors also leads to more complex questions around scaling the existing development company platform with additional acquisitions.

On Apex’s website, it lists over 10 GW of onshore wind and solar development projects, with the lion’s share of those projects slated to come online in the next 12-36 months. Savion Energy, which is being shopped by Guggenheim Securities and Macquarie Capital, has put only 39 MW in operation, but currently has 12.5 GW of solar under development and 3.3 GW of energy storage under development, according to its website.

Tsesarsky foresees developers still selling projects given the strength of the private asset market, however, developers may choose to keep certain assets in-house “where there is a little bit more risk/optimization angle.”

Ares has been buying onshore wind projects from Apex prior to the deal. Apex has also sold assets to other institutional investors such as Blackrock and Northleaf Capital Partners and strategics such as Southern Power Co.

Separately, sponsors are also expected to scale their existing platforms which could include bolt-ons such as middle-market and/or smaller developers and/or services such as EPC companies, according to panelists at the Platts US Financing Power Conference last week.

Southern Current, which is both a developer, EPC contractor, O&M service provider in the Southeast, is exploring potential strategic alternatives, said two sources familiar with the situation. Separately, Pine Gate Renewables hired Lazard to sell a minority stake in the business.

Given the direction of the marketplace as of late, there has also been chatter of expanding into different verticals with battery storage with green hydrogen perhaps talked about down the road, said one industry source.

“Apex will own, long-term, more of the assets that the company develops. In the past, we sold most assets to investors and strategics,” said an Apex spokesperson in an emailed statement to this news service.

“With the help of DIF, the company is transforming from a pure play developer to an IPP with an operational asset base as well,” said a DIF spokesperson as well adding that “without our backing this would probably not be possible.”

Shady Past

IPPs certainly had a moment 20 years ago, but it was not a good one. Coming out of the ‘90s, utilities were in the process of pushing deregulation, giving rise to scores of IPPs with fleets of natural gas-fired plants being offered as an alternative to coal fired generation.

In the wake of Enron’s 2001 collapse, deregulation failed, natural gas prices soared and power prices dropped. This left the likes of Calpine, Mirant and others, overleveraged and unable to meet debt service requirements, leading to a string of bankruptcy filings.

Some real key differences between that era and now is that while merchant tails are real for older generation solar and wind generation, developers being included in this latest round of deals have massive development pipelines. So those sponsors will become majority owners of these portfolios at the very beginning or before PPAs kick in, even as duration has shortened in private corporate PPAs from larger utility-scale PPAs.

There is also consensus that renewable generation, driven by aggressive carbon emission reduction targets from federal and state authorities, and newer consumers of power such as data centers and EV charging stations, will insure a steady stream of new development opportunities over the next decade.

Matching Funds

And all these opportunities surfaced as the fundraising for both infrastructure funds and energy transition funds accelerated during the COVID-19 pandemic.

EQT Infrastructure Fund V, where the Cypress Creek investment is housed, exceeded its target of EUR 12.5n earlier this spring and has not reached a final close on its fund yet despite deploying roughly 60% of the available capital.

However, this was merely the tip of the iceberg which also saw asset manager behemoth Brookfield initially raise USD 7bn for a proposed USD 12.5bn energy transition fund and Stonepeak close a USD 2.75bn Stonepeak Global Renewables Fund.

On the other side of the fence, the developers in these types of sponsor-backed deals have the advantage of having “less reliance on banks and bonds” which is a key driver for project finance and yieldcos raising capital, said Allan Marks, partner in the law firm of Milbank LLP and a member of the firm’s Global Project, Energy and Infrastructure Finance Group.