FINANCING: S&P Global Director says new REC Price Forecast will help lenders and investors clear project hurdles

In his annual letter to CEOs released last month, BlackRock Chairman and CEO Larry Fink asked companies to disclose plans for how their business models would be compatible with a net zero economy, in line with a global aspiration of net zero greenhouse gas emissions by 2050.

“We know that climate risk is investment risk,” Fink wrote. “But we also believe the climate transition presents a historic investment opportunity.”

As climate change escalates and ESG pressures mount, the push for transparency and disclosure around climate data from clients and investors is driving the world’s largest asset managers to cut GHG emissions and incorporate renewable energy resources into their portfolios.

Last year, BlackRock asked companies to report sustainability risks in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). Over the past year, the move has seen a 363 percent increase in SASB disclosures and more than 1,700 organizations expressing support for the TCFD.

A number of international and regional policy and regulatory initiatives are moving in the same direction, with countries and supervisory authorities beginning to require climate risk disclosures leading up to the United Nations COP26 taking place in Glasgow in November.

In response to increased demand for improved climate data and disclosure, S&P Global Market Intelligence recently rolled out its Renewable Energy Credit (REC) Price Forecast dataset, which enables market participants to analyze and assess the value of wholesale renewable electricity in the U.S. The new REC price forecast will provide insight into new revenue streams for energy facilities that are looking to be compensated for the value of their renewable energy.

"I think what this does is make the financing discussion a little bit easier," Steve Piper, Research Director for Energy at S&P Global Market Intelligence, told NPM. "The dataset can offer a view for a specific piece of the value stack for renewable energy that lenders and investors can pull in that helps clear a couple of hurdles in getting projects completed. They want to have an independent provider like us following those markets, target updates, and new legislation and what might that mean. Changes in policy can have really dramatic outcomes, and the range and volatility of pricing is quite a bit wider than even wholesale electricity."

The REC pricing forecast will allow market participants to estimate environmental compliance costs to utilities that rely heavily on fossil fuels, and identify which market each clean asset sells into and tie that identification to a REC projection. The data can also help stakeholders project financial impacts of regulatory changes and renewable power generation mandates.

“They're looking at the discoverable value stack for renewable generation,” Piper said. “They are looking at what it sells into the wholesale market for, and then what kind of value is attached to its REC attribute. Does that meet the requirements of good project finance? Can the project survive if, for some reason, that contract were to erode or go away entirely?”

As global energy markets continue to shift their reliance on fossil fuels to alternative sources, organizations may look to RECs to help comply with increasing clean energy mandates. The new pricing forecast will provide differentiated insights into the value of renewable energy and give investors the ability to forecast the green premium for energy transition.

“It's not a magic bullet necessarily, but what it does is help the stakeholders in those markets put boundaries around their risk and expected budget," Piper said. "For the most part, a compliance entity like a utility is pursuing a portfolio of means to comply. And for the most part, they're trying to sign contracts with developers. Maybe if they’re vertically integrated, their goal is for some of their facilities to comply. At the margin, they're going to be dealing with issues like whether there will be a delay in bringing something on stream, or will their facilities overperform or underperform in such a way that they will be long or short of their compliance targets. It can help with some of those issues.”

Where the rubber meets the road

Project developers continue to have their sights set on states that have ramped up their climate and clean energy targets. New York, which is well on its way to decarbonizing its electric sector by 2040 via massive renewable generation mandates, continues to offer prime stomping grounds for wind, solar and storage developers.

Other states like New Jersey, Rhode Island and Massachusetts are following similar tracks to decarbonize, and in turn wooing developers to set up shop.

“Many of these states have ambitious mandates that, if you just extrapolate out from where we are now to the final target, implies a lot of renewable build," Piper said. "And so part of the thinking that goes into the REC forecast is, what level of pricing is needed to entice developers to build at that pace? You need to get a lot of developers and the price needs to be high enough to attract them into those markets at the rate needed. And that will tend to put upward pressure on the REC price as we project it going forward until that ultimate target year. That, of course, is policy-driven. And it would be reasonable to predict that New Jersey or New York might double down on those standards as they go along and as the urgency around transition to decarbonize electricity gets stronger.”

With REC pricing currently strong across several New England states, developer interest in the region has grown, along with major commitments to offshore wind. S&P projects that increasingly favorable wholesale power economics and expanding contributions from offshore wind may pressure New England REC prices lower in the years ahead.

“Developers know what the legislation is as well as we do, and that's where the rubber meets the road for them and what their customers' requirements are,” Piper said. “Policy on the ground is what underlies REC value. Pricing pressure comes from customer demand, not compliance, so that affects our life-of-asset REC pricing. We’ll have high pricing for a while, and then it will moderate. Or if we think that developer interest is already very high, then we expect those prices to moderate even sooner.”

Developers who are chomping at the bit to get projects built--and willing to accept lower REC pricing to make that happen--could present some challenges in the market, says Piper.

“Most folks will say they like to target a particular rate of return, but there are always developers hungry enough to say, ‘let’s get some projects in the pipeline, let’s get them developed, let’s get them built,'" Piper said. "And so that's going to create a headwind. There are premiums to natural gas in the wintertime, RGGI pricing has appreciated over the last six months or so--those things just go straight to the bottom line of renewables in terms of their value stack. So these markets, even at a middling or low REC price, still look pretty attractive for developers. The rate of installation and the wholesale premiums that are available both influence the course that our REC projections take.”