Energy investment: Deutsche Bank on keeping it clean

From subsidy-free renewables to the rise of corporate PPAs, Deutsche Bank Corporate Trust’s Dean Kennedy and Thalia Delahayes discuss the latest trends in clean energy investment.

This article is sponsored by Deutsche Bank Corporate Trust

What are the big emerging trends in energy infrastructure?

Thalia Delahayes
Thalia Delahayes

TD: There has been a lot of interest in battery storage in the US, driven by legislation and a number of incentive programmes. In terms of technology, lithium-ion has been the main focus and the decrease in battery costs is pushing this new asset class forward. Energy storage has an important role to play, especially with the growth of renewable assets, power intermittence and grid management. We have worked on a few transactions already. From a project finance perspective, those have been fairly small. But we see great potential and a lot of interest from infrastructure players.

Dean Kennedy
Dean Kennedy

DK: We saw at least one battery storage project financing in Europe last year, although it was bilateral in nature and relatively small. We still keep our eyes open for bankable projects going forward and expect to see more activity in this space this year. There are a number of specialist battery storage funds that are cropping up now, as well as dedicated electric vehicle and other sub-sector funds. That reflects an asset class’s coming of age. Those are predominantly UK-focused funds, which makes sense given the UK government’s targets for reducing CO2 levels by 2025.

TD: I would agree that there is a lot of interest in electric vehicles and related infrastructure. Just think about how many gas stations there are. With the expected growth in EV, the scale of infrastructure required for charging stations will be vast.

What about developments in wind and solar?
TD: Something that is new for the US, although not new for Europe at all, is offshore wind. European countries have installed a total of offshore wind capacity of 18,500MW compared to 30MW installed in the US. The first US offshore wind deal was done in 2016, in Block Island, and we are now seeing a big push with six states having committed to deploy more than 15GW of offshore wind along the Atlantic coast. There is a lot of expectation for this market in the US and we are seeing a number of European developers coming over and bringing their experience with them.

DK: Wind remains key in Europe as well. The UK clearly represented the lion’s share of the market last year, with well over £10 billion ($13 billion; €11 billion) of debt raised for greenfield projects or refinancings. That’s before you even start to look at the next offshore transmission grouping and contracts for difference auction expecting to produce 6GW, two-thirds of which are going to be wind projects, that we are going to be seeing soon.

There has been a lot of refinancing activity around existing German windfarms as well. And we have also been in involved in some acquisition-style financings, where developers are getting to the stage where they are nearing completion of the wind farm and are looking to divest to other players, in particular large infrastructure funds. We have helped those funds by supporting the finance of these deals.

I would agree with Thalia that a number of European players are looking at opportunities in the US – some of the big oil names that are focusing on becoming cleaner, for example. We have seen a number of transactions where those corporates are looking to co-invest alongside players that have been in the market for some time.

Are you seeing more corporate involvement in terms of PPAs?
DK: Yes, we are. We were involved in a greenfield onshore wind financing in the Nordics last year and are about to close on a second. Both of those were backed by corporate PPAs. We are expecting to see similar deals in Ireland, which is targeting 40 percent of renewables electricity generation by 2020, ramping up by another 15 percent by 2030. There are some very big-name corporates coming in as offtakers with long-term contracts. I think that trend is going to accelerate in other countries as well.

TD: Corporate PPAs have been proliferating in the US for a few years now. According to a recent Bloomberg New Energy Finance report, of the 13.4GW of clean energy deals signed by corporations around the world through PPAs last year, 8.5GW of those were signed by US companies. Traditionally, these corporate PPAs have involved large tech and industrial companies. Now we are seeing universities and hospital complexes get involved and there is an expectation that smaller businesses will become more active in the future too.

Are there key differences in the way European and US industries are evolving?
DK: I think the two geographies are becoming more similar. We are seeing institutional investors really come into play in both Europe and the US, working alongside some of the banks. The challenges are also pretty similar in terms of what we have seen in the UK with PFI. We know the PF2 scheme has finished now and P3 has its challenges.

Obviously, there are political differences. We also don’t see so much in the public bond space in Europe with spreads volatile. There has been very limited use of the publically offered bonds we used to see pre-crisis, with the monoline wraps. In general, though, there is increasing alignment between the US and Europe in terms of the way deals are structured and the nature of players lining up for these deals.

TD: I would agree that it has definitely become a very global market. There is a lot of European and Asian money coming to the US. But there are still always local differences and local legislation which impacts financing structures. For example, in the US, tax incentive plans have driven renewable investments for many years and resulted in the predominant role of tax equity in the financing of renewable energy projects. And we expect a short-term rush in wind and solar in the US as the production tax credit and the investment tax credit are respectively set to expire and step down starting in 2020.

What are your thoughts on subsidy-free renewables?
DK: It is a dominant theme. We have seen the issues there have been with tariffs, in Spain for example. We have come through that and there are rigorous targets to be met with new entrants and re-entrants to the market. There has been a lot of refinancing over the past few years and now we are seeing a lot of greenfield opportunities, particularly in southern Europe, with schemes in the Netherlands on the horizon.

We expect to continue to see subsidy-free opportunities and to continue to see the costs of building renewable projects, such as solar and wind, coming down. Obviously, technology is improving as well.

TD: Rapid cost declines made unsubsidised onshore wind and utility-scale solar cheaper than coal in many parts of the US and even competitive with combined-cycle natural gas on a levelised level. The growth of renewable energy is going to continue as costs continue to decrease and innovation – such as bifacial panels, battery storage and larger wind turbines – will help accelerate the transition. At the same time, given the challenge of climate change, the continuity of renewable subsidies (or alternatively, a carbon tax) is still an important question.