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A ‘new normal’ for clean energy capital markets

A ‘new normal’ for clean energy capital markets

Episode 64 of the Factor This! podcast features Thomas Byrne, CEO of CleanCapital, a clean energy financier, developer, and asset owner. Subscribe wherever you get your podcasts.

Corporate demand for renewables, and the urgency of fighting climate change, fueled a decade of meteoric growth in clean energy.

In 2010, U.S. solar PV developers installed 878 MW of capacity, doubling the total from a year prior. More than a decade later, in 2022, some 20,000 MW had been added by year's end.

But one big driver of that surge — cheap capital — has all but disappeared. Inflation, interest rates, and insufficient tax equity now call into question whether the rise can continue. Or, at least, at what pace.

Take, for example ,the fledgling offshore wind industry. Offtake agreements for many of the first projects in the U.S. have been trashed due to macroeconomic turbulence that left them "unfinanceable," even for multinational heavyweights with rock-solid balance sheets.

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And while the challenges are most acutely felt by offshore wind, the most capital-intensive clean energy asset class, they also are felt broadly throughout the industry, experts say.

Thomas Byrne, CEO of the financier and independent power producer CleanCapital, said developers in solar and storage have no choice but to adapt to the "new normal" in clean energy capital markets— one that could persist for years barring significant economic collapse.

"We have to be grown-ups and adjust to the new reality," Byrne said on the Factor This! podcast from Renewable Energy World. "Returns are going to get adjusted. PPA rates are going to have to be higher. There might have to be some expense shaving to make deals work."

Navigating the new normal

The cost of capital materially impacts how developers manage their pipeline and portfolio. Construction costs elevated by inflation eat into already-thin profit margins, while high interest rates mean an interconnection delay can single-handedly push a project into the red.

Power purchase agreements negotiated before interest rates soared are unlikely to hold in today's economic environment. Great projects are now good, good projects get shelved.

The hard truth, Byrne said, is that these conditions are unlikely to ease in the near term.

CleanCapital, to some degree, mitigated its risk by establishing an in-house development team in 2021, preserving margin and deepening control over its pipeline.

"It was fortuitous because we now are able to withstand the big shifts in the macro-environment that are happening," he said.

Byrne advises developers to investigate short-term, and potentially smaller, debt options to limit exposure to high interest rates.

While the financial landscape is challenging to navigate, this isn't the industry's first rodeo, Byrne emphasizes. It's weathered storms before, and at least no longer fears the biannual risk of sunsetting tax credits now that the Inflation Reduction Act is law.

In February 2023, CleanCapital announced the acquisition of a 34.5 MW portfolio of operating solar assets in New Jersey, comprising projects ranging in size from 1.6 MW to 23.4 MW. (Courtesy: CleanCapital)

The tax equity gap

On top of debt pressures, the reality of a scant tax equity market is coming to a head.

Much of the available tax equity investment—the critical piece of project finance that monetizes clean energy tax credits—is held by a handful of large financial institutions. Byrne believes there simply won't be enough tax equity investment from traditional players to meet developer demand over the next five years.

The Inflation Reduction Act's novel transferability rule presents one potential solution. Another, Byrne said, is to recruit corporations with their own ambitious sustainability goals to enter the tax equity market.

CleanCapital pushes that message with corporate partners. Some have seen the light. Others may come soon, Byrne said, lured by the relative simplicity of transferability.

Byrne argues that corporates with ESG and climate initiatives, as well as healthy balance sheets, should build up a tax equity desk “if they want to do something meaningful.” Why they are sitting on the sidelines of the tax equity market, he said, “is bewildering to me."