Private Credit and Project Finance For the Transition Economy

In the face of numerous economic, social and geopolitical challenges, the renewable energy industry has not only weathered the storm but forged ahead with a positive investment trend that has gained momentum year-on-year since 2018.

In 2020, investments soared to USD $348 billion, marking a 5.6% increase from the previous year. The global landscape of renewable energy finance vividly depicts the flows along the investment life cycle in 2019 and 2020.

As we delve into the intricacies of this landscape, we see an even more accelerated pace of investment in 2021 and 2022. In 2021, investments surged to USD $430 billion, representing a robust 24% increase from the previous year. This momentum continued into 2022, with a further 16% increase to reach an impressive USD $499 billion.

In this dynamic environment, the trajectory of investments serve as a crucial indicator of the resilience of the renewable energy industry. This highlights the sector’s pivotal role in steering the global transition towards sustainable practices—a narrative essential for prudent investment strategies in the broader context of responsible and forward-looking financial management.

From 2013-2020, 83% of renewable energy investments were made domestically, demonstrating a reliance on in-country sources. However, regional disparities are evident, with mature markets such as East Asia and Pacific, North America (excluding Mexico), and Europe displaying higher percentages of domestic investments. In contrast, regions like the Middle East and North Africa and Sub-Saharan Africa depend more on international capital.

The economic fallout from the COVID-19 pandemic has exacerbated challenges for emerging and developing economies. These challenges make it likely that these markets will continue to rely on international public and private funding in the coming years.

The financing landscape for renewable energy has witnessed a notable evolution. The share of equity financing globally fell from 77% in 2013, to 43% by 2020. Within equity financing, balance sheet financing accounted for 55% of the equity portion, while project-level equity averaged 45% over the period.

Conversely, the share of debt financing increased from 23% in 2013, to 56% in 2020. This shift is attributed to the maturation of major renewable technologies, such as solar PV and onshore wind, which can attract high levels of debt due to predictable cash flows facilitated by power purchase agreements (PPAs) and policy support mechanisms.

Project financing, which transfers risks from the lender to the project developer through non-recourse financing, has been declining since 2013. The share of project equity fell from 40% in 2013 to 10% in 2020. In contrast, balance sheet financing has experienced growth in recent years, with the debt and equity portions constituting 30% and 31%, respectively, of total commitments by 2020.

As the renewable energy sector matures and established project developers and operators expand their portfolios, access to direct lending, and therefore private credit, has become a viable option. This shift is particularly evident when the cost of non-recourse finance becomes more expensive, and risks are well understood and mitigated.

Access to private credit also brings with it the many benefits various real estate developers have enjoyed over the years. Established technologies as well as new entrants can benefit from predictable cash flows over the long term, facilitated by mechanisms like power purchase agreements (PPAs) and policy support, making private credit a key enabler for the deployment of capital-intensive renewable energy projects, while also offering attractive levels of gearing.

Simultaneously, private credit recognises the ongoing importance of equity financing. This is especially true in kickstarting less mature technologies and financing projects in credit-constrained circumstances. This tailored and accommodating approach ensures that financing structures align with the specific needs of a project, contributing to its success and the overall resilience of the sector.