The Southeast Renewable Energy Summit took place November 30th to December 2nd in Charlotte, North Carolina. This conference focuses on renewable energy policy, programs, procurement, and finance trends. In light of new legislation such as the Inflation Reduction Act (IRA) and regulatory updates at both the federal and state levels, participants focused on how such changes impact markets in the Southeastern United States.
Leyline CEO Erik Lensch spoke at two sessions, closing out the conference with a panel offering perspectives in renewable energy project finance. He was joined by J Barrett, Underwriting Manager at Pathward; Austin Scheffy, Chief Investment Officer at Heelstone Renewable Energy, LLC; and Paula Zagrecki, CEO of Zorya Energy Advisors.
The panel discussed what turned out to be a year full of surprises in finance. Erik noted the impacts of the Ukraine war, and how the geopolitical turmoil has highlighted the global reliance on fossil fuels. "It just isn't practical for the entire world to rely on only a couple of countries to power our lives," said Lensch. "Diversifying our fuel portfolio is key." Erik also mentioned that the maturation of the renewables industry, particularly with solar and battery storage, has driven a surprising amount of early stage capital this year compared to last. "No to say that the solar industry is quite recession-proof, but these developments have been providing some buffer against market volatility."
Other panelists mentioned how inflation and rising interest rates are impacting debt pricing and increasing the cost of capital. Prior to this year, interest rates had been low for a long time, and existing debts in some cases are no longer accretive. It has been difficult in the finance world to create debt that makes sense amidst 2022's volatility. Wrapped in all of this were also supply chain issues: Rising shipping costs, labor issues, module pricing, tariffs, and other costs have upended the supply chain network. Big obstacles for financiers included overnight bill increases by 20 or 30 percent, as well as how to scale and balance these on projects where cash was already out the door.
The panel additionally discussed how the confluence of headwinds this year impacted financing, net-net. As the IRA comes out, these merging factors have slowed its execution. Erik discussed how the ability to get offtake, or lack thereof, in the Southeastern U.S. may be a financing hurdle. Despite this, the new opportunities for tax transfer should make financing increasingly easier going forward. In the past, there was no ability for entities to transfer clean energy tax credits to other entities, or to receive direct refund payments.
"The money going into fees and tax equity has been a barrier in the past, especially for smaller developers," said Erik. "Tax transfer opportunities in the next few years will soon be shifting how project finances work in the Southeast. In the past, the tax investor had to be the owner or lessor of an asset to gain benefit - now, developers can monetize and pass it along. This will likely begin with utilities that engage with larger assets and then perhaps smaller projects."
All of the panelists agreed that such IRA options will ultimately make financing much more certain and bring a host of new players to the market. But there are still a lot of unknowns yet to come. For example, tax transfer guidance has yet to be issued by the IRS, which could have interesting implications. But in the interim, Erik said that "Leyline has come up with a bridge solution. Banks and more conservative capital lenders likely will not risk lending while there is a lack of clarity from the IRS. We, however, are comfortable taking a risk. Our Tax Credit Bridge Loan provides community/utility-scale solar, standalone storage, and renewable natural gas (RNG) developers cash for construction, development, or deposits by borrowing against the value of the transferable tax credit."
In the past, storage and RNG have not qualified for these benefits. It may still be a while until tax equity is comfortable dealing in these technologies, and tax transfer will provide a more near-term solution. "Nevertheless," noted Erik, "2023 likely won't be the year for transfers to really blow up. That's where our bridge solution will fit in - it will get developers started while also giving them time to decide if they want to pursue a transfer or tax equity in the future."