Opportunity for Investors and lenders to support the entire energy supply chain offers exciting opportunities
NatWest has been at the forefront of the development of financing for renewable energy assets – such as solar and wind – since the inception of the market*. This has involved developing a model for sizing appropriate debt levels based on power production levels and forecasts for power market revenues. Over that period, the ‘renewables’ asset class has moved from being perceived as a highly risky new technology, where sponsors were largely utilities or specialist investors, to a mainstream asset class, sought-out by institutional investors and infrastructure funds.
Equally, lenders have changed their perception of the credit risks relating to those assets, particularly for offshore wind: these are now seen as relatively low risk. Furthermore, the use of government support through subsidies and contract for differences, as well as the development of the corporate power purchase agreement (PPA) market, has provided stable revenues. The availability of debt and equity for this asset class will now help further boost the growth of renewables and ultimately help achieve zero carbon energy production.
However, banks and investors now have a new challenge. With the energy sector transforming and as a result new business, new markets and new technologies emerging, they will need to assess and analyse the new credit risks arising from such lending and structure the debt offering to meet client needs but also protect against new and different risks. Risks can include the viability of new technologies, particularly those that have little track record of being scaled-up for use on a commercial scale. There may also be the risk of some technologies having a limited life span as they could become obsolete due to the speed of technology advances. Furthermore, banks and investors will need to develop an understanding of new markets and how demand and pricing for new products will evolve, such as the hydrogen market or the market for voluntary carbon credits.
The opportunity is not limited to large scale projects sponsored by large corporates – energy transition involves the growth of small and medium-sized businesses, technology start-ups, as well as other supply chain and services businesses. Banks will need to assess how they can support the full breadth of customers across the economy.