Investors taking positions in US power projects need to educate themselves on a host of regulatory and operational issues as the sector transforms under the pressure of regional market changes, political shifts and increased renewable fuel use.
Unlike in other sectors where financing transactions are relatively transparent and based on easily-forecast cash flow and growth models, the US power sector requires its investors to “take a view” on the state of US electricity markets overall, a panel at the Platts Financing US Power conference in New York said.
The US power markets have to be the most sophisticated and the most confusing among energy markets, among all markets, in the world.
Despite the impacts of the ongoing recession and the recurring financial crises, capital remains available for a wide range of energy projects, bankers, project developers and operators said.
“The bank market [for loans] is pretty deep for well-structured deals,” LS Power CFO Joseph Esteves said, and when bank lending dries up the private placement debt market has stepped in as a countercyclical source of funds.
There is increasingly a “partnership nature” to the capital structures available to power companies facing turmoil in their operating and regulatory realities, RBC Capital Markets Managing Director Frank Napolitano said.
While more-aggressive “loan to own” investors seeking an eventual equity position in projects have long invested as an expression of their outlook on the eventual shape of power markets, even more traditional investors with a “payback” model – like bond buyers – are being forced to “take a view” on power markets, Napolitano said. Read more on financing structures: Financing That Could Revolutionize Renewables Industry.
“The US power markets have to be the most sophisticated and the most confusing among energy markets, among all markets, in the world,” Napolitano said.
The sheer complexity of shifting regulatory structures and the prospect for deep policy changes have made many investors reticent to invest: “As a banker, how many credit meetings can you go to?,” Napolitano asked.
With uncertainty continuing to swirl in developing or trading power assets, and the prospect of politicians continuing to pressure electricity firms to keep prices low, investors are making local, regional bets around individual assets rather than funding full-scale new building programs.
Funding has been comparatively easy in the renewable fuel space, bankers on the panel evaluating the state of the power markets said, which is counterintuitive given the lack of operational and market certainty. Government inventive programs that allow investors to collect potential revenue and repackage projects to attract new financing as they proceed has eased building, boosting wind and solar additions in the US.