Perspectives
11 September 2024
The development of major renewables infrastructure assets in Australia has picked up pace over the past few years as both state and territory governments and the Commonwealth have set ambitious emissions reductions targets; the Australian Government has a target of reaching 82 per cent renewable energy in the country’s electricity grid by 2030.1
The level of capital required for large-scale renewables projects, together with the unique risks they carry, has, however, slowed the pace of their growth. But changes to the way investors manage these risks and developers secure the required capital for large projects are helping overcome these challenges.
“The use of portfolio financing for the development of new renewables assets is enabling developers to realise the benefits of scale, enhance project economics and increase flexibility across construction and operations,” according to Danish Aleemullah, Division Director at Macquarie Capital.
“By securing borrowing against a portfolio of assets rather than just one, it makes financing easier and enables the construction of new assets, supporting a growing role for large-scale renewables in Australia’s energy mix,” he adds.
Renewables already account for 35 per cent of Australia's electricity mix.2 But, as our coal-fired power plants start to go offline over the next two decades, renewables and storage are necessarily going to have to carry an even greater share.”
Nick Cowling
Division Director
Macquarie Capital
To date, however, Cowling says a serious challenge in speeding up the development of large-scale projects within Australia has been obtaining competitively priced and flexible capital that can be deployed at scale and matches the requirements of developers.
“Developers are facing the challenges of an increasingly capital-intensive industry, with the number of projects growing in terms of size and volume,” says Cowling. “The average onshore wind farm in Australia now costs between $A3 million and $A3.5 million per megawatt to develop.3 That means constructing a 400-megawatt wind farm can cost upwards of $A1.2 billion, putting a strain on developers’ balance sheets and testing lender market capacity for single asset financings.”
With so much capital potentially at stake, lenders have traditionally sought to de-risk their positions by ensuring certain requirements are met by the asset owner. This has included securing power purchase agreements (PPA) for the majority of a project’s output and ensuring that construction risks are covered under a fully wrapped price and time delivery framework.
“The asset owner essentially becomes a price taker because they have to lock in long-term agreements to sell electricity for a fixed price, regardless of where the price of electricity goes,” Cowling says.
“On top of this, increasing costs of construction and minimised availability of traditional contracting structures is slowing project development.”
It’s just one of the factors that contributed to the development of new solar farms shrinking by more than a third over 2023 ($A1.5 billion compared with $A6.5 billion in 2022) despite the supportive political backdrop.4
Aleemullah says that changing the risk profile of major renewables infrastructure assets can help overcome these challenges. Macquarie Capital helps clients reset their capital structure and secure borrowing against a portfolio of assets rather than just one.
Located in Queensland Australia, Fotowatio Renewable Ventures’ 126 MW dc Lilyvale solar farm generates enough power to supply a population equivalent to 45,000 homes.5
A recent example was Fotowatio Renewable Ventures (FRV) Australia. Macquarie Capital advised on the $A1.2 billion portfolio financing of its solar assets, as well as the greenfield financing of its first standalone battery energy storage system (BESS).6
The portfolio financing covers eight solar farms either operational or under construction with a total installed capacity of ~1GW, and a standalone BESS project with a capacity of 100MW/200hrs.7
Aleemullah notes that Macquarie Capital has been responsible for some of Australia’s first portfolio financing deals, including advising clients CWP Renewables and Intera Renewables, with the same model likely to be beneficial for more renewables developers.
“When you have one asset that is subject to a non-recourse loan, a lender might take the view there are project-specific risks that may result in underperformance of the loan. Through increasing the number of assets in the financing perimeter, we have successfully been able to demonstrate the benefits of a diversified risk profile in order to achieve significantly improved financing terms and flexibility for developers.”
Squadron Energy’s Sapphire Wind Farm is located in northern NSW. It has a maximum capacity of 270MW and annual output 764GWh.8
Aleemullah notes that one area where features of the portfolio financing structure have allowed developers to be more creative is in how they sell the electricity they produce.
“When you sign a PPA, you are essentially tied in to supply electricity for a fixed price. However, the spot price of electricity can fluctuate from a negative price to well over $A15,000 per megawatt hour.”9
Portfolio financing structures open up substantial flexibility for a business in maximising the value of their output. In place of securing large volumes of ‘vanilla’ PPAs for individual projects, developers can have increased freedom to secure a more innovative, diversified revenue strategy for their portfolio.”
Danish Aleemullah
Division Director
Macquarie Capital
“Some generation volume may be covered by contracts with price ‘floors’ and ‘ceilings’, while some output may remain uncontracted to retain trading flexibility or wait for a time where PPA pricing is more favourable. The growing availability and lower prices of batteries helps create more flexibility within these portfolios.”
By using batteries and other storage technology, energy producers that finance their projects via a portfolio structure can take better control of their output, storing electricity when prices are low and selling it when they’re high. This lets them manage price risk and significantly increase their potential profitability.
Even developers that can use their competitive advantage to access capital and drive greater profitability may still face issues. Many of these relate to community concerns around the building of infrastructure close to residential or agricultural land.
“It is a simpler discussion with a landowner or neighbour that a wind farm should be built when they are being directly compensated for it,” Cowling observes.
As a result, Macquarie Capital Division Director, Bethwyn Cowcher, notes that successful developers appreciate the importance of proactive and thorough community engagement and are investing heavily in programs such as employment and indigenous programs.
Successful developers understand community concerns around a particular renewable asset, identify ways in which communities can benefit from it over the longer term and deliver on their commitments.”
Bethwyn Cowcher
Division Director
Macquarie Capital
“This may include facilitating skills development and training, as well as investing in social infrastructure to support increased population during construction and operations.”
Another challenge is likely to come in the form of securing regulatory approval for projects, with each state and territory having different requirements. For instance, one study estimated it costs 25 times more to get project approval in New South Wales, Australia’s most populous state, than in neighbouring Queensland.10
Despite the challenges, the potential upsides are enormous, Cowling says - most notably that greater access to flexible financing arrangements, and the associated potential for profitability, will allow Australia to continue to build out its energy assets while being more likely to meet its decarbonisation ambitions.
“Under Australia’s current plan, coal-fired power plants are slated to be shut down by 2038, just 14 years away,”11 Cowling observes. “When you consider that they account for almost 60 per cent of Australia’s electricity supply,12 that is a large amount of firmed energy supply that needs to be replaced quickly.
“If we’re to maintain much of this supply through renewables and storage, the only way we can do it is by rapidly building large-scale projects that can meet the country’s dispatchable power needs,” he says.
“Creative financing that allows for flexibility, profitability and encourages development is an essential ingredient in the mix. At Macquarie Capital, we are pleased to be spearheading this and providing innovative solutions to our clients.”
Get in touch with our specialised team at Macquarie Capital.
Macquarie Capital is the exclusive gold sponsor of Australia’s leading infrastructure conference, ‘Partnerships’, hosted by Infrastructure Partnerships Australia (IPA). The conference is a leading annual gathering of its kind, bringing together senior public and private sector leaders from across the Australian infrastructure market.
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