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Project finance

Small renewables developers face a financing catch-22

Big banks won’t give them a glance until they’re interconnected. But that takes working capital, in short supply for small projects.

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Solar on a farm

Photo credit: Robert Gauthier / Los Angeles Times via Getty Images

Solar on a farm

Photo credit: Robert Gauthier / Los Angeles Times via Getty Images

The renewable energy industry has big barriers to entry for small developers. And — much like the interconnection queue that represents one of the biggest barriers — they’re only getting bigger. 

  • The top line: The United States is deploying more renewable energy than ever, and that is only expected to continue. And, thanks largely to the Inflation Reduction Act, money is flowing to get those projects built. But small developers face problems accessing it, especially at the early stages of projects, when finding an offtaker or getting a spot in the interconnection queue is crucial.
  • The current take: At ACORE’s recent finance forum, Clark Conlisk, a vice president and assistant director for U.S. Bank’s environmental finance group, told the audience that an already-challenging environment for small and emerging developers is made harder by the fact that there is “a pretty acute shortage of pre-development working capital available from legacy financial institutions, as well as private equity boutiques that tend to dominate creative structuring and financing products in the space.”

With interest rates as high as they are, Conlisk added, venture capital and other working capital options are also unaffordable for the small operations that are just getting off the ground. Unless a developer has an established track record and relationship with a financial institution, it can be hard to secure funds.

Pre-development financing specifically, Conlisk said on a panel about scaling small- and mid-sized developers, is “one of the largest — if not the largest — barriers that are facing developers.”

In practice, this means that even paying for the privilege of languishing in the interconnection queue can be a hurdle; those developers “are going to have to eat a couple million dollars just to get an interconnection deposit down,” Conlisk added. And, as other speakers throughout the day made clear, those costs are rising.  

And the line itself is growing too. The capacity stuck in line climbed nearly 12% to over 110 gigawatts last year, and wait times are also growing, from under two years in 2008 to an average of five years in 2022. For smaller, less experienced developers, the cost of the wait could be existential.

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That said, there is a new stream of capital coming into the market: from the federal government. 

Michael Hoffman, chief investment officer for the Coalition for Green Capital, appeared with Conlisk on the panel. The non-profit received a $5 billion grant from the Environmental Protection Agency that it can use for “anything up and down the capital stack,” he said: term debt, unsecured loans, backstop tax equity, bridge loans, and construction loans, to name a few. (He caveated this list with the fact that the firm will likely “do very little equity.”)

“We have a huge number of opportunities in front of us,” Hoffman said, so many that choosing the ones to finance is the firm’s primary current challenge. The company has already been approached by a number of large institutions, from unions to pension funds, looking to co-invest. 

The non-profit organization is planning to share about $1.7 billion of that fund with 90 participants, from state green banks to community development financial institutions (CDFIs) that will be investing the funds across the country. The remaining $3.3 billion will be for direct investments. He did not specify how much would be given as working capital specifically.

“It’s a nationwide green bank as opposed to a state green bank,” he said. “Our money is really designed to be the grease that makes something happen that might not have happened.”  

Another form of “grease” that Conlisk encouraged: more intentional use of the big banks’ prodigious networks.

“If you can’t give working capital to an emerging developer, the ability to connect that emerging developer to a potential PPA or site host where they can build is not quite as good as working capital, but does help unlock capital,” he told the room full of financiers, adding that an offtake agreement makes a project “immediately more bankable.” 

But he emphasized that this would require an internal, cultural shift in how most large financial institutions do business. It would require disparate departments to talk to one another, and a company-wide embrace of “how important and widespread an economic imperative decarbonization is,” he said. 

And that, he added “is a long and difficult battle that if you work at a financial institution…it’s probably incumbent on you to fight.”

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