Luis Silva from EDF Renewables Shares a Developer's Perspective on Financing the Energy Transition

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Energy Institute 2024 Statistical Review of World Energy

As the financial landscape for the renewables industry continues to evolve, Luis Silva, the chief financial officer at EDF Renewables, joins the show to offer his perspective on what lies ahead for the energy transition. Luis delves into areas of focus like the Inflation Reduction Act, the cost of capital and emerging trends around how projects are being financed. We also spend a great deal of time talking about transferable tax credits. In fact, when asked to share his bold predictions … the first one Luis mentions is very much related to transferable tax credits.

Key highlights
How the financial landscape for renewables has evolved - (3:21)
Operating in the current interest rate environment - (5:06)
What are the biggest financial risks to the renewables industry right now? - (6:40)
New players in the transferable tax credit market - (8:10)
Key questions being asked around tax deals - (10:19)
Luis' views on the Inflation Reduction Act - (13:47)
Policy moves that could help the renewables industry - (17:05)
Top concerns around deal finance - (17:51)
Luis' bold predictions - (19:26)

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Transcript

(Note: This transcript was created using artificial intelligence. It has not been edited verbatim)

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This episode of the Renewable Energy SmartPod is brought to you by KPMG. 

Transferable tax credits granted by the Inflation Reduction Act have faced delays and challenges in implementation, particularly in the renewable energy sector. Despite these obstacles, there are opportunities for companies to monetize credits and contribute to the growth of the renewable energy industry. KPMG’s experts understand your business and can help you prepare for the future. 

To learn more, visit kpmg.com/us, that's kpmg.com/us. Or click on the link in today's show notes. 

Sean McMahon

What's up everyone and welcome to the Renewable Energy SmartPod. I'm your host, Sean McMahon, and in a few minutes, I'm going to be joined by Luis Silva, the Chief Financial Officer at EDF Renewables. I'm excited to talk to Luis because I want to get his perspective, as the CFO at a major developer, on the financial landscape for renewables. 

Everyone knows that higher interest rates have certainly taken a toll in the last couple of years, and even though Fed Chair Jerome Powell made it clear in his comments in Jackson Hole last week that rate cuts are on the way. Cost of capital remains a concern for many in the renewables industry. Luis and I will also delve into other pressure points, like supply chain challenges and construction costs. And for the second episode in a row for this podcast, we're going to spend a fair amount of time talking about transferable tax credits. In fact, when I asked Luis to make some bold predictions, his first was very much related to transferable tax credits, while the other touched on the long term prospects of offshore wind in the United States. 

Looking ahead at the schedule for this show next week, we're going to go inside the Loan Programs Office at the US Department of Energy to hear how the Biden administration is working to accelerate high impact energy and manufacturing investments in the US. Chris Creed, the Chief Investment Officer at the loan programs office, will join me to discuss exactly how the LPO does what it does. 

So I guess it's worth noting that if you listen to our previous episode with Alfred Johnson from Crux, this episode with Luis Silva from EDF renewables, and next week's episode with Chris Creed from the LPO, you'll get three different angles on trends that are shaping how the energy transition is being financed. This podcast doesn't always plan to produce clusters of episodes that touch on the same topic, but in this instance, I think it's pretty cool. 

But don't worry, with RE+and other events on the horizon. Future episodes will continue to bring you expert insights that aren't all about money. But right now, let's get things rolling. With Luis Silva from EDF Renewables. Luis, how are you doing today?

Luis Silva  03:05

I'm doing great. Sean, how are you?

Sean McMahon  03:06

Great. I'm excited to have you on the show. We're doing, kind of a series of episodes looking at how the energy transition is being financed. So I'm excited to have you on because we can kind of have a perspective from a developer. So I wanted to kick things off right out of the gate. How have you seen the financial landscape for renewables evolve in the past few years?

Luis Silva  03:27

Thanks, Sean. It has definitely evolved. I guess. I would start by saying that I have never seen, or haven't seen until now, a lack of capital, or a lack of availability of capital for investment in renewable energy, I would say that the class of assets of renewable energy are still one of the most interesting class of assets for investment in the infrastructure context. Now, conditions have changed significantly, and the structures of financing has changed significantly, and the IRA is the main reason why they've changed. The way that I see it, I would say that over the last two decades, monetizing tax credits through the involvement of a tax partner, so through the structured tax equity, has been the most dominant structure of financing. That transaction in itself, is stringent for the organizations, you know, for organizations like EVF renewables, it has kept us away from raising debt at the level of the projects. And now with the with the enactment of the inflation Reduction Act in the summer of 2022 also with the fact that the projects are more expensive, they generate larger cash flows as well they are there is now a possibility to leverage those cash flows, because the transferability of tax credits is significantly less stringent than the Tax Equity transaction, and so that's it. That's a big thing. So we're seeing, we're seeing less tax equity transactions and more transferability of tax credit transactions. And opening up the door for traditional debt into the projects.

Sean McMahon  05:05

That makes sense, and then obviously we've seen kind of a change in the interest rate environment that doesn't come as news to anyone listening to this podcast. But are there any kind of wrinkles to that that people might be overlooking, or how have you seen that shake out?

Luis Silva  05:17

Interest rate is always extremely impactful in the infrastructure business. The renewable energy industry relies on very strong capital commitments up front, and so capital needs to be raised for such investments. The increase of interest rates have naturally an impact on the funds made available by lenders, even by tax equity, so we saw those costs naturally going up. But from my perspective, I think the largest impact has been on the cost of construction. So our vendors, those that sell either the technology itself or the balance of plant, they've also suffered with increase of interest rates. And we're seeing, or we've seen, a rapidly increase of the cost of construction over the last, I would say, 18 months. 24 months, that increase of CapEx generated challenges on established offtake agreements that the industry has had as a whole had a need to renegotiate. Some of them got canceled. And so I would say that the increase of the cost of capital, the increase of interest rates, among other things, but specifically there had, I would say, a disruptive impact in the offtake agreements, in the in the pace of construction, even in the megawatts brought to fruition. 

Sean McMahon  06:40

And so when you look at the big picture, what do you see as the biggest financial risks for the renewables industry right now?

Luis Silva  06:47

I believe that capital is available. So it's not a question of volume of capital. It's going to be a question of cost of capital. So with the introduction of the transferability of tax credits, we've now had, for the first time ever, a competitor to the Tax Equity transaction. The transferability of tax credits is less efficient for the sponsor than the Tax Equity simply just because the tax equity transaction also monetizes the tax assets that arise from depreciation, and the transferability is a transaction that only allows to transfer the production tax credits or the investment tax credits. What we saw, or what we've been seeing naturally happening, is the Tax Equity transaction becoming more expensive, so becoming in terms of competitiveness, par with transferability. So we saw that increase of cost. So the way that I see it, the main challenge is going to be cost of capital. See how it's going to continue to evolve. And then secondly, availability of purchasers of tax credits, or tax equity investors. It is not completely clear what is the pool of receivers of tax credits in the United States that would be interested in purchasing such tax credits or tax equity providers. So I think that will be the biggest challenge in the in the near term.

Sean McMahon  08:10

Are you seeing any new players in terms of on the purchaser side? Are you seeing any new players, or even industries who are starting to express more interest in purchasing these transferable tax credits?

Luis Silva  08:20

Certainly. So I feel that there was a learning curve, and we've now have corporate taxpayers that before wouldn't consider participating in the tax credit market, that are now interested also with the help, you know, with attorneys and consultants of purchasing the tax credit. So we're definitely seeing that now. We have to have in mind that tax planning is really complex, and it's also really complex for large organizations, and so they have difficulties understanding in the in the mid run, what are the tax credits that they will they will need. So I'm hoping that as they become more proficient, we'll see more players, but we're definitely seeing more corporate taxpayers interested in purchasing the tax credits on the tax equity side, my view is that the main players are still the same, big organizations like JP, Morgan, Bank of America, Wells, Fargo, those continue to be the largest tax equity investors, the ones that take the largest tickets and tax equity transactions,

Sean McMahon  09:23

Okay, within these transactions, are there any technologies within renewables, say, solar, wind or storage? I know you guys are big in EV charging. Are any of those technologies generating the most interest from purchasers?

Luis Silva  09:35

I feel that the interest is probably linked with the technology that is being the most developed. My impression is that the tax transfer purchaser is thinking of the tax asset, not really the technology behind it, as long as it is renewables in the United States, you know, solar became the most dominant technology for renewables. I believe that last year, the country put out north of 30. Kilowatts of solar and wind has been steadily reducing. I think last year they were under 10. And so naturally solar, and now, more recently, solar, plus storage, it's become the dominant technology there. And so for that reason, those are also the technologies that generate the tax credits that get purchased. 

Sean McMahon  10:19

So then when these tax credit deals are being finalized, what are some of the key questions, or maybe new questions, that are being asked now that perhaps weren't a few years ago?

Luis Silva  10:28

Sure. So they're essentially questions linked with the increased risk of the industry. And so, for example, on the solar side, hail became one of the largest risks for new solar plants, and that had an important impact on tax equity transactions or on tax transfer transactions. The purchaser wants to make sure that they will be kept whole in case, you know, extreme event of hail could bring the project down. So that's one aspect. Another aspect is that in specifically on the on the tax credit transfer, one of the largest concern for the purchaser of the tax credits is the risk of recapture. So recapture is essentially the recapture of the tax credit in case the project did not operate for at least five years. And so there's now insurance you can purchase to insure against that risk. Developers like EDF, renewables, that have been in the market now for almost 40 years and that have foundation of credibility and reputation established, we don't tend to have to buy that insurance. Normally, the tax credit buyer relies on the fact that we are long term operators of our assets, and so for that reason, we can stay away from that cost. But that's one of the risks that we hear the most. 

Sean McMahon  11:51

How common is that, I know, obviously not for projects EDF renewables is involved with, but across the industry at recapture, how common is that?

Luis Silva  12:00

To the best of my knowledge, it’s not very common. Now, at the same time, we have to say that that transferability is rather young, so that risk before used to be undertaken by by the tax equity. I never really felt that they were concerned. You know, tax equity, tax equity, was looking for well established, reputable developers. And so I would say that for organizations that have been doing this for a while, the risk is perceived as low. However, there's new players in the market, right? And we haven't spoken a lot about IRA, but I would say that in the last couple of years, a lot of new players came into the renewable energy industry, focusing a lot on solar. Solar tends to be well positioned for investment tax credit, and so the recapture risk definitely exists there. So I can imagine a tax credit buyer being concerned that a certain operator, for some reason, wouldn't stand behind the project within the first five years, and the tax credits that they purchased will be recaptured.

Sean McMahon  12:59

We'll be right back 

Advertisement

Transferable tax credits granted by the Inflation Reduction Act have faced delays and challenges in implementation, particularly in the renewable energy sector. Despite these obstacles, there are opportunities for companies to monetize credits and contribute to the growth of the renewable energy industry. KPMG experts understand your business and can help you prepare for the future. To learn more, visit kpmg.com/us that's kpmg.com/us or click on the link in today's show notes. 

Sean McMahon

And now back to my conversation with Luis Silva, the Chief Financial Officer at EDF Renewables. 

Okay, well, you mentioned the IRA, and that segues perfectly to my next question. Earlier this month, we celebrated the two year anniversary of the passage of the IRA, and so I want to ask you, like, how would you rate the overall impact it's had on the industry successes, you know, some stumbles or failures or any surprises.

Luis Silva  14:02

So the way that I see it, the IRA was the perfect fuel to boost the industry. And so we've seen the industry grow a lot with new players, with records, new projects. We've seen it a lot also, I think, on offshore, definitely with the current administration. Well, this wasn't specifically linked to the IRA, but the area IRA, but there is also supporting that offshore grew significantly, or the offshore ambitions grew significantly in the country. Solar, for sure, has been growing a lot thanks to these incentives that come with the IRA. So I would say that that intention of supporting boosting the renewable energy industry is definitely being achieved. Having said this, I would say also that the challenges that existed before, so challenges of linked with a disrupted supply chain, where you have to wait a long time to get transformers, or you have matters with panels that are subject. Tariffs, or maybe even more importantly, an aging transmission grid that requires upgrades, that requires quite a bit of investment, problems with congestion curtailment. I will say that all those problems became larger with the increase of participants in the market. And so my view is that, in a way, the IRA also accelerated those problems, because now there are more players trying to secure major equipments or trying to connect. For example, the interconnection queues in places like California are extremely long, and now there's even more people trying to get them the transmission grid that, of course, transmission with is different in every in every state. But don't quote me exactly on this. I'm going to be wrong. But the transmission within the United States is old, so it has definitely, most places, surpassed its useful life, and it requires a lot of a lot of investment and a lot of planning that is not easy to put in place, but the penetration of renewals is making all those challenges larger, right? So we now have intermittent sources that are connecting to the grief that generate added concerns of reliability. So in a way, the IRA also accelerated those challenges.

Sean McMahon  16:21

So let me try and wrap this up for you. So by being successful in creating more players, it also kind of contributed to issues that were even around beforehand that are still probably here.

Luis Silva  16:33

I would say so, yes. 

Sean McMahon  16:37

Fascinating. Anything else you want to add about the IRA? Any things you wish it had included or other surprises.

Luis Silva  16:43

Personally, I wish that he had focused more on transmission. I just mentioned it before as as one of the the main challenges for the for the industry, but not just for the renewable energy, but for the energy industry as a whole. If I had a wish, it would have been for the IRA to support more the construction and the modernization of the transmission grid. 

Sean McMahon  17:06

Are there any policy moves you could envision that would help the renewables industry, aside from transmission, which you've already outlined, any other areas where policy could be of help at this point

Luis Silva  17:15

I feel that, aside from transmission, any policy that could bring stability to the current tariff environment that exists around solar panels are the importance of solar panels will definitely be helpful and as well policies that can support a more regulated discipline access to interconnection instead of being first come first serve, maybe it's those that are ready have more access to interconnection could definitely also help. But this is, this is a great question for for the development side of our organization.

Sean McMahon  17:50

Well, I'll be sure to connect with them on that. And then now getting back to the overall financial picture and the financial landscape for the renewable industry. Are there any issues that quote, quote, keep you up at night

Luis Silva  18:02

In terms of financing. I'm not really concerned with the access to it. I think that the strong developers will always have access to capital. I'm always, of course, concerned with the cost of that capital, but I think we adjust well to that evolution. I would say that what keeps me up at night thinking about the financial risks, and in an organization like EDF Renewables, is the adoption of the project finance debt that is something that we haven't had in the organization. And so the transaction itself is not concerned about it. I'm more concerned about the new instincts and processes that it will require the organization to develop. Having a lender at the project level is something that we haven't had, and that it requires quite a bit of procedures and communications with this new stakeholder. So there is that dimension where I believe we will have to develop some efficiencies. But apart from that, as I've said before, access to capital isn't really keeping me up at night, and the cost of capital we're all expecting that it will start to move to numbers that are lower than the ones we have today, probably never as low as they were before, but lower than what they are today. And that, in the end, is always going to be helpful for for an infrastructure industry.

Sean McMahon  19:26

Okay? And then one thing I like to do on this show is I ask guests for bold predictions. You know, what are we going to be talking about in, you know, two or three years when it comes to EDF renewables and the landscape for financing the energy transition, got any predictions there?

Luis Silva  19:44

I feel that from a financing perspective, two aspects are probably going to take place. One of them is the Tax Equity transaction structure will probably fade away. I feel that the tax credit transfer is taking over. It's becoming the base case. Is for for the industry and for the developers. It is important that the tax credit transfer context and structure continues to exist after a new administration from November onwards or from next year onwards. But I believe that that's that's going to take over tax equity, just because it allows for, as I mentioned before, it allows to raise capital with banks on on a debt structure in an easier way, and that that brings flexibility to the developers. The other prediction that I have is that offshore will will start gaining significantly more weight in the renewable energy context of the country. And that will mean bigger stakeholders, new stakeholders, the need to recycle capital. I think that those that have positioned themselves early on, they will look for new partners in the future. So a lot of m&a activity there, I think it makes sense. It's going to be important also for the development of the of the offshore dimension of renewables. So, you know, new players, new investors, and the tax credit transfer is probably what I predict for the for the midterm, really.

Sean McMahon  21:17

So with offshore, offshore wind sector seems to be kind of had some rough headlines lately, but you're, you're, you're in it for the long haul. You think it's gonna that'll all smooth out. 

Luis Silva  21:28

Absolutely, the fundamentals of of the offshore business model are strong. The appetite is there from the different, you know, cities that are willing to take to buy that electricity. So to be very frank, these challenges that we're seeing now, they're not very different from challenges that we've seen in the past on big onshore developments when they were at their beginning. Of course, offshore is more striking because the stakes are higher, right? The capex is significantly higher than on onshore. But I personally believe that over time, all of this is going to fade away, streamline itself, and offshore is going to be a big dimension of the production of renewable energy in the United States. 

Sean McMahon  22:16

Well, we'll, we'll definitely keep tabs on that, and that's an easy one to kind of keep track of. They're always kind of counting how many gigs are coming and going so well listen. Luis, I really appreciate your time today. Thank you for sharing your insights.

Luis Silva  22:28

Thank you so much. Sean, it was a pleasure. I enjoyed our conversation.

Sean McMahon  22:36

That's our show for today. But before we get out of here, I want to say one final thank you to the exclusive sponsor of today's episode, KPMG, thank you all for listening, and if you haven't already, please subscribe or follow this show on Apple, Spotify, Google or wherever you listen to your podcasts, and as always, please be sure to share it with your friends and colleagues. Have a great day.