United States: Global Opportunities: How Corporate Energy Buyers Can Leverage Development And Climate Finance For International PPAs

Corporations increasingly are looking to expand their renewable energy purchasing in international markets. This is particularly true for those having experienced procurement success in the U.S. off-site market. Major opportunities for international deals can arise in the context of existing energy-intensive industries such as mining, fossil fuel production and large scale construction projects. However, international projects and PPAs can be attractive to companies in many other sectors where there is a global footprint.

Successful international project finance and development must overcome several common challenges, including:

  • For those seeking to implement self-supply, securing debt financing for the initial investment in infrastructure can entail management challenges, and the shift from operating expense to capital expense must be addressed in project financing.
  • General contractors and operators may not have core competency in renewable energy and may the lack technical capacity to design and finance complex and hybrid energy systems.
  • Project developers and operators must ensure reliable power supply as offtakers will have no tolerance for risks of power disruption.
  • The useful life of assets does not always align with typical uses abroad. For example, renewable energy systems have expected life that substantially exceeds the typical duration of a mining project; project investment payback periods are generally shorter than clean energy project finance cycles.
  • Local incentive programs may be non-existent, or differ from those with which U.S.-based financiers have experience.

Despite hurdles, multinational corporations are increasingly looking outside the U.S. for opportunities to procure renewable energy. Several sources of development financing and risk mitigation support should be evaluated to help reduce the cost of capital and improve the odds of project success.

World Bank

World Bank provides low-interest loans, zero to low-interest credit, and grants to developing countries. These support a broad variety of investments in areas including energy and other public infrastructure, financial and private sector project development, and environmental and management.

The World Bank's International Finance Corporation (IFC) is one of the world's largest financiers of private projects in developing countries, providing financing over the last decade for renewable power, energy efficiency, sustainable agriculture, green buildings and private sector adaptation to climate change. As of FY15, IFC's portfolio of climate-smart investments had reached $13 billion, supporting $115 billion worth of projects, with over $2 billion of new projects invested in the fiscal year ended June 2015.

Overall, World Bank Group members have provided over $49 billion in financing and guarantees since 2010, of which over $21 billion was for energy efficiency and renewable energy projects. World Bank Group financing in the sector totaled $6.5 billion in FY15.

Overseas Private Investment Corporation

Since 2010, the Overseas Private Investment Corporation (OPIC) has committed more than $1 billion a year to renewable energy project, supporting more than 85 renewable energy projects across the developing world. For a project to be eligible to apply for OPIC financing, it must include the meaningful involvement of the U.S. private sector, most often by significant ownership of the investment. Although the financial structure may vary with the nature of a specific business, the percent of total project cost funded in debt, including OPIC's loan, is typically limited to 50% for a new project, with the remaining 50% funded in equity capital, grants, or fully-subordinated
debt capital.

OPIC also offers Political Risk Insurance, which can allow U.S. businesses to take advantage of commercially attractive opportunities in emerging markets, mitigating risk and helping them compete in a global marketplace. OPIC insurance provides comprehensive risk-mitigation products to cover losses to tangible assets, investment value, and earnings that result from political perils, including economic instability such as currency devaluation, war, conflict and corruption.

U.S. Export-Import Bank

The U.S. Export Import Bank (Ex-Im) is an independent federal agency. Its mission is to support U.S. jobs by providing export financing at no cost to American taxpayers. Ex-Im provides a variety of financing mechanisms, including working capital guarantees, export-credit insurance and financing to help foreign buyers purchase U.S. goods and services.

Climate Finance Sources

To date, the UN Climate Investment Funds (CIF) reports having allocated more financing to private sector mitigation, forestry and adaptation investments than any other multilateral climate fund. The $5.6 billion Clean Technology Fund, the largest of the CIF's four funding windows, is channeling $1.9 billion to support private sector work in renewable energy, energy efficiency and sustainable transport projects and is expected to leverage $20 billion in private sector co-financing. Renewable energy projects and programs reportedly accounted for 35 percent of total climate mitigation finance in 2014. This figure shows the high investment priority from both the public and private sectors - and represents a large potential opportunity for new project development.

Strategies for Accessing Development Finance

IFC and OPIC have previously joined with sponsors and private lenders in financing numerous wind and solar projects in developing countries. These projects provide a reliable track record and template for developers and corporate buyers considering international projects. Keys to success include early assessment of development finance opportunities and ensuring the project team includes international development and climate finance expertise.

Where are the International Opportunities?

Dan Seif, Managing Director of Grid Economics, LLC notes that, "For the next set of deals, large corporations are keen to transact where substantial facility load, viable market mechanisms, and competitive renewable energy pricing overlap."

Dan notes the following as major emerging opportunities:

  • Chile has outstanding renewable resources and a viable wholesale power market. While not a major load center for most corporations, it is for the mining industry, which has led the Chilean corporate renewable deal flow.
  • Mexico has a wide distribution of industry types, moderate industrial load, and good renewable resources. Their new, much more open power market regulations are gradually setting in, with corporations eyeing the potential.
  • India is seeing an explosion in wind and solar generation development, with thousands of new utility scale wind and solar projects under development.
  • By far the leader in diversity of industries and corporate load outside the U.S. is China. China's renewable power industry and in-country development activities are world class. The missing piece, a viable market opportunity for corporate direct procurement, may be occurring with a new interprovincial power trading system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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