More tax equity needed
To fully take advantage of the IRA, experts on a renewable energy panel said, more tax equity will be needed in the market.
In 2022, Denham Capital Partner Jorge Camina said, the tax equity market was about USD 25bn. Over the next decade, he said, some USD 500bn in tax equity is needed.
“Right now getting a tax equity investor is extremely difficult,” Camina noted. “Even getting a tax equity advisor is difficult.”
The question marks around tax equity availability advantages larger, more established developers over upstarts, Camina added.
Renewables and digital infra attract capital amid challenging macro environment
In a challenging macro environment defined by rising interest rates, continued supply chain challenges and general uncertainty, infrastructure investors say the outlook for the renewables and communications infrastructure sectors remain strong.
Particularly in the US, where last year’s landmark clean energy and environment legislation provides significant tail winds, growth opportunities in the renewable sector will continue to drive deal-flow in the near term, said Crosby Cook, a partner with EQT Partners Inc.
“The deals that are getting done right now in this market are the ones that are very high credit quality… And then some very growthy deals. And so, renewables is a great example where there’s a huge amount of growth coming on the back of the Inflation Reduction Act,” Cook said.
Nasir Khan, managing director at Natixis Investment Managers, agreed.
“Long term, renewables and digital infrastructure are where the growth is going to happen,” Khan said.
From an LP perspective, OMERS Infrastructure Senior Managing Director for the Americas Gisele Everett said the value-add promised by both renewables and digital infrastructure remains attractive for investors looking to stay ahead of persistent inflation.
“When I look at the landscape, I tend to favor situations where not only are we replacing infrastructure, but we’re replacing it with something better. So, renewables and fiber continue to be two areas where we’re very active,” she said.
Competition to stake out positions in those sectors, she added, will also continue to drive deal activity even if the dual challenges of inflation and rising interest rates persist.
“Especially in those two sectors, there’s a landgrab going on. If you don’t take that space someone else will, so you can’t just wait on markets,” she said.
Vanilla is the flavor of the month
Infrastructure investors grappling with a turbulent macroeconomic environment and, particularly in the US, significant policy uncertainty, are likely to drill down on “plain vanilla projects” in the energy space, even as they position to take advantage of future opportunities in more risky verticals, experts said during the IIF in New York today.
The challenge of pricing in inflation and supply chain costs over the course of a five-year development timeline leaves little room for additional uncertainty or risk, Himanshu Saxena, chief executive for Lotus Infrastructure Partners said.
Those challenges are amplified, he noted, in areas of the US like the PJM Interconnection footprint where energy generation projects regularly spend six years in a queue before receiving a decision on interconnection.
The Inflation Reduction Act (IRA), signed into law last year by President Joe Biden, promises to inject hundreds of billions of incentive dollars into the US market for renewables projects over the next decade. But in the near term, those incentives too are clouded by uncertainty, EnCap Energy Transition Managing Partner Jim Hughes said.
The massive public incentives for clean energy in the IRA are already driving a “sea change” in how renewables are financed, Hughes said.
Lenders who previously would not discuss bridging transferability of tax equity financing credits for renewables projects have now reversed their position in response to the incentives in the IRA, Hughes said.
But the slow trickle of regulations defining how those incentives will be doled out, and which projects will be eligible, makes any investment decision aimed at taking advantage of the IRA a major risk, he said.
Saxena agreed, noting that a major push to partake in the IRA’s clean hydrogen tax credit component could risk being wiped out if forthcoming regulations disqualify certain projects from being defined as “clean hydrogen” projects for the purposes of the tax credit.
GOP efforts to repeal aspects of the IRA inject further risk into the investment environment for energy, as do signals that the Environmental Protection Agency could impose regulations on power plant emissions so stringent as to make the majority of the existing US generation fleet unviable within the span of a few decades, Hughes and Saxena said.
As those situations play out, Hughes said his focus will be on closing deals for plain vanilla fully contracted energy projects, in which all the necessary supply components are already secured.
Other investors are also likely to take a wait-and-see attitude for projects outside that plain vanilla category in the near to medium-term, Alfred Griffin, senior managing director and head of credit at Generate Capital, said.
“If you have a large center of the plate utility scale project with contracted offtake, I think there’s plenty of liquidity, but other deals are struggling to generate interest,” Griffin said.
Debt markets open for quality deals
A wobbly macroeconomic picture has ushered in a more prudent atmosphere when it comes to debt-financing infrastructure deals. But, the markets are far from closed, and there is plenty of liquidity available for quality deals, Nanda Kamat, head of Infrastructure for the Americas at MUFG said.
Her comments echoed other speakers at IIF who said there are plenty of financing dollars ready to line up for quality deals, even as lenders cast a gimlet eye on riskier deals.
“What we’re seeing is that there is bank market liquidity for well-structured deals in the project finance market,” Kamat said.
Elevated base-rates, and a widespread sense that those higher rates are temporary, has held down deal volume in recent months. But lenders have liquidity available, and they will put it to work behind quality deals, she said.
“There’s a lot of deals in the market. And I think, if they’re good they’re getting done,” Kamat said.
The shift away from the previous low-interest era and uncertainty around inflation and supply chain issues going forward, Katan noted, has made lenders more selective.
Edward Fanter, managing director at National Bank Financial, described the current environment more as a return to trend in lending practices than a tightening compared with historic trends.
“The market’s still there. It’s just that everyone’s not doing what they were doing in the go-go years,” Fanter said.
Lenders, in particular, see the current trend toward tighter requirements on borrowers and more selective lending as more of a return to normal than an outlier, he said.
“When we talk to sponsors, sometimes they’ll say, ‘When are we going to go back to normal?’ And when we go back to lenders, they’ll say, ‘Well, that was normal. It was the abnormal period that we just lived in right now,” said Fanter.
Big opportunities in small ports
Years of global shipping volatility have not diminished the long-term case for port investments. And opportunities exist on the smaller side of the asset class, Emmet McCann, managing director at Oaktree Capital said.
Infrastructure funds will have trouble getting around major ocean carriers, which remain well-capitalized and motivated to be aggressive in the space, in finding entry points to major port assets. But smaller ports, particularly those that lack the capacity to accommodate larger vessels offer under-the-radar opportunities, McCann said.
“There are really interesting opportunities in ports where literally the big lines can’t fit in. And if you can find a trade lane; if you can find a specific commodity and an underdeveloped property, and invest now and grow it—that’s what happened in Baltimore—that’s the way to get in from my perspective,” McCann said.
Artificial intelligence to deliver genuine shakeup to data centers
Data center owners will face a major transition in the sector, driven by the emergence of artificial intelligence (AI), and many existing assets likely aren’t equipped to meet the challenge, Sayles Braga, a senior partner with Sidewalk Infrastructure Partners, said.
As the influence of AI grows, demands on data centers will change dramatically. And those owners who are able to adapt will have to adapt quickly, Braga said.
“On the data center side, the buzzword today is ‘what is AI going to do to my business?”
In the age of AI, Sayles said, many existing data centers are obsolete when it comes to computing architecture, network density, cooling needs and other factors that come into play when dealing with cutting edge technology.
That reality is likely to drive innovation in how data centers are designed, which could pose a challenge for owners of existing assets, he said. Necessary changes will be difficult to make at existing data centers, he noted, as retrofitting at existing data centers can be very difficult to execute.
The resulting shakeup will present asset owners with significant risks, while creating opportunities for new entrants and incumbents capable of evolving to meet the challenge.
“I think there’s huge opportunities in kind of taking, not even what’s over the horizon but what we’re looking at today and applying it on a large scale infrastructure level going forward,” Braga said.
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