Inflation, currency effects drag on Europe's race to renewables: Bracewell

Inflation and currency effects are squeezing Europe's wind and solar developers as they strive to meet challenging project deadlines, lawyers at Bracewell LLP said Oct. 4 during a media roundtable.

While the EU's RepowerEU initiative increases the Renewable Energy Directive's target from 40% to 45% by 2030, developers on the ground are finding it increasingly difficult to deliver projects at anticipated rates of return, the lawyers said.

"Capital costs are significantly higher this year," said Bracewell partner and project finance expert Andrej Kormuth.

"EPC contractors are reporting steel and copper costs up 55%, aluminium up 50%, silicon for solar PV modules up 270% and logistics up 700%," he said.

With internal rates of return falling below 10%, renewable assets were getting harder to deliver across a number of jurisdictions, including the Middle East, Kormuth said.

"Developers that were jubilant [at winning project tenders] a year ago are now finding it very difficult to execute," he said, with some even weighing up the possibility of walking away from deals.

Offer deadlines

Many deals from last year had taken significantly longer to bank, with pressure building on developers to meet offer deadlines or risk the cost of money rising, Kormuth said.

The low-interest years leading up to the post-Covid recovery and then the war in Ukraine were well and truly over, with "strong pressure" on developers to get projects squared off ahead of lending banks' credit approval deadlines.

The pressure extended to suppliers exposed to cost pass-throughs in power purchase agreements, while many big projects that had signed Contracts for Difference were now sitting on "extremely unattractive" strike prices versus exorbitant market prices, he said.

This was encouraging asset owners to hold off entering into CFD commitments in order to benefit from merchant returns, he said.

Currency fluctuations were also an important factor in non-US dollar jurisdictions, Kormuth said.

"If you are a bank lending in euros you have a problem," he said.

While debt could be refinanced within a year or two of operation start, capital costs were crystalized "for up to three decades, so even if the cost of commodities are projected to come down, deals [done under current conditions] are invariably more expensive," he said.

US comparison

Higher wholesale power prices helped offset a number of these effects, said Bracewell's Ro Lazarovitch.

"Renewable projects are banked over a certain period – there is the possibility to extend that period to account for the rise in costs without having to change the [awarded] tariff," he said.

Higher prices also improved the outlook for battery storage investments, the law firm's Tom Swarbrick said. Interest had spread from the UK, focus for over a third of the overall European market, to Germany, Greece and southern Europe, he said, with the global shortage of lithium ion the only caveat to future growth.

Lazarovitch drew a comparison between the sluggish pace of enabling regulation in Europe, and the dynamic impact of the US' Inflation Reduction Act.

"We've seen an immediate uptick in clients accelerating projects due to the range of incentives in the IRA.

We've not seen the same reaction in Europe in the last couple of months", despite the RepowerEU initiative and pledges to streamline permitting procedures, he said.