With a record US renewables project pipeline in place for 2024, most lenders now regard wind and solar generation assets with long-term contracts as low-risk, key infrastructure investments. But despite banks' increasing comfort financing those projects and investors' access to them through more traditional vehicles, the prospect of merchant exposure still entails risk that gives capital markets pause, industry experts said.

US renewables capacity scheduled to come online in 2024 totals 92,362 MW, according to S&P Global Commodity Insights' Clean Energy Technology data. Even without the 10,807 MW in the planning stage, that still far exceeds previous years' pipelines, and the amount planned for 2025 is growing as well.

No longer relegated to "separate risk-weighted climate, ESG, or even 'core-plus' funds," wind and solar have matured to the point of having what financiers view as "'bond-like' returns," Commodity Insights Climate and Cleantech's Peter Gardett and Conway Irwin wrote in an April 3 report.

"A pipeline of project origination, effective capitalization and revaluation into final delivery is now firmly established at scale for renewable power assets," they said. "Sustained access to institutional capital for renewable energy is now a feature of mid-2020s power markets."

Don Dimitrievich, Nuveen LLC senior managing director and portfolio manager for energy infrastructure credit, agreed that the tide toward renewable financing has shifted over the last 10 to 15 years.

"You could get comfortable that the technology works, that the cost was a known amount for these projects and then you had cash flow in returns visibility with inflation protection," Dimitrievich said in an interview.

Nuveen's Global Infrastructure Fund includes US renewables giant NextEra Energy Inc., which comprises nearly 3% of the vehicle's portfolio, as well as smaller positions in developers Clearway Energy Inc. and Brookfield Renewable Partners LP subsidiary Brookfield Renewable Corp.

The debt component of renewables financing stabilized before equity, according to Greenbacker Capital Management LLC Managing Director and Head of Infrastructure Dan de Boer.

"The compression of debt spreads kind of led the comfort," de Boer said. "As early as 2014, 2015, we started to see real compression in terms of what lenders would accept to lend against these projects."

'Classic attributes'

Brookfield Renewable Partners parent Brookfield Asset Management Ltd. is in the process of raising the Brookfield Global Transition Fund 2, which secured $10 billion as of February and aims to exceed Brookfield Global Transition Fund I's $15 billion final close.

The first fund has invested in US companies such as Colorado-based independent power producer Scout Clean Energy LLC and Maryland's Standard Solar Inc. as well as forming a consortium with uranium miner Cameco Corp. to buy nuclear service business Westinghouse Electric Co. LLC.

The second fund intends to focus similarly on "infrastructure-like" investments even though the vehicle is riskier than a core infrastructure fund, according to Jehangir Vevaina, a managing partner in Brookfield's renewable power and transition group.

"It still is a value-add fund, so not core, but our goal when we created that [first] fund was not that it would take technology risk; it was really with the goal of funding broader infrastructure," Vevaina said in an interview.

Nuveen's Dimitrievich thinks that battery storage is in a similar place to contracted wind and solar generation.

"This asset class has many of the classic attributes that define infrastructure investing, so you've got hard collateral, you can structure it where you've got offtake contracts for the product that provide you cash-flow certainty, inflation indexing," Dimitrievich said.

In February, battery storage developer and operator Spearmint Energy added Nuveen as a financing partner to a $200 million enhanced credit facility that will support the development of its 2.8-GW battery energy storage system portfolio.

Nearly 6.8 GW of new large-scale battery power storage capacity entered service in 2023, up 59% from 2022.

Greenbacker, meanwhile, is focusing on power purchase agreements (PPAs) similar to one inked with Berkshire Hathaway Energy's PacifiCorp for the 200-MWac Appaloosa Solar 1 in Utah, which came online in February and will support Meta Platforms Inc.'s operations.

"That will certainly be indicative of PPAs that we'll see in the market for our assets," de Boer said.

Both de Boer and Dimitrievich attributed renewables' shift to core infrastructure in part to big tech companies seeking electricity for AI-driven datacenter demand growth.

Renewable energy developers secured contracts for at least 4,012.6 MW of capacity in the 12 months ended Feb. 1 that tech companies will use in part or entirely to power US datacenters, according to an analysis of Commodity Insights data.

Re-contracting, merchant risks

Whether renewable energy generation remains core infrastructure depends on what happens when long-term contracts expire in the latter half of the decade, according to Commodity Insights' Gardett and Irwin.

"Many of those agreements have termination dates far shy of the planned life of the power asset," they wrote. "The conditions under which power from an existing solar or wind farm comes up for renegotiation will be crucial to the long-run performance of infrastructure funds investing in those projects today."

Another risk is that banks and some asset managers remain hesitant to finance and invest in projects with merchant exposure.

"In the last three years one of the features we've seen more frequently is upside sharing mechanisms in PPA contracts," Energy Capital Partners LLC Principal Matt Himler said in an interview. "A technology company or a Walmart Inc. will sign a PPA at a price, and any merchant price above that the PPA counterpart and the owner of the asset will share in that excess revenue."

Talen Energy Corp. affiliate Cumulus Growth Holdings LLC recently sold its hyperscale datacenter campus in Pennsylvania to Amazon Web Services Inc. for $650 million. The campus, which has up to 960 MW of datacenter capacity, is adjacent to and will be powered by Talen's 2,494-MW Susquehanna Nuclear power plant in Luzerne County, Pa. The independent power producer will both supply nuclear energy through a power purchase agreement and earn additional revenue from the Amazon.com Inc. subsidiary for any remaining power sold to the PJM Interconnection LLC market.

"We've seen really low PPA prices with 100% upside sharing, almost like a floor price," Himler said. "Most of the renewable assets we look at, especially for our lower-risk vehicles, we either don't pay for that upside sharing or we look for contracts that don't have it."

Banks especially "shy away" from merchant risk, but it can still be attractive to some asset managers, Nuveen's Dimitrievich said.

"Those projects will still have some type of cash flow visibility to support our debt, but by virtue of allowing some of the production to be exposed to market pricing, it can be attractive to the project equity owner and make it a pretty attractive risk-adjusted return," Dimitrievich added.