➤ The European Investment Bank is responding to subsidy phaseouts by taking on additional project risks, says head of renewable energy division.

➤ Unsubsidized renewables to remain "a minor part" of the market, as power price drop due to coronavirus worsens economics.

➤ In the long run, governments need to keep providing revenue stabilization.

As the head of the renewable energy division at the European Investment Bank, Alessandro Boschi is overseeing operations at one of the largest lenders to clean energy projects in Europe. Following a broader industry shift, the bank, or EIB, has started financing unsubsidized wind and solar projects under Boschi's leadership. And as it now prepares to greatly increase its climate financing, Boschi explained in an interview why he thinks renewables still need state backing and how the coronavirus might hasten a shift towards that realization. The following is an edited transcript of the conversation.

S&P Global Market Intelligence: A growing number of renewable projects in Europe do not rely on direct subsidies. How is that new reality changing your lending strategy?

Alessandro Boschi: We have a few signed operations in Sweden and Spain where, for the first time, we are financing projects which have no kind of public subsidy. Typically, they have some [power purchase agreement, or PPA] with a private offtaker. But then, depending on the project, the PPA does not fully cover the entire revenue stream of the project. So, typically, you will have a portion of the volumes which are not sold under the PPA, they're sold on the market. And then you can have structures where there is a tail, and a loan goes beyond the tenor of the PPA. Just to mention two aspects.

This was completely new for us. And of course, this is a way for us to adapt to the market and to the needs of projects. It means, for banks, clearly a higher risk in terms of the credit exposure to those projects. It has to do also with the counterparty risk, of course: who is the offtaker and what is the creditworthiness of the offtaker? But leaving that aside, purely from a project point of view, the question [for us now] is also looking much more in detail at the terms of the power purchase agreements — what are the pricing conditions exactly? Because one thing is what the average wholesale price will be on a given day, or the average on a week or a month, and another thing is the price that will be actually captured by the wind farm or the solar [photovoltaic, or PV] plant, which will normally work at particular hours of the day. And who's setting the price during those hours? So there is a call for banks and for us to be much more precise in assessing the market prices and also taking a view on the medium and long-term prices.

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We have [the European Fund for Strategic Investments, or EFSI] until this year — basically, we are benefiting from an EU guarantee to our loan that can allow us to take a higher degree of risk. And it is through this financial instrument that we've been able to finance riskier projects. Of course we still have a duty of care towards the [European] Commission.

Alessandro Boschi, head of renewable energy at the European Investment Bank. Source: European Investment Bank

So it still means that we need to apply best banking practices in terms of credit risk assessment. But it did allow us, and this will be [the case] in the future with Invest-EU [which will replace EFSI], to lend to higher volumes of these projects, which we could not have done [otherwise]. So we have, if you like, adapted that need. Then, we're also discussing under InvestEU, with the commission, whether we could have actually a specific financial instrument for projects with commercial PPAs, so that we can really tailor it to the project. This is still in the works.

Will this become a major part of your lending? How much of a role do you see for these kind of projects?

I think that this will remain a minor part of the market. Especially now, with [the coronavirus], that is even accelerating that dimension. This is simply because the higher penetration of renewables in the markets will bring prices down. And even if the cost of the investments have come down, [because] the levelized cost of electricity from those wind farms and solar PV parks have gone down, it is only in specific market conditions [of high power prices and good conditions for renewables].

In the longer term, given the scale of the capacity that we need to deploy and the amount of investments that will need to be financed, I still see a role for public support, at least in terms of what I would call revenue stabilization. I would not call them subsidies. The [contracts for difference, or CfD] schemes we've seen in the U.K. — they can go either way. So there can be times where the market prices are higher or lower and then whether there will be an advantage or a cost for the public authorities will depend [on that]. But in order to finance projects at the level of scale that is needed, on a project finance basis — well, that's another thing.

READ MORE: Inside the European Investment Bank's planned €1 trillion green spending spree

And you will need central planning. You cannot develop that scale of capacity [needed for the energy transition] and just expect that this happens. Because you need to have sites available, you need to have the grid connection, you need to have permits and who's going to be putting that in place? You cannot leave that to the private initiative. So you need central planning to make sure that you deliver on the capacity by the deadlines to meet the overall EU target. And then, if you want to finance that scale of capacity, you may have a portion of the market which is PPA-based. But I think the vast majority will come from a kind of CfD model.

Can you elaborate on the effects you foresee from the coronavirus pandemic on all of this?

I think it may accelerate what I was, in any case, foreseeing to happen, which was that you would need revenue stabilization from governments to deliver that scale ... which may not be so negative, to be honest, because in this merchant market, there are also some risks ... If this merchant market becomes a big failure, that will then deter new investments in renewables. If the shift towards a model which is more sustainable happens earlier, it's avoiding having some projects which are defaulting, for example. Because you have a higher share of projects out there which are merchant, and then prices suddenly go down and these projects face difficulties. That can deter investment sentiment in some markets and that can then delay investments in the sector. You don't want that to happen.