Capital market activity is expected to remain robust in 2022 as investors and project developers in the U.S. look to cash in on the clean energy transition.

Project finance veterans participating in a Jan. 19 webinar hosted by law firm Norton Rose Fulbright on the outlook for cost of capital agreed that ample liquidity is available for project developers looking to tap the equity and debt markets.

"Even a pandemic can't seem to slow down all this lending appetite," Ralph Cho, global co-head of power and infrastructure finance for Investec Group, said during the virtual discussion. "Nobody has really missed a beat. Demand for paper is still sky high."

Tax equity

Representatives of Bank of America Corp. and JP Morgan Chase & Co. said they expect about $20 billion in tax equity financing for renewable projects in 2022.

"The demand for tax equity continues to be exceptionally strong, particularly in the utility solar-plus-storage factor. We believe that will surpass 2021," said Rubiao Song, managing director and head of energy investments at JP Morgan.

Total volume in 2021 was about $19 billion to $20 billion, split almost equally between wind and solar projects, Song said.

"It's probably not an exaggeration to say 45% or 50% of the 2021 tax equity is represented on this panel," said Jack Cargas, managing director and head of tax equity origination at Bank of America.

"It's interesting to us that the market size is roughly doubled over the course of five years," Cargas added. "It was about $10 billion as recently as 2017, so we have seen a consistently accelerating pace," with about 80% of Bank of America's 2022 tax equity already allocated.

The project finance experts noted that tax equity represents about 35% of the capital stack for the typical solar project and 65% for the typical wind project.

"We see numerous offshore [wind] transactions on the horizon. Most of those deals are two to five years away," Cargas said. "We do expect to see one offshore wind tax equity transaction close in 2022."

JP Morgan, meanwhile, has noticed a small decrease in wind financing and a large increase in solar financing compared to 2020, according to Song.

Headwinds

Both Song and Cargas pointed out that supply chain issues, forced labor concerns, uncertainty over federal policy such as the stalled Build Back Better legislation, and the COVID-19 pandemic have presented challenges making it hard to predict how many tax equity deals will get done.

"It is more important than ever for developers to be realistic about a development timeline," Song said, noting the importance of building cushion and planning for delays and cost increases before signing on to a tax equity commitment.

The Build Back Better bill itself is "so complex and so nuanced, it's not particularly susceptible to contingency planning," Cargas said. "You can't feasibly document comprehensive treatment for the many, many scenarios possibly emanating from the potential bill, which may or may not include [an investment tax credit] extension or [a production tax credit] extension ... or direct pay or stand-alone battery [storage] ITC ... and a slew of other possible tax credit provisions."

Cargas added that supply chain issues have do not appear to have moderated.

"Despite the headwinds that we're talking about ... we can all clearly observe that the energy transition is well and truly upon us," Cargas said.

Financing ESG

Cho, with Investec Group, said part of what is driving investor interest in renewable project finance is that lenders and investors want to gain exposure to environmental, social and governance practices.

"In general, anything connected to ESG deals has super, super high appetite levels from investors," Cho said, adding that some investors have acknowledged being granted a lower cost of capital based on ESG exposure.

"Every level of the capital stack that wants ESG exposure has to be willing to accept lower return, higher risk compared to other asset classes," Cho said.

Banks and lenders are looking at decarbonization, direct air capture and new technologies such as hydrogen and carbon sequestration, thus making them more reluctant to finance thermal and "quasi-merchant" gas assets.

"With all this appetite focused on ESG, we've seen banks turning down thermal activity to pursue ESG activity," Cho said.

Uncertainty and low pricing in the PJM Interconnection LLC capacity auction has also hurt thermal financing.

"It really makes banks rethink what their overall merchant gas exposure should be in their portfolio, and they're considering cutting back, and that's why pricing has to move up if I want to hit a different market of execution," Cho said.