Renewable project financings are expected to pick up in 2023, backed by federal policy, an increasing focus on environmental principles and energy security.

Experts participating in a Jan. 13 webinar hosted by law firm Norton Rose Fulbright on the outlook for cost of capital said they expect $20 billion to $21 billion in tax equity financing for renewable projects in 2023. This is an increase from about $18 billion in tax equity financing realized in 2022, roughly a $2 billion drop from what was expected and a 10% decrease from 2021.

"We expect to see the transition to a clean energy future accelerate," said Jack Cargas, managing director and head of tax equity origination at Bank of America Corp. "The passage of the climate bill [known as the Inflation Reduction Act] is viewed by many in this industry as the single most positive development in the history of renewable energy finance in the United States."

In 2022, supply chain constraints, construction delays and the lingering impact of the threat of tariffs on crucial materials continued to delay renewable development, especially solar projects.

"We would suggest that not only were there supply chain delays and construction delays, there were [also] a number of sponsors who were looking forward toward the availability of new types of tax credits starting in 2023," Cargas said.

Inflation Reduction Act impact

The Inflation Reduction Act, or IRA, was signed by President Joe Biden in August 2022 and contains $370 billion in energy climate spending, including tax incentives for solar, wind, hydrogen and energy storage projects. About $270 billion of the new law is tied to various tax credits, but project developers and financers await more details from the U.S. Treasury Department's Internal Revenue Service on implementation.

"We expect it to be something of a swing year as there is expected to be a 12- to 18-month gap between passage of the climate bill and actual real impact on the marketplace," Cargas said.

Backed by the IRA, bankers and asset managers expect 2023 to have about the same level of tax equity activity as was expected in 2022.

"We're bullish, in light of the climate bill, but we should point out that the system is sort of already clogged. Calendars are already full," Cargas said, adding it could take months for project sponsors to consummate deals. "These delays are compounding themselves."

Rising interest rates also are having an impact on project finance, further restricting the environment for developers seeking sponsors.

"Tax equity investors are being even more selective than before," said Rubiao Song, managing director and head of energy investments at JPMorgan Chase & Co. "Some projects will not be able to attract tax equity."

Provisions within the IRA, however, allow tax equity investors to buy and sell production tax credits and investment tax credits.

"We do expect to be a purchaser [of tax credits] in some cases, and we expect to be a seller in other cases," Cargas said. "Bank of America wants to be relevant in this evolving market and as the entire market as a whole is tax equity constrained, these transferability trades really are going to take center stage."

JP Morgan, meanwhile, expects financing for onshore and offshore wind projects to overtake solar financing in 2023.

"The number of megaprojects that [are expected] to come into the market in 2023 for financing is phenomenal," Song said.

ESG still 'hot'

Ralph Cho, global co-head of power and infrastructure finance for Investec Group, said lenders and investors continue to seek environmental, social and governance, or ESG, opportunities.

"I think this will continue to stay hot," Cho said.

Cho, however, said "not all deals are ESG," with the war in Ukraine contributing to debt activity in the energy security and LNG space.

In addition, the IRA opens up lending opportunities for electric vehicle charging infrastructure, transmission, stand-alone storage, renewable natural gas, hydrogen and carbon capture technology.

"In general, there is a very, very strong appetite for all of these types of deals from the lending community," Cho said. "We just need to ... see more deal flow. It [also] has to be a structure that is financeable and does not look like we're taking equity-like risk."

Proven technology and contracted revenues also are important, Cho added.

Overall, Cho said funds are expected to "continue to raise large amounts of capital" in the debt markets in 2023.

Banks, however, are being limited in how many deals they can do because of staffing issues, said Elizabeth Waters, managing director of project finance for Mitsubishi UFJ Financial Group Inc., or MUFG, Americas.

"So, you're going to want to pick the cleanest deals out there and [the] most profitable," Waters said, adding "the pendulum is now swinging in favor of wind" projects.

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