French renewable energy producer Neoen SA expects to spend €750 million more than originally budgeted to reach its 10-GW target by 2025 because of significant increases in wind and solar project costs.

After hiking its technology cost assumptions, the group — which at year-end 2022 had 6.6 GW in operation or under construction in Europe, Australia and the Americas — upgraded its 2021-2025 capital expenditure plan to €6.2 billion from the €5.3 billion it estimated two years ago.

"That not only reflects market conditions but also an acceleration that Neoen wants to materialize in the next couple of years," CEO Xavier Barbaro told analysts during a March 1 strategy update.

Renewables developers across the globe continue to grapple with rising capex prices, driven chiefly by more expensive raw materials and higher logistics costs.

The cost of solar projects has grown by roughly 50% in the last two years due to a significant increase in the price of polysilicon, according to Neoen COO Norbert Thouvenot. The price of photovoltaic modules has risen 80%-100% in that time, Thouvenot said.

In the wind sector, the COO said project costs are up 20%-25%. Inflationary pressures have led to major Western wind-turbine makers suffering significant financial losses in recent quarters and being forced to hike their prices.

"Looking forward toward 2025, we see this market stabilizing but unfortunately due to ... a bounce-back on steel costs and the fact that those [turbine-makers] are going to factor their losses in their future price. We don't expect a reduction of ... project costs when it comes to wind farms," Thouvenot said.

The cost inflation also extends to battery storage, where projects are 60% more expensive compared to two years ago due to higher lithium prices driven by strong demand for electric vehicles, the COO added.

Capital needs

Barbaro said Neoen, which went public in 2018, can absorb the higher capex without needing to raise more equity than the €600 million it already planned to raise in 2023. The company completed a €600 million capital raise in 2021.

The capex increases will instead be met by project-level funding as well as increased revenues, which in 2022 grew 51% year over year to €503.2 million, including a 63% annual increase in the fourth quarter of 2022.

Neoen will, however, require an additional €150 million in equity as it pivots toward longer-duration batteries.

The company, which has 1.1 GW of installed storage capacity globally, plans to invest in two-hour batteries instead of one-hour batteries, which will allow it to maximize profitability and perform more grid services, according to Deputy CEO Romain Desrousseaux.

The higher storage capex takes Neoen's equity needs to €750 million in the next couple of years as it shoots for 10 GW of capacity in operation or construction by 2025. The company has 800 MW of awarded projects on top of its existing 6.6 GW in operation and under construction. Its total portfolio stands at 19.3 GW, including 11.9 GW of advanced development assets.

"There is more than enough in our pipeline to fulfill our 2025 targets," Barbaro said.

After that, Neoen has 10 GW of early-stage projects that it aims to build out in the coming years to double its portfolio to 20 GW by 2030. That would propel the company into what Barbaro described as the "champions league."

Corporate power contracts mean 'great future'

Neoen's adjusted EBITDA grew 38% to €414.0 million in 2022, and the company is guiding toward a range of €460 million to €490 million in 2023. By 2025, it expects adjusted EBITDA to exceed €600 million, which is double the amount seen in 2021.

That growth will be underpinned by a target to reach more than 2 GW of projects awarded per year by 2025, with Neoen having achieved 1.3 GW in 2022.

At the center of the ramp-up is an expansion in the market for corporate renewable power purchase agreements, or PPAs. Neoen has signed more than 2 GW of corporate PPAs since 2015 — almost 1 GW of which have come in the past year.

The company has struck deals with tech giants such as Alphabet Inc.'s Google LLC, consumer companies such as Heineken NV and mining firms such as BHP Group Ltd. Neoen is also now increasingly looking for mid-sized clients with which it will enter into PPAs for 10-MW to 25-MW projects.

"Those plain vanilla companies ... mean a great future for Neoen," Barbaro said, pointing to the likes of Koninklijke Philips NV and H & M Hennes & Mauritz AB (publ). "We started with 20 clients a few years ago. Our vision is to have probably 200 clients in the next three or four years. At some point one day, we will probably have 2,000 clients going potentially down to 5-MW or 10-MW contracts."

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