The infrastructure that’s holding back the growth of renewable energy isn’t the one you think. But there’s a quiet revolution in project finance that could change everything.
Current macroeconomic and political conditions along with ambitious climate change reduction goals have put the global energy transition into renewables front and center for government and financial institutions alike.
While there is a near consensus among governments who want to support solar, wind, and other renewables projects, and project finance banks want to invest, at present, only a fraction of their capital is reaching the critical volume of projects needed to fund energy transition.
The problem isn’t what you may think. It’s not a blind spot in ESG investment mandates, political controversy, or even questions about investment returns. One major reason that more capital isn’t flowing to the renewables sector is essentially a bottleneck in the global financial infrastructure that supports lending to these projects.
Overcoming Outdated Financial Infrastructure
A majority of renewables projects, 61.1%, are funded through project finance. Corporate finance accounts for 36.5%. The remaining 2.4% is funded through Public Sector Financing*.
There are many reasons for this market dynamic. Relative to DFIs and other public sector finance institutions, project finance banks have the personnel and experience to get through due diligence more quickly and therefore deploy capital faster. They also have the balance sheet to support these investments, the expertise to structure them quickly, and often take on smaller projects. The average public sector finance renewables deal size is $434 million, while the average project finance deal size in this sector is $184 million*. Banks have the capacity to allocate even more capital to renewables.
However, the advantages project finance bankers enjoy over other financing institutions have reached their limits. While many corners of capital markets have benefited from more advanced technologies over the last decade, project finance remains mired in manual workflows, constraining bankers’ ability to increase lending.
There are major problems with standardization, transparency, and efficiency of project finance, making it prohibitively expensive to fund the many smaller renewables assets that are increasingly available. The bulk of those problems are the result of using legacy banking systems and manually managing disparate data formats, such as PDF documents and spreadsheets, to originate, monitor and manage the details of these deals.
While the current tools and methods may have worked well 25 years ago, or perhaps for a once-in-a-decade utility-scale project, they make it difficult to fund the thousands of smaller renewables deals available.
At the same time, most renewables deals lack the data accessibility and overall transparency that lenders require to make sizable commitments. The culprit is again the use of outdated tools, as the paper trail of spreadsheets and offering memorandums can make these deals difficult to evaluate from a risk perspective.
The relative opacity of these deals can also mean that banks can’t leverage them on their balance sheets in the same way they can leverage more transparent assets, which limits how much they’re willing to invest. Standardized data can deliver the transparency necessary to improve the risk profile of these investments.
We Can Overcome the Renewables Funding Bottleneck Today
At T-REX, we are tackling the funding bottleneck into renewables by delivering the industry’s first scalable, turnkey solution designed for project finance.
Our platform offers lead arrangers, advisors, lenders, sponsors, developers, and all of the parties involved in project finance, the ability to centralize all deal data, securely share and update information and create a single source of truth. This will help to reduce friction in the process, allowing for capital to be deployed more efficiently and in a shorter amount of time.
By using T-REX to standardize data inputs on each deal, lenders have access to clear, transparent data. That allows them to compare risk-adjusted returns and other key metrics in their portfolio.
With the ability to evaluate more data, lenders can approach this space with more confidence. For institutions subject to capital requirements, this additional transparency can change the designation of these deals on their balance sheet. T-REX can help investors allocate more capital to renewables projects that are necessary to accelerate energy transition without having to allocate more people.
Connecting Innovation, Energy and Opportunity
The energy transition presents new opportunities across many facets of our lives, our economy and our environment. By increasing deal flow intelligently and accelerating tech innovation within project finance, we can help open these new renewables projects to the large flows of capital that the markets can provide, while also delivering competitive, risk-adjusted yields.
* According to IJ Global’s historical financial close transaction data across a variety of types, including primary, additional facility, refinancing, etc.