The Infocast Projects & Money conference each January is a good leading indicator of how strong a year it will be in terms of deal flow. If the CEOs are out in force, they have time on their hands, and it will be a slow year. The conference was virtual this year. The opening panel was a wide-ranging discussion via Zoom with four of the industry’s big thinkers about new trends in the market.

The panelists are Jonathan Bram, a partner with Global Infrastructure Partners, Ted Brandt, CEO of Marathon Capital, Himanshu Saxena, CEO of Starwood Energy Group, and Sarah Slusser, CEO of Cypress Creek Renewables. The moderator is Keith Martin with Norton Rose Fulbright in Washington.

Overall Market

MR. MARTIN: Jon Bram, how would you characterize the current state of the market?

MR. BRAM: The market today is absolutely exciting. It is very attractive in terms of the volume and access to capital at attractive pricing. People have much more ambition to do larger transactions now than they had 18 months ago.

MR. MARTIN: Ted Brandt, same question.

MR. BRANDT: The market going into 2021 is very strong and getting stronger. We are seeing massive amounts of liquidity looking for places to go from all over the world. At Marathon, we focus largely on the clean and sustainable areas of the market, but clearly the traditional, mature parts of that market are seeing condensed yields and more and more risk assumption by buyers. Some newer areas, like renewable natural gas, are growing at impressive rates.

MR. MARTIN: I was going to ask how much of the liquidity is being driven by the US Federal Reserve pumping so much money into the economy, but I think you addressed that when you said the liquidity is coming from all over the world.

MR. BRANDT: The last few auctions we have held produced winners from Canada, Europe and Asia. Normally I get on a panel like this with you Keith, and you always ask me “Have yields changed?” and I usually say, “No, they’re about the same.” But for the first time ever we are watching yields condense.

MR. MARTIN: Is that true across the sector?

MR. BRANDT: There is much more of this in the markets where you cannot put leverage or where raising tax equity is difficult. In the mature segments of onshore wind and utility-scale and distributed solar, every auction produces a new low yield for the bidder.

MR. MARTIN: What are yields in those areas?

MR. BRANDT: We are seeing leveraged returns of 6.5% to 7%. Those used to be the figures for unleveraged returns. Leveraged returns used to be 2% to 3% higher.

MR. MARTIN: Those are returns for the cash equity that is at the back of the capital stack?

MR. BRANDT: Correct. It is behind debt and tax equity.

MR. MARTIN: This is a good bridge to Himanshu Saxena, who complained during this same panel last year about how long the cash equity investors must wait to get their capital back, let alone a return. Himanshu, how would you characterize the current state of the market?

MR. SAXENA: It is really exciting, in part because we are now truly undergoing the energy transition to the green economy. There has been a massive acceleration in the last few quarters, and COVID seems to have not done anything to slow it down. If anything, the transition is accelerating.

With the two Georgia Senate seats changing hands just a couple of weeks ago, I think 2021 and 2022 will result in a major resetting of how many participants are approaching the market. Utilities are starting to get out of the gas business. There are tons of local gas distribution companies up for sale. Oil and gas companies are getting into renewables on a broader scale than just offshore wind. We are spending as much time talking to oil and gas companies, chemical companies and industrial gas companies as to traditional renewable energy developers. Different industrial segments are coming together, and this is creating new types of investment and collaboration opportunities.

It is time to go up to the 20,000-foot level, take a fresh look at the landscape and rethink where are the best places to put our capital.

MR. MARTIN: Investors like inflection points when everything changes. We will come back to what you are chasing. Sarah Slusser, you bring a pure developer’s perspective to this. How would you characterize the market?

MS. SLUSSER: Incredibly exciting, just like everyone said. I really am pinching myself. I can’t believe that we are at this point where solar has reached grid parity in multiple states. Distributed solar is as exciting as utility-scale solar in terms of opportunity. We have 1,600 megawatts of operating assets at Cypress Creek, so we are not only a developer but also an operator of power plants. Having operating clean energy assets in a market with all the money that wants to invest into ESG is a tremendous opportunity. We are really excited that the world has come around to loving clean energy.

MR. MARTIN: Let me go off on a tangent for a moment. Himanshu Saxena, Sarah Slusser mentioned ESG investors. One of the things you are targeting is carbon capture. Is that an ESG play?

MR. SAXENA: It is. Carbon capture is an area where investors can have a meaningful impact on the environment. It is very much an ESG play because it is an opportunity for emitters of carbon dioxide — for example, from gas plants or cement plants — to capture and dispose of it and, in the process, reduce their carbon footprints. The federal government offers section 45Q tax credits as an inducement for 12 years. These types of projects are starting to make more sense now than they ever have in the past. Oil and gas companies, in particular, are looking at carbon capture as a way to reduce their carbon footprints. We see this as an area that will be active over the next few years.

COVID Effects

MR. MARTIN: Sarah Slusser, how is COVID affecting the ability of developers like you to get projects built?

MS. SLUSSER: It is remarkable how well companies have made the transition to remote work. We have done zoning meetings remotely. We have gone through lots of virtual approval processes at the county level. People have become incredibly creative. It is harder to negotiate land agreements remotely, because a lot of that is personal. We have had no trouble raising capital without meeting in person. We did two huge financings in 2020 — all remote and with no in-person meetings.

MR. MARTIN: Sarah what about the construction crews out in the field? Has COVID affected the actual construction?

MS. SLUSSER: Our construction workers were all considered essential workers, so no. We have been able to push forward with the proper social distancing, wearing masks and taking other safety measures.

MR. MARTIN: Ted Brandt, how is COVID affecting the ability to get projects financed?

MR. BRANDT: There clearly was a market meltdown in March, and that extended through April. Then the Fed came in with a major accommodation and the PPP loan program was put in place by Congress for small businesses. It was still possible to do club bank deals and close on tax equity. Some tax equity investors were still issuing new commitments. Some remained on the sidelines. It seemed by June or July like things had normalized. Everything that was supposed to close closed, at least for us.

MR. MARTIN: Are any of you getting on planes and traveling to business meetings?

MS. SLUSSER: I am not.

MR. SAXENA: Not getting on planes, but doing business meetings.

MR. BRANDT: I am. We have had several clients that said “We are not putting all our eggs in your basket without meeting in person.” We try to do it appropriately socially distanced, but I have traveled six times since the summer.

MR. MARTIN: Himanshu, are the business meetings virtual or in person?

MR. SAXENA: We are doing some in-person meetings. We do a lot of work with developers, and there are still people, especially developers whom we have not met before, who want to see you in person to assess whether you are trustworthy. We have done in-person meetings sitting six feet apart in a big conference room.

MR. BRAM: It is hard to buy business on a Zoom call. We have had a few dozen meetings.

MR. MARTIN: Most of last year seemed like a Formula One race where there was an accident on the track and all the cars were told to slow down and remain in position.

Sarah Slusser, you raised $200 million in early November in holdco debt against the portfolio of 1,600 megawatts of operating projects you mentioned. Can you say what the spread was above LIBOR?

MS. SLUSSER: It was 450 basis points above the LIBOR, and we had a LIBOR floor of 1%.

Storage

MR. MARTIN: Let’s move to new trends as we enter 2021.

Storage is one big one. It has moved quickly to being financed on a quasi-merchant basis. A financing for a large portfolio of standalone batteries in ERCOT will close this month. The source of debt repayment is revenue from providing ancillary services to the grid. There is a hedge to put a floor under the potential revenue stream.

It took wind projects years before they could be financed on a merchant basis. Solar came next after a lag of another few years. Now, all of a sudden, storage is already there. Are there other senses in which storage has passed a tipping point?

MR. BRAM: I think so. Two years ago, visionaries talked about the need for storage in the abstract, and a few very intrepid developers started to move forward. We have committed to more than 1,000 megawatts of storage investment in just the last 18 to 24 months through our Clearway platform.

We have commercial and industrial customers who require solar plus storage. This has moved quickly from something that people thought of as forward looking to a realization that the growing renewables penetration means storage will be needed everywhere. It is not just in California where storage is already entrenched, but also in ERCOT. This is a whole third lane of meaningful investment for us.

MR. SAXENA: Storage is at a different starting point than wind and solar were.

Many years ago, fully contracted wind and solar projects with 15- to 20-year contracts were available for investment. You had output uncertainty, but you did not have any price uncertainty.

With storage, every deal we have seen has less than 50% contracted revenue. For example, in California, we see 30% to 40% of revenues locked in under a 10-, 15- or 20-year RA — or resource adequacy — contract, but the rest of the revenue is merchant.

In Texas, we are seeing deals with three-, four- and five-year contracts, but less than 50% of the revenue is contracted.

Equity investors have always been comfortable taking that risk. Lenders have figured out that if they want to play in this market, they have no choice but to underwrite some floor value for the uncontracted revenue.

It is not clear how the market would react if somebody came to market with a $600 to $700 million financing of storage assets that has that risk component to it. Is that something that would clear the market? I don’t know because it has not been tried yet, but $100 to $200 million financings with a club of three or four banks can be done where there is a 50-50 split of contracted versus uncontracted revenue.

MR. MARTIN: Sarah Slusser, what percentage of your utility-scale solar projects now have storage?

MS. SLUSSER: Almost every interconnection application we are making today will have a storage component to it.

MR. MARTIN: Does it make sense to retrofit existing projects?

MS. SLUSSER: Yes. We are looking at whether there is some advantage to that under our existing power purchase agreements. That is an avenue for improvement of our existing fleet. One reason why it is good to be a developer who owns operating assets is you can improve on the portfolio as new technologies like storage come into commercial realization.

MR. MARTIN: AES sold down a 12% interest in Fluence, the storage company that it owns in a joint venture with Siemens, for $125 million to the Qatar Investment Authority at a price that was 1.5 times gross revenue. What does the price suggest about how the market views the prospects for standalone storage?

MR. BRANDT: There is no question that standalone storage is getting financed, but in most cases with all equity. People are bullish, as Jon Bram said, about the general market, and there is demand. The issue is really the revenue model.

The RFP process pushes more and more risk on bidders. All of the engineers predict that the ancillary services revenues and the arbitrage will go away, even in places like California, after a couple of years.

The revenue model needs to improve if storage is going to go crazy, but so far, there is so much liquidity in the market that everything is getting built in any case.

Offtake Contracts

MR. MARTIN: People have been talking for the last several years about how the offtake arrangements for power projects have become so much more varied. For example, community choice aggregators in California signed 117 power contracts in the 12 months through October 2020. There were 8,200 megawatts of corporate PPAs signed last year through November, of which 79% were virtual PPAs, meaning they did not involve physical delivery of electricity.

Sarah Slusser, what trends do you see in offtake arrangements?

MS. SLUSSER: In addition to what you just said, we see power being sold into liquid markets like PJM and ERCOT with hedges to put a floor under the electricity price. Financial hedge offtakers are a very big market for all developers, in addition to the virtual PPAs that you mentioned. And, of course, utilities in some of the newer markets are turning more heavily to renewables.

MR. MARTIN: Has there been any change over the last year in the level of utility interest in signing long-term contracts to buy electricity?

MS. SLUSSER: The change we are seeing is a move to shorter-term contracts for by existing customers. Both the CCA and hedge provider markets have been growing bigger and bigger. Corporate PPA tenors are growing shorter.

MR. MARTIN: Short-term means less than 10 years?

MS. SLUSSER: No, 10 years is probably the shortest.

MR. MARTIN: To what extent are utilities in the market now looking for power?

MS. SLUSSER: It is most noticeable in the Southeast. Dominion continues to run competitive auctions. There are retail suppliers in Texas looking for renewables. Utility demand for renewables will continue to grow.

MR. MARTIN: Was there a period when utilities were out of the market and now they are returning as electricity purchasers?

MS. SLUSSER: It does feel like a resurgence of interest for renewables from the utilities, absolutely.

MR. MARTIN: It seemed during early 2020 like interest among corporate customers had cooled. Wholesale electricity prices have fallen significantly in recent years. Corporations with existing PPAs were not happy about having locked in high prices.

Have they come back into the market? Were they ever out?

MS. SLUSSER: We are seeing strong interest from corporate buyers. It is not just from the top companies, not just the FAANGs, but demand is also broadening into the second and third tier of potential buyers.

MR. MARTIN: To what do you attribute the increasing demand?

MS. SLUSSER: Primarily ESG, as well as the fact that you can lock in a low cost power for 30 years.

MR. BRANDT: Keith, two comments. First, the reason that hedges and virtual corporate PPAs have tended to be for 10 years is that is what the tax equity market wanted. It would not do the deals otherwise. Lately, the out-year electricity price forecasts have been so pessimistic that more and more developers want to do shorter-term offtake contracts and take more merchant risk.

Comment number two is that while the FAANGs were the corporate buyers in the past, we are now seeing pipeline companies and others with big carbon footprints moving to sign corporate PPAs as a way of displacing their carbon footprints.

MR. MARTIN: Explain “FAANG” for our audience.

MS. SLUSSER: Facebook, Amazon, Apple, Netflix and Google.

MR. MARTIN: Jon Bram, you heard Ted Brandt say that developers, whose basic DNA makes them optimists, would rather have a limited contracted revenue stream and keep the upside on the out-year electricity prices. How do you view that as an investor?

MR. BRAM: We see the customers under corporate PPAs becoming a lot more sophisticated in their ability to allocate risk to the developers. Our bias, especially if you have a successful developer who every year is creating more projects, is not to speculate on out-year prices.

There are some developers who only want to contract for the bare minimum period required to get a project financed. That has not been our preferred approach.

On the other hand, in some projects where electricity is being sold into a liquid market and there is a long-term hedge, you can have very material electricity basis and shape risk. Over-contracting a variable resource can be as speculative as under-contracting.

We have to spend a lot of time stress testing all of the projects in which we invest because the customers are becoming much more sophisticated.

Another thing we see is more and more utilities wanting to sign build-transfer agreements — rather than PPAs — where the utility takes the project at the end of construction. That makes sense for them because they are trading fuel for steel that they can put in rate base. As long-term investors, we are not as keen on these arrangements, but from a developer’s standpoint, the transactions offer attractive margins.

Green Hydrogen

MR. MARTIN: Let’s talk about green hydrogen, which has been the rage lately in the trade press. It means using renewable energy to power electrolyzers to split water and hydrogen in water.

Ammonia fertilizer factories and oil refineries use hydrogen today as part of their manufacturing processes. Hydrogen fuel cells use them for specialty vehicles like forklifts, but the potential big play is for energy storage. Hydrogen can be used to shift energy usage across whole seasons rather than just from off-peak to peak hours in the same day. It is also expected to power heavy vehicles like trucks, buses and trains.

Himanshu Saxena, this is not on your top four things to chase this year, but how bullish are you about hydrogen and over what time period?

MR. SAXENA: We are in the process of building an ammonia project in Texas. That project will take about three and a half years to build, so it should be completed by the end of 2023. It is one of the largest ammonia projects in North America. We will buy hydrogen and nitrogen from suppliers, convert it into ammonia and put the ammonia on big ships to sell into the global market.

The reason we made an ammonia investment is because it is a proxy for a hydrogen investment.

Because of that project, we have been thinking a lot about both blue and green hydrogen. Green hydrogen is obviously the cheapest to produce, but blue is where we think most of the activity will be. Producing completely green hydrogen is actually really hard because creating base-load renewable energy so that the electrolyzers can run 24/7 is expensive.

The biggest variable in producing hydrogen is the capital cost of electrolyzers, and the second biggest variable is the cost of renewable energy. If you can buy renewable electricity for $20 a megawatt hour versus $30 or $40 a megawatt hour, it makes a world of difference in the price at which the hydrogen can be sold for the numbers to work.

From everything we have seen lately, the cost to produce blue or green hydrogen is still in the range of $7 to $10 a kilogram, and that is not cost-competitive. That is equivalent to a price of well north of $10 an mcf for gas. As a replacement fuel, hydrogen numbers still do not work.

The numbers have to drop below $2 a kilogram. For that, you need the cost of renewable energy and, more importantly, electrolyzers to come down.

Watch the two cost curves over the course of the next several years. Just as with LNG, the first deals that got done look expensive in hindsight. The early hydrogen buyers will pay $6, $7 or $8 a kilogram. Over time, the price will drop to $2 to $3 a kilogram.

We think there is opportunity in this market, but the buyer base is really limited today. A few discrete deals will get done over the next few years, but the market will really not start to grow until the latter half of the decade.

Tax Equity

MR. MARTIN: Ted Brandt, many developers told us last year that they were having trouble raising tax equity. There were signs at the end of 2020 that things were improving. Have they improved?

MR. BRANDT: My sense is that good projects are getting done, and some new investors have come into the market. In the fourth quarter, we represented Nestlé on making a tax equity investment in a Texas solar project. My sense is 2021 will be slightly better than 2020. That said, there is a hierarchy of developers. The tax equity is going to the A and B+ developers. The smaller developers are really struggling.

MR. MARTIN: Sarah Slusser, does that sound right?

MS. SLUSSER: Yes. COVID affected the supply of tax equity. Tax equity investors were unsure what tax capacity they would have in 2020 and 2021. That delayed things quite a bit. With a vaccine now in place, there is a lot more clarity about the economy. I expect things to improve this year.

MR. MARTIN: The US dollar lost 7% of value last year against a basket of peer currencies. Goldman Sachs expects a further 5% erosion this year. Shipping costs from Asia have soared. Rates to the US West Coast are now double what they were a year ago. A lot of renewable energy equipment is manufactured overseas. Is this a big deal?

MR. SAXENA: There are definitely cost pressures. Whether we are building transmission lines, an ammonia factory, new wind or solar projects or a gas-fired power plant, we see pressure on commodity prices like the price of steel, and a lot of that is connected to the dollar exchange rate.

We do see further upward cost pressures in 2021. People looking to build in 2021 or 2022 are going to have to factor in an appropriate potential further increase in commodity prices. Most people are not in a position to lock in prices while projects are being developed, especially early in the development phase.

Look forward and say, “The price of steel is $X, but by the time I put in an order, it will be 1.2 times $X because the dollar will have deteriorated.” That is what we are doing, and I think others are doing it as well.

Uighurs

MR. MARTIN: I am going to roll through a lot of questions quickly.

Sarah Slusser, coming back to you: The New York Times over the weekend ran a story about how Chinese solar panel manufacturers in Xinjiang province may be using Uighur forced labor. More than a third of the global polysilicon supply used to make solar panels comes from that region. Congress could ban goods made with forced labor. How do you see this affecting the US solar market? How has it affected you?

MS. SLUSSER: We obviously don’t support those terrible labor practices. We are putting measures in place to ensure that is not something in which we participate. In terms of the whole sector, the solar industry is moving to shift sourcing elsewhere.

MR. MARTIN: Jon Bram, the yield curve is growing steeper. The 30-year Treasury bond yield hit 1.875% on Friday. That’s a 23-basis-point increase since the start of the year. Most debt in the project finance market is floating-rate debt. Do you foresee a move to lock-in rates, perhaps by refinancing with project bonds?

MR. BRAM: In our project businesses, we tend to fix rates. Because obviously you want to match your expense, which in renewables is primarily capital, to your revenues, which are often fixed.

So we have always been doing that, not so much with 30-year debt because if you look at a 15- or 20-year offtake agreement, your average life winds up closer to 10 years.

When the 10-year treasury is at 60 basis points, if you have not thought about hedging or locking that in, you are very unlikely to be happy one, two or three years from now. Our approach is to do that, and I think you will see more of that this year.

MR. MARTIN: Does anyone see a marked trend toward project bonds this year? [Silence.} I will take that as a “no.”

Policy Upside

MR. MARTIN: There is clearly potential upside from government policy changes this year. A lot of the upside has already been priced into the market. But starting with what has already happened, Sarah Slusser, how big a deal were the year-end tax extenders for solar?

MS. SLUSSER: They were a really big deal. They lengthened our runway for the 26% investment tax credit by two years. With Biden and the Georgia Senate results, there may be further extensions.

MR. MARTIN: If any of you could put one policy change on the to-do list of the new Democratic-controlled Congress, what would it be? What would have the biggest impact?

MR. SAXENA: Make the tax credits refundable.

MS. SLUSSER: I agree. I think direct pay is the number one.

MR. SAXENA: Do it for carbon capture or section 45Q credits as well. There are so many industries that are going to benefit from it. There is no reason to pay a massive friction cost to somebody to monetize tax credits. That just makes no sense.

MR. MARTIN: Himanshu Saxena, you said in a September interview that you are chasing four sectors: transmission, storage, midstream opportunities and carbon capture. We talked a bit about carbon capture. Transmission projects are notoriously difficult to build. They have regulated returns. Are you expecting any policy changes to help?

MR. SAXENA: I think the policy changes that help renewables, will end up also helping transmission. For example, to the extent policy changes lead to more rapid retirements of coal-fired power plants, that affects transmission.

Any time you remove big sources of generation, or start putting in a lot of distributed generation, you have to assess the effect on the grid.

These are second-order effects. We do not expect any direct new policies to help with transmission, but transmission will benefit indirectly.

It is really hard to develop transmission. We are developing a project in California that has already taken five-plus years to develop, and when the development is done, it will take another year to build.

The ratio of development time to construction time — at five to one — is completely upside down compared to wind and solar, where the ratio is closer to one to one or two to one.

We think this ratio needs to narrow to improve things in that sector. Any support from states or stakeholders that are enabling the transition to a greener economy would be very helpful.

A lot of ESG-focused foundations and investors have come into the market and said, “We want to support transmission developers, because we see transmission as an enabler for a broader greening of the economy, and we value that.” Things are heading in the right direction, but the ratio I mentioned has to improve before there will be major growth in the sector.

MR. MARTIN: Anyone interested in building transmission should read Superpower by Russell Gold, a Wall Street Journal reporter. It is the story of Clean Line Energy Partners, Michael Skelly’s company, and the challenges of building new transmission lines. A single person can hold up a major multi-state project. In this case, it was a local politician in Arkansas.

Property and casualty insurance premiums have increased as much as 400% in the last two years in the solar market, and some coverages are not available at any price. Wildfires have pushed Pacific Gas & Electric into bankruptcy. What other effects are any of you seeing from climate change?

MR. BRAM: The wildfires made it really hard to operate plants. People could not get around in California. Solar projects were affected as smoke from fires dramatically reduced the amount of sunlight reaching solar panels in some locations.

MR. BRANDT: One effect of escalating insurance premiums is people are looking at doing insurance differently: for example, by setting up captive insurance companies and effectively leaving the first-mile risk in the sponsor’s hands. We are watching that trend.

MR. SAXENA: It is not just wind and solar where insurance costs have increased, but we see that across the portfolio. The cost of procuring insurance for gas-fired power plants has increased. When insurance companies have to pay large claims after strong hurricanes, wildfires and 500-year floods, they have to increase premiums across the board to cover the cost.

MR. MARTIN: So it is not just the projects that are in hurricane or tornado alleys or flood zones that are being affected by climate change because the entire insurance market is suffering.

SPACs

MR. MARTIN: Switching to M&A, Ted Brandt, you said on a panel that you and I did in May 2020 that the M&A market went through a short-term storm. When the COVID lockdowns started, the financial players pulled back because they could earn the same returns on offer in projects by investing in liquid instruments with less risk. However, you said there was no pullback by strategic investors.

What do you expect this year? Will both financial and strategic investors be in the market with both feet?

MR. BRANDT: In the past when we thought about putting assets or a development platform out for bid, we would ask ourselves whether it was more likely to go to a financial or a strategic investor. You would strum both strings on the guitar, and that would be the process.

The fact that there are more than 100 fully funded SPACs out looking for a dance partner really has changed that calculus. All of a sudden, we are finding that clients want us to see whether we can find a SPAC dance partner as an alternative to a private capital raise or an M&A deal.

That is a major, major change. SPACs have been around for a number of years, but nothing like last year when $82.1 billion was raised. Some amazing amount of capacity in the PIPE market is also available.

MR. MARTIN: SPAC stands for “special-purpose acquisition company.” People often call them blank-check companies. Money is raised on a stock exchange and then the SPAC goes in search of a target. I thought they were simply a faster means to go public, but you are describing a broader role for them as a general source of equity.

MR. BRANDT: That is certainly the way I look at them. Yes, they are a faster way to go public, but you also get to know your price when you sign a term sheet as opposed to the classic IPO process, which is not all that much fun.

Most people who go through that traditional process say the process really stinks. You don’t know your price. You don’t know where the lead underwriter is going to come in, and you almost always have to depend on the secondary market because you never get the whole business plan funded.

SPACs have been a pretty interesting response to that. I call it a different way to raise equity rather than just a faster way to go public.

MR. SAXENA: I think the big difference also is the fact that you can rely on growth projections a lot more when you use a SPAC to go public. That fundamentally changes how you market a SPAC versus a traditional IPO.

All of the SPAC targets are heavy growth companies with 30%, 40%, even 50% compounded growth rates year on year. It is far harder to pitch such growth in the traditional public IPO market than it is to a SPAC. It is just not the same product.

MR. MARTIN: Stem, which is a storage software company, will merge into a SPAC in the first quarter this year. All of this money chasing deals should drive down returns.

Jon Bram, the organizers of SPACs generally take about 20% of the target once they find one. Does this have staying power?

MR. BRAM: The fees are higher than in the IPO market, but they are coming down over time.

SPACs would seem to have staying power, at least in the near term. SPACs raised something like another $7 billion just in the last week. There is a lot of pent-up capital looking for these growth investments. To Himanshu’s point, the ability to market off projections is fundamentally different than the IPO process.

MR. MARTIN: Ted Brandt, before we leave M&A, what are current discount rates for bidding for contracted wind and solar assets?

MR. BRANDT: For contracted projects that are pre-NTP — they are not yet under construction — we are seeing unleveraged after-tax rates of sub 6% for solar and sub 7% for wind. The leveraged rates are not that different for operating projects.

A big factor in how much someone is prepared to bid is expectations about future power prices because there is so much of a merchant component on a solar project with a 35-year useful life. There is a lot of cynicism among investors today about future power prices. In many cases, the future power price assumptions are way more powerful than the discount rate.

MR. MARTIN: Jon Bram, Ted tends to be on the sell side. You tend to be on the buy side. Do those discount rates sound right to you?

MR. BRAM: We are on both sides because everything we buy, we subsequently sell at some point.

Discount rates are hard to compare because you would use a different rate for a hedged project selling on a merchant basis into the grid than for one with a 20-year PPA. The price for a west Texas solar project on the wrong side of the GTC transmission constraint is different than for a solar project in the Pacific Northwest.

What is clear, though, is the rates of return have compressed by at least 100 basis points in the last 12 months.

MR. MARTIN: Switching gears, the major oil companies are talking about an energy transition. Many of them have moved into offshore wind where their experience with offshore drilling may help. Do you see them becoming significant players in renewables beyond offshore wind and, if so, where?

MR. BRAM: I do because of their ability to trade power. I think they are naturally well suited for onshore projects.

MR. SAXENA: It would not be the first time they have made inroads into renewables. BP and Shell have been in and out of the renewables business over time. Pressure from shareholders is causing them to take another look. They know how to build, own and operate renewables projects.

MS. SLUSSER: Shell just increased its investment in Silicon Ranch, a solar developer, last year.

MR. MARTIN. Another question. Jon Bram, I read that GIP, your company, raised $2.8 billion in early December for two infrastructure credit funds. GIP Credit, which I think stands for the two funds, has already announced four investments, three of them in Latin America — a Columbian port, Uruguayan railroad and Mexican IPP — and one is a natural gas pipeline in the US. These all seem bets against conventional wisdom. Do you expect deal flow to pick up this year in Latin America?

MR. BRAM: We have about $5 billion managed in our credit business that sits alongside our main equity funds. Those deals were not really counter to conventional wisdom. They were pretty much straight-up, classic project finance transactions with which most people would be very comfortable.

One was upgrading railroad in a government public-private partnership. Another is a newly-built port to support farm exports out of Columbia. The Mexican IPP is classic holding company debt. We can mobilize reasonably large amounts of capital that banks may not be set up to do on fixed- and floating-rate basis. The demand for that type of capital has been fairly strong for smaller deals in the $200 million to $300 million range that are not down the fairway. Banks are more choosey. We can provide transitional capital at reasonable returns.

Green Bonds

MR. MARTIN: I have three more quick questions and then we will go to audience questions.

Ted Brandt, do you expect green bonds or sustainability-linked bonds to get more traction in the US market? Sustainability-linked bonds reward or penalize issuers for hitting or missing environmental targets. To date, both have found more favor abroad than they have in the US.

MR. BRANDT: We have not seen much demand for them, but we are exploring them for a client now. You may have asked the perfect question earlier, which is whether a steeper yield curve will cause CFOs to turn to fixed-rate bonds in place of floating-rate bank debt. At least for the last couple of years, the answer to that has been “no.” Bank debt has been so attractive that it is where 90% of the market has been going.

MR. MARTIN: Bank debt should remain attractive as long as there are so many banks chasing deals. This keeps downward pressure on rates.

MR. BRANDT: It sure seems like that. Sarah Slusser proved that holdco debt that maybe a year ago was done by the non-bank mezzanine lenders is now being done at literally half the spreads by the banks.

MR. SAXENA: We have not seen much difference in pricing between a normal bond and a green bond. It is not as if a borrower will get capital that is 25 or 50 basis points cheaper by turning to green bonds. There has been a lot of chatter about green bonds, but from a borrower’s standpoint, it is hard to justify the amount of work and the obligations you take on by issuing green bonds for a not-very-meaningful reduction in cost of capital.

MS. SLUSSER: Traditional power projects were hard to finance in the bond market because of the negative arbitrage during the very long construction periods for those types of projects. This is not as much of a problem for solar projects with construction periods of less than a year. If there were a meaningful difference in borrowing costs between bank debt and green bonds, then green bonds would be attractive.

MR. MARTIN: Last question and then we go to the audience. Are there other trends that we did not discuss?

MR. BRANDT: Renewable diesel. This is an energy transition area where developers are trying to find contracts. The unleveraged yields are in the double digits.

MR. MARTIN: That’s interesting. Two groups of Norton Rose lawyers submitted articles for our December Project Finance NewsWire on renewable natural gas without knowing that the other group was working on the same topic. How big a market do you foresee this year for such projects?

MR. BRANDT: Five or six? We were part of a big one last year in which Brightmark raised money from Chevron. Half the market sells into California whether the production facility is in Indiana or Oregon, but a non-California market is growing around the country. More and more utilities are getting involved as a possible new source of business for their local gas distribution companies.

Audience Questions

MR. MARTIN: Let’s turn to audience questions. “Can you discuss build-transfer agreements versus PPAs?” Jon Bram, you already mentioned the move to BTAs. Is there anything you want to add?

MR. BRAM: When you approach a utility about repowering an existing wind farm, what we usually hear is relief that the PPA will end soon and interest in owning the project rather than entering into another PPA. Their priority is to invest in rate-base assets, preferably green rate-base assets.

MR. MARTIN: Sarah Slusser, you and I both had an association with AES. You were a top executive. We were the outside counsel for at least the first two decades. If you start with an IPP mindset, the fact that the market is moving to a build-transfer arrangements is a source of frustration, no? The utilities will not buy the power.

MS. SLUSSER: I am one of these all-of-the-above people. I am happy to develop projects and sell them to a utility under a build-transfer model, while other utilities or corporate customers want to sign PPAs. I am happy to have a mix. Our assumption is that we will sell half the projects that we develop and retain half.

MR. MARTIN: Next question. Himanshu Saxena, you and Sarah Slusser both mentioned that you would like to see refundable tax credits. An audience member asks, “Is that really a good idea? Won’t that lead to the same delay, rule-writing and litigation that was associated with the section 1603 program?”

MR. SAXENA: The complexity and the cost of structuring tax equity deals is too great. You build a 100- or 200-megawatt solar project and you end up spending $2.5 to $3 million in legal fees.

There is too much friction cost with tax equity. We love our tax equity investors because we need them and they are good people, but they are making a pretty penny on these investments. If you want mass adoption of utility-scale and distributed generation renewables, there has to be a better way.

MR. MARTIN: Sarah Slusser, the solar industry tired of the section 1603 program after a while. Something like 27% of solar projects were told by the Treasury that they were using inflated tax bases to claim grants. Why dive back into that world?

MS. SLUSSER: I think the industry learned its lesson and would not go back in with such an aggressive stance. Direct pay is much simpler. The full subsidy goes where it is intended.

MR. MARTIN: Next question. “ESG seems to be on everyone’s mind. How easy has it been to raise capital for these types of projects and what are investors weary of when looking at ESG investments?”

MR. BRAM: There is a whole different level of reporting and awareness. We have added a lot of people just to deal with collecting, managing, and presenting this information to our investors for whom this is important. They are focused on returns, but they are also focused on sustainability. With that comes reporting.

MR. MARTIN: Next question for Ted Brandt. “How significant is the Xinjiang Uighur issue among the finance community? Is something being tracked and potentially priced as a risk factor to projects sourcing supply from China?”

MR. BRANDT: It is an emerging issue. We are all trying to figure out what the new administration will require.