Stockholm (NordSIP) – As the energy transition remains high on the agenda of European countries, companies and policy-makers continue to consider what can be done to facilitate this paradigmatic shift. To this end, the Danish Financial Services Authority (FSA), Finanstilsynet, published a new report on financing renewable energy production.
According to the FSA’s conclusions, renewable companies face a number of challenges, including financial difficulties, lack of government support, technological uncertainty, market volatility and competition. Nevertheless, the report notes that strong demand, favourable power purchase agreements (PPAs), district heating expansion and potential for increased financing may assist the renewable energy companies capable ofexploitng these advantages. Companies need to increase their risk awareness and competence, focus on realistic assumptions and implement better processes for documenting their projects and controlling them.
Challenges
According to the Danish FSA, several macro and micro factors have coalesced to create a number of challenges for renewable energy companies. On a macro level, inflation and interest rate changes create volatility and affect the profitability of projects. At the micro level, fluctuations in electricity and gas prices, tougher competition in the renewable energy sector has compressed revenues and increased financing costs.
The report also warns that there have recently been several cases of renewable energy companies facing financial difficulties, such as bankruptcies and restructurings. The report specifically mentions the bankruptcy of battery manufacturer Northvolt, the restructuring of Better Energy and its subsidiaries’ bankruptcy, as well as the problems of district heating company in the municipality of Odsherred.
The report focuses on biogas companies, who have faced significant challenges in their reliance on certificate sales, which are subject to market uncertainty regarding prices. At the same time, given the presumed maturity of the sector, newer biogas plants no longer receive government subsidies, unlike some older plants, which creates a disadvantage.
The Danish FSA also notes uncertainty regarding Power-to-X technologies, which convert renewable electricity, from wind, solar, hydro, and geothermal power plants, into a wide variety of end products.
The report also discusses intermittency issues, noting that solar power plants produce electricity during periods when it is sold at negative prices. This happens especially during periods of a lot of sunshine, where production increases supply without demand increasing. The report notes that financial institutions can take this into account by internalising this fact into the average electricity price, or varying prices to match these pricing facts. A similar dynamic is at play with wind turbines, where energy production can sometimes be so large that it is more profitable to shut down production than to sell the energy.
Opportunities
On the positive side, the report notes that for the companies that are able to tackle the aforementioned challenges, certain favourable conditions are in place to facilitate success and growth in this sector. The stable trend of growing demand for green energy creates a degree of stability and predictability for renewable energy companies that facilitates businesses operations. Despite the end of subsidies in some sectors, political support for accelerating the rollout of district heating also presents expansion opportunities. District heating projects also appear to enjoy favourable access to financing on account of their relative ease of implementation.
Developments in the terms of PPAs also feature prominently in the report. Financial institutions appear to be increasingly aligned in their preference for PPAs without delivery obligations. Traditional PPAs often include delivery obligations, which require the renewable energy producer to supply a certain amount of electricity at a specified price. If the producer is unable to meet those obligations due to weather conditions or other factors, they may face penalties. PPAs without delivery obligations remove this risk, by not penalising the producer if it cannot deliver the agreed-upon amount of electricity. This removes some potential costs for the renewable energy company, contributing to budget security, which should make for a better investment.
Realism, Awareness and Control
The Danish FSA’s report argues that to navigate the present business environment, financial institutions should focus on realism, awareness and control. Financial institutions should continue to increase their awareness and analysis of the risks associated with financing renewable energy projects, leading to improved competence in this area, as has been the case since 2023.
The report also stresses that financial institutions need to use realistic and well-supported assumptions for electricity prices, production estimates, and stress-test scenarios. Last but not least, the report highlights the need for financial institutions to improve documentation of their approach to financing renewable energy projects, especially regarding deviations from standard practices.
