Part I: A Quick Note on Project Finance

Project finance is a benchmark financing technique for long-term investment that is emerging as the financing method of choice for renewable energy projects.

The basic premise behind project finance is that lenders loan out money for the financing of one single project, based only on that project’s risks and future cash flows.

Project finance is:

  • mostly used by private companies
  • used for complex infrastructure projects like energy projects
  • tackles one specific project at a time (NOT a portfolio of projects)

However, an easier way to wrap your head around PF, is to think of it as a web of contracts between the project company (we’ll get there) and its stakeholders.

But before we get there, let’s have a quick look at what the macro picture looks like for PF.

In terms of sectors, Scope Ratings analysts estimate that power, particularly renewables, and transportation will continue to dominate new project financing issuance in the short term, with oil and gas representing the primary uses of funds.

Figure 1: EMEA Project Financing H1 2016 (tot: €76bn)

Renewable Energy Project Finance
From Scope Ratings, 2017

The “Power” pie wedge represents 30% largely because of renewables. Indeed, 2016 was marked by strong PF activity, especially in the UK (EUR 11.7bn), with two mega offshore wind projects, Dudgeon (EUR 1.6bn) and Beatrice (EUR 2.8bn), in particular.

How does project finance take place? 

STEP 1: A company wants to build a wind farm. The wind farm is complex, expensive and will require a long-term plan. Since it is unlikely that a single company will be able to swing such a project on its own, the company then seeks out other investors who are interested is such a project, to share the risk (and return) of the project with. This group of initial investors becomes known as the project sponsors.

STEP 2: The project sponsors then create a Special Purpose Vehicle (SPV), which is a company in its own right, with its own balance sheets and cash flows separated from its sponsors. The SPV is created with the sole purpose of managing and handling that one specific project. The SPV is also called the project company.

STEP 3: The SPV and it’s sponsors then must raise money to fund its project, so it approaches banks and bond holders for financing.

Why do companies choose project finance for their investments?

To understand why many (renewable) energy projects are financed via project finance, you have to look at what project finance offers to both the project sponsors (money borrowers) as well as the lender‘s side.

On the Project Sponsor’s side: Project Sponsor’s love to project finance because the liabilities and obligations associated with the project are removed from the Sponsors. This has many benefits, including:

  1. Limited Recourse: Usually, when a company defaults on a loan, the bank has “recourse” to the assets of the company. In project finance, the bank’s only recourse is to the assets of the project company. Given that the magnitude of the average project is in the order of 100m and above, this is an important consideration. This enables the Sponsors to effectively protect their assets, investments in other projects, intellectual property, and key personnel;
  2. Avoiding Risk Contamination: closely tied to the above point, project finance makes sure that risk incurred by the Project Company does not spread to the project sponsors because the Project Company is it’s own entity with its own balance sheet, so risk does not spread to the balance sheet of its sponsor. Sponsors avoid mixing cash flows with other projects they are financing;
  3. High Leverage: Project finance is typically involved highly leveraged transactions, usually not financed with less than 60/40 debt/equity. The key advantages that such a capital structure for has for the project sponsors are:
    • more debt means that lower initial equity injections are needed, making the project less risky (leading to a lower cost of borrowing);
    • enhanced shareholder equity returns;
    • debt finance interest may be tax deductible from profit before tax, further lowering the cost of borrowing;
  4. Balance Sheet: Normally, in “non project” finance situations, when a company needs to raise debt financing, they approach a bank, which will judge the company’s creditworthiness based on its balance sheet. Project finance allows debt to be booked off the balance sheet, depending on projects;
  5. Hedging Risks: Project finance is also a way for companies to hedge risks of their core business.

The advantages above all come down to this→ the reduction of risk corresponds to a lower cost of borrowing for the Project Sponsor’s balance sheet. Having a high Weighted Cost of Capital has negative effects on balance sheets, so avoiding this is an imperative. Shareholders will look very favorably at this.

Moving on to the lender’s side: The lenders, which are banks or bond holds tend to view project finance favorably as well.

The main disadvantage of project finance for banks (and a corresponding advantage for the Project Sponsors) is that the structure is nonrecourse that we discussed above. The revenue generated by the SPV is the primary, if not sole, the source of payback of the project debt. Thus, banks in project finance transactions, view the increased risk of not being repaid if the project is unsuccessful very negatively. So, if the risk cannot be allocated or credit-enhanced, by default the risk falls to the banks.

In spite of this, lenders are keen on project finance because:

  1. Higher Fees for Banks: The higher degree of risk for lenders also translates into higher fees and costs than for other types of financings. The risk inherent in project finance and the complexity of the projects result in an extensive and expensive due diligence process (the cost of which is borne by the project sponsors) conducted by the lenders’ lawyers, technical adviser, insurance consultant and other consultants, and big fees can be earned here;
  2. More Fees for Banks: owing to the higher risk involved, lenders scrutinize project sponsors more. Banks require more supervision over the construction, management, and operation of the project relative to other forms of financing.  The increased supervision during construction, startup or commissioning, and operations often adds up to higher transaction costs;
  3. Avoid Sharing Cash Flows: Once a bank identifies a project as being worthy of investment, they will not want to mix the eventual cash flows that the SPV will generate with other, pre-existing creditors;
  4. Focus on One Project: Lenders like PF also because they can focus on one specific project. This means that the lender evaluation will be on analyzing if that project will be able to generate sufficient cash to pay back principal and interest.

A quick note of explanation is necessary: You’re probably wondering why on earth would a bank forgo recourse to a project’s sponsor, therefore putting itself in a risky position?

Renewable energy has a projected and predictable revenue stream that can be secured to ensure repayment of bank loans. When it comes to wind and solar power projects, this revenue is typically generated from a power purchase agreement (“PPA“) with a utility, under which the can piggyback on the creditworthiness of the utility to reduce its borrowing costs. While the wind power market has matured, resulting in the successful project financing of “merchant” projects in the absence of long-term PPAs, solar projects are generally not there yet.

As legal advisors, Wilson, Sonsini, Goodrich and Rosato explain in this detailed note,
in merchant power projects, lenders get a guarantee of the project’s ability to repay its debt by focusing on commodity hedging, collateral, and the income that will be generated based on historical and forward-looking power price curves.

While project finance lenders prefer a long-term power contracts that ensure a consistent and guaranteed revenue stream (including assured margins over the cost of inputs), in the context of some industries, banks know that sufficient revenues to support the project’s debt are of a high enough probability that they will provide debt financing without a long-term off-take agreement.

However, solar projects are different. Due to their peak period production, high marginal costs, and lack of demonstrated merchant capabilities are not yet viewed as “project financeable” without PPAs that most of their output. Moreover, solar’s lack of merchant viability is worsened by the fact that the southwest United States (the region most appropriate for utility-scale solar power development in the USA) does not have a mature merchant power market that functions in the absence of long-term bilateral sales agreements. This is not likely to change in the short or medium term.

Stay Tuned for Part II: Renewable Energy Project Finance: The Checklist


☀️Sunny Saudi is Going Solar

There is a famous quote by Former Saudi Oil Minister from 1962-86 Sheik Zaik Yamani that people in (renewable) energy never tire of throwing out there,

“The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil” – Sheik Zaik Yamani

Sheik Yamani was no wishful thinker.

Energy shifts happen, in part because of poles pulling in different directions, not necessarily because of a lack of supply. There is plenty of oil in the ground and it is being extracted more cheaply and efficiently than ever before, yet the current environment is propelling Saudi Arabia (&Co)  into the opposite direction. 

Today, when someone mentions Saudi Arabia’s energy mix, what usually comes to mind is crude, crude and more crude, but come a few years this will change radically. With the nosedive that the oil price took in the last few years, Saudi Arabia is launching a massive renewable energy plan to try to replace some, if not all, of their energy needs.

The Plan

Newly appointed energy Minister Khalid al-Falih, a graduate of Texas A&M University and Chairman of Aramco, intends to launch an ambitious renewable energy program and is currently soliciting tendering bids. The program, which is to be officially launched “very soon” is expected to involve an investment of between $30 billion and $50 billion by 2023, he said at a press conference in Dubai.

Minister al-Falih interviewed by CNN’s Becky Anderson @ ADSW 2017,

The plan involves the development of almost 10 gigawatts of renewable energy by 2023, starting with wind and solar plants across the sun-soaked northwestern desert. The effort has the potential to replace the equivalent of 80k barrels of oil a day now burned for electricity generation.

According to Bloomberg, bidders seeking to qualify to build 700 megawatts of wind and solar power plants should submit documents by March 20, and those selected will be announced by April 10, Saudi Arabia’s energy ministry said Monday in an e-mailed statement. Qualified bidders will be able to present their offers for the projects starting on April 17 through July.

The Kingdom intends to require all investors to invest in the local supply chain of goods and services, so as to render themselves more competitive.

🇸🇦The Kingdom’s Electricity Needs

Relying heavily on hydrocarbons as feedstock for the electricity sector, Saudi Arabia is by far the largest user of crude oil for power generation in the world. Oil accounts for two-thirds of the input into electricity generation, with natural gas providing most of the remaining portion, according to the Joint Organizations Data Initiative (JODI). During the prohibitively hot summer months, consumption of electricity increases as domestic demand for air conditioning rises. The Kingdom has recognized that this is both highly inefficient, expensive and unsustainable.


Saudi Arabia used an average of 0.7 million bbl/d of crude oil for power generation during the summers from 2009 to 2013, which is massive. To put this into perspective, that same period, Iraq and Kuwait, the next two largest users of crude oil for power generation in the Middle East, each averaged roughly 0.08 million bbl/d of crude burn. At the same time, net electricity consumption in Saudi Arabia has more than doubled since 2000.

Shifting the energy mix towards renewable energy would bring about several key advantages:

  1. Local Emissions Reductions: more on that later;
  2. Economics: The Kingdom has seen two years of budget deficit, and is looking at a $53b deficit moving into 2017. Stubbornly low oil prices have forced austerity measures on a country that is not associated with belt- tightening measures. In the context of the 2018 Aramco IPO prospected to raise $100b, it is clear that the economic tide is shifting. With the Kingdom’s main sources of income: oil exports, decreasing due to a number of economic factors, this leaves less for exporting and therefore less revenue. By shifting to renewables, they aim to free the crude currently being consumed domestically so they can export it, thus generating more revenue;
  3. Diversification: diversifying their investment portfolio away from oil is recognition that an economy based on the export of crude is, as demonstrated, highly vulnerable to prices drops and other external shocks.
Price Oil Drop from 2014- Feb 2017

Saudi Arabia has boosted output for years to sustain export income while also satisfying domestic demand. Demand for refined fuels such as gasoline has doubled since 2003, according to JODI. Moreover, Saudi Arabia, the UAE, Qatar, Oman, and Bahrain have significantly reduced or eliminated fuel subsidies over the past year to limit government spending because of low oil prices. Brent crude is trading at $55 a barrel today compared to $112 per barrel between 2011 and 2014.

Domestic demand for oil increased by about 24,000 barrels a day in the first five months of 2016, the slowest growth rate for that period since at least 2010, the first year according to JODI.

Bloomberg, 2016

Mario Maratheftis, chief economist at Standard Chartered Plc. said, according to Bloomberg, “Renewable energy is not a luxury anymore – If domestic use continues like this, eventually the Saudis won’t have spare oil to export.’’

Without alternative power sources, including gas and renewables, the kingdom would be forced to increase the amount of crude it burns, diverting it from exports. That can reach as high as 900,000 barrels a day during the kingdom’s summer months, according to data from the JODI.

Saudi Arabia has already taken steps to substitute natural gas for oil in power plants, a change that’s had “immense” impact on the crude burn, OPEC said in its Monthly Oil Market Report released in January. The use of crude for domestic power has fallen by nearly 1/3rd since the Wasit gas plant began operations in March 2016, according to the OPEC report.

300,000 Barrels

Saudi Aramco will bring online the similar-sized Fadhili gas project in the country’s east by the end of the decade. That gas project along with the renewable projects, planned for completion by 2023 could save about 300k barrels of oil from being burnt for power, according to estimates based on IEA and OPEC data.

According to Fabio Scacciavillani, chief economist at the Oman Investment Fund, “Alternative energies are a key factor in the economic transformation, this region has a great competitive advantage in low-cost energy production and that will continue with renewables. That will create a big advantage particularly in energy-intensive industries.’’

On top of that, the Saudis want to build nuclear reactors, a less ambitious program that would see 2.8 GW of new electric capacity.

The end goal is to generate 30% of the Kingdom’s electricity from renewable sources by 2030, with the remainder to come from natural gas and a small portion from nuclear.

Deputy Crown Prince Mohammed, at the forefront of promoting reforms and development in his country, said, “I think by 2020, if oil stops, we can survive…We need it, we need it, but I think in 2020 we can live without oil.”

The Tide is Turning to an Energy  Transition

It goes without saying that the primary reason the Saudis are shifting to renewables is economics rather than emissions, yet we can still predict some emission reductions.

It is clear that the Kingdom does not expect oil prices to increase above $100 like it was a few years ago. They know that the days when they would squeeze massive economic rent out of oil have passed. Their long-term objective is to ensure the future competitiveness of their oil in a global environment where paradoxically, fossil fuels are abundant and renewable energy has a higher penetration, while still decarbonizing their energy sector.

This takes me back to Sheik Yamani’s prediction. It is not so much that the Kingdom is physically running out of oil to sell as much as the energy environment is changing. The supply is outpacing demand and oil is just not as profitable as it was. The hammer blows of energy efficiency, renewable energy, and global economic trends are forcing a transition to better options.

Sheik Yamani’s prediction is coming to life.


Trend #1: Investment in Renewable Energy 2015

Old critiques, die hard. For the longest time, renewable energy (RE) has been viewed as too expensive and un-scalable, as a luxury energy source, that will not be deployed in developing countries. As a matter of fact, how many times did you hear the criticism, that by diverting investment away from so-called “cheap” fossil fuel energy, we would be depriving developing countries of their right to develop?

The numbers quantifying investments in RE are in! It should be no surprise that RE investment is increasing significantly and the developing world, especially China, is leading the way.

The findings of the United Nations Environment Programme (UNEP) Global Trends in Renewable Energy Investments 2016 confirmed that RE set new records in 2015 for dollar investments, the amount of new capacity added and the relative importance of developing countries in the context of that growth.

Record-breaking uptrend in Renewable Energy Investments

Global investment in RE rose 5% to $285.9 billion from 2014 to 2015, breaking the previous record of $278.5 billion reached in 2011 (FYI that’s double the dollar allocations to new coal and gas generation, which was an estimated $130 billion in 2015) when the famous ‘green stimulus’ programs in German and Italian were in full throttle. The figure below shows that the 2015 investment increased sixfold since 2004 and that investment in RE has not been below $230b since 2010.


Source: UNEP, Bloomberg New Energy Finance

*Asset finance volume adjusts for re-invested equity. Total values include estimates for undisclosed deals.

Over the course of the 12 years shown in the chart, the cumulative RE investment has reached $2.3 trillion.

Moreover, in 2015 some 134GW of RE excluding large hydro were commissioned, equivalent to some 53.6% of all power generation capacity completed in that year – and this is worth mentioning because it is the first time it has represented a majority. Of the renewables total, wind accounted for 62GW installed, and solar photovoltaics 56GW, highest ever figure and sharply up from their 2014 additions of 49GW and 45GW respectively.

Developing Countries Leading the Way

The investment which led to record-breaking levels came from China, which lifted its investment by 17% to $102.9 billion, about 36% of the global total. In the Middle East and Africa, investment was up a total of 58% at $12.5 billion, helped by project development in especially in South Africa and Morocco; and in India, up 22% at $10.2 billion.

More significantly, 2015 was the first year in which investment in RE (excluding large hydro) was higher in developing economies than in developed countries. The figure below shows that the developing world invested $156 billion last year, some 19% up on 2014 and a remarkable 17 times the equivalent figure for 2004, of $9 billion.


source: UNEP, Bloomberg

The key contributors to this shift from developed to developing are the big three: China, India, and Brazil, who saw an investment rise of 16% to $120.2 billion

A large part of the record-breaking investment in developing countries took place in China. Indeed China has been the single biggest reason for the strong increasing trend for the developing world as a whole since 2004. In spite of low market fundamentals and much talk of decreased investment in RE, China has been a key contributor to these figures. China invested $102.9 billion in 2015, up 17%, representing well over a third of the global total.

Likewise, India enjoyed a second successive year of increasing investment, breaching the $10 billion for the first time since 2011.

Other developing countries, excluding the big three, lifted their investment by 30% last year to an all-time high of $36 billion, some 12x their 2004 investment, the biggest players are:

  • South Africa also deserves an honorable mention as it’s RE investment is up 329% at $4.5 billion significantly ramping up their solar PV, in the context of their auction program. In June last year, the government in Pretoria launched a tender for an additional 1.8GW for its renewables program. One of the signal deals later in the year was the financing in September of the 100MW Redstone solar thermal project for an estimated $756m, helped by loans from the World Bank’s International Finance Corporation and Overseas Private Investment Corporation of the US;
  • Mexico saw a 105% increase at $4 billion, aided by investment from the development bank Nafin for 9 wind projects. Moreover, Mexico is emerging as an important location for bond issues to back renewable energy projects. In November last year, National Financiera issued $500 million worth of five-year bonds to contribute towards the development of nine wind farms with a total capacity of 1.6GW;
  • Chile saw an increase of 151% higher at $3.4 billion, thanks to a sizable uptrend in solar project financings;
  • Morocco, Turkey, and Uruguay also saw investment increases in excess of the $1 billion milestone in 2015.

Developed world downward trend (mostly)

In the developed world, however, we are witnessing a downward trend quite consistently, since 2011, when it peaked at $191 billion, some 47% higher than the 2015 outturn. Developed countries invested $130 billion in 2015, down 8% and their lowest figure since 2009. This decline is due to two major factors:

  1. because of the US, where firstly; there was a rush of investment in 2011 as projects and companies tried to catch the Treasury grant and Federal Loan Guarantee programmes before they expired and secondly, the US Supreme Court’s decision in February 2016 to allow all legal objections to the Environmental Protection Agency’s Clean Power Plan to be heard before it can be implemented may be deterring investment in 2016.
  2. but much more to do with Europe, where allocations fell by 60% between 2011 and 2015. That big drop was caused by a mix of factors including retroactive cuts in support for existing projects in Spain, Romania and several other countries, an economic downturn in southern Europe that made electricity bills more of a political hot potato, the cut of government subsidies aimed at incentivizing RE in Germany and Italy, and the big fall in the cost of PV panels over recent years.Italy, in particular, saw renewable energy investment of just under $1 billion, down 21% on 2014 and far below the peak of $31.7 billion seen during the PV boom of 2011.

Retroactive cuts to feed-in tariffs really weaken support for solar energy investments. Spain, scene of particularly painful retroactive revenue cuts imposed by the government during the 2011-14 period, and the end of all support for new projects, saw investments of just $573 million in 2014. This was slightly up on the previous year but miles below the $23.6 billion peak of 2008.

But it’s not all bad in Europe, especially since the UK has not seen a significant slowdown in RE investments in recent years, and is actually pushing in the opposite direction. Moreover, in spite of the fact that offshore wind in the North Sea has seen massive investments amounting to $17b, Europe’s aggregate RE investment is still in decline.

The Siemens-Gamesa Merger

Following several rounds of consolidations by their competitors in the energy sector including General Electric’s purchase of Alstom’s energy business and a merger between Germany’s Nordex and Spanish rival Acciona Wind Power, Siemens and Gamesa have announced their merger.

Siemens and Spain’s Gamesa agreed last week to merge to create the world’s biggest manufacturer of wind farms, with the German company paying 1 billion euros ($1.13 billion) for a majority stake in the combined business. The combined group’s order portfolio would be worth some 20b euros. The merged business will have 21,000 employees, an installed power base of 69 gigawatts.

Before the merger

Before their merger, Siemens had an 8% share of the global wind turbine market, according to data from FTI Consulting, which made it the second-biggest manufacturer after Denmark’s Vestas, which had a share of nearly 12%.

But Gamesa’s relatively small 4.5% market share put it steadily behind other large players, such as China’s Goldwind, which has been growing internationally into fast-growing renewable energy markets in Latin America, as well as the parts of the US and Europe.

Wind Turbine Manufacturers by Market Share 2015, 

The Siemens-Gamesa merger

The Siemens-Gamesa merger would create a new global market leader in wind energy by capacity, surpassing China’s Goldwind, Denmark’s Vestas and General Electric, according to FTI Consulting.

The merger is broadly considered a win-win in that this move would bring together Siemens’ strength in offshore wind power in mature markets and Gamesa’s leading role in emerging markets.

Each has their own competitive advantage

More specifically, Siemens operates in the mature North American and European markets and whereas Gamesa’s turf are the fast-growing markets such as India, Mexico, and Brazil. 

Moreover, Siemens’s wind division, which had almost €6 billion in revenue in 2015, manufactures and installs wind turbines for on- and offshore farms. But the business has been largely focused on the offshore market—where it has a large order backlog for turbines—while fumbling on onshore growth opportunities. Gamesa is also a major player across South America, where it expanded when the Spanish government cut subsidies to clean energy producers in 2013 as well as China and India, where it is the number one foreign producer.

Siemens is known to all of us as a quality engineering company (whose other products include trains, medical body scanners, and technical instruments), but it has struggled to make its wind turbine business profitable. After the merger, it will take a 59 % stake in the company but it will not have a majority on the board but will have five out of the 13 board members in the new group.

Their deal states that in return for Siemens becoming majority shareholder, Siemens will pay Gamesa’s shareholders, which include Spanish utility firm Iberdrola, 1b euros in cash in the form of an extraordinary dividend.

The businesses will be combined within Gamesa which will retain its Madrid headquarters. The Spanish group is creating new shares to be offered to Siemens.

Gamesa has further affirmed that the merged business will be operational by March- April 2017  and will be worth 230m euros of earnings before interest and taxes (EBIT) within four years due to the cost and savings strategy that is being implemented. The idea is that getting bigger would also help to lower costs, one of the industry’s key targets in its race for more efficient turbines, which in turn will make it more competitive. 

And then there’s Dong

It’s hard to find a comparable energy company to Dong, the world’s largest developer and operator of offshore wind farms and European poster child for the transition from fossil fuels to green energy. Dong Energy is looking to sell a stake of approx. 17% which could value the company at €16bn.

Winds of Change: Move from black to green

Over decade ago, Dong Energy was one of Europe’s most coal-intensive utilities, providing thermal    electricity to its customers.It was also very active in offshore oil and gas exploration and extraction in Norway and Scotland.

In recent years,  the company embarked on an energy transition strategy and began selling off coal-fired assets and a part of its oil and gas business. For the past few years, their vision has been to reduce their energy generation from coal and transition to wind energy, becoming world’s biggest offshore wind company and are aiming to double their installed capacity from 3.0 gigawatts in 2016 to 6.5 gigawatts by 2020, equivalent to the annual electricity consumption of 16m people.

Dong Investor Presentation, March 2016


According to their March 2016 Investor Presentation, towards 2020, they expect to allocate 80% of their capital investment to wind, 10-15% to biomass conversation and investments into the power grid. Finally, an ever shrinking 5-10% is targeted towards oil and gas.

Chief Executive Officer Henrik Poulsen, had this to say regarding their transition, “Fundamentally it is a strong portfolio. However, we see simply better risk-return opportunities in the renewables business, and therefore we are managing the oil and gas business for cash and reallocating that cash back into renewables.”

However, there is no denying that Denmark today is still reliant on oil, coal and gas. Make no mistake, was it not for the North Sea oil fields, the Danish success story might have looked very different. Since the 1990s, the oil and gas driven from the seabed north of Denmark have made the Danes quasi-self-sufficient with oil and gas, while simultaneously boosting the Danish economy. But the Danish energy story is changing, the investment strategy clearly trends towards RE and away from fossil fuels.

Coming Soon: June 9th, 2016 Dong Energy IPO

On Thursday, 9th June, Dong will look to sell a stake of as much as 17.4% in an IPO that may value the company as high as 106.5 billion kroner (€16 billion) for 200 to 255 kroner (€26-34) per share, thus making this the largest IPO this year.  Previously, Dong tried and stopped three past attempts to list from 2006 to 2008 due to market turmoil and other difficulties, but this time, they are marching ahead.

However, what’s special about Dong is that unlike any other large energy company, 75 % of its capital is already employed in wind power generation. While Dong has a small but active oil and gas business, it’s clear this is trending toward being a triviality in the overall core business mix.

Traditionally, investors interesting in exposure to RE through large companies typically have to invest in a traditional energy company whose diversification into clean energy is still small relative to their conventional power assets, but Dong has practically already transitioned. Moreover, the high quality domestic Danish power distribution network provides the stable revenue returns which are very reassuring to their investors. This signals that they can support investment in its core wind business.

Owners of Dong Energy
Owners of Dong in %, Bloomberg


The Danish government now holds 59% of Dong and plans to maintain a holding of 51% after the IPO. Goldman Sachs with an 18% stake underscored its commitment to being a long-term partner in the future of the company.

Here are the take home messages that I think are valuable to keep in mind in the wake of their IPO:

1. Dong has access to very low-cost capital, especially in a macro backdrop where policy makers are incentivizing clean energy

2. Dong needs capital investment to ensure healthy returns to their shareholders

3. Dong’s objective, via this IPO is to share out the capital expenses through its partners

4. Dong’s distribution, generation and storage assets, can provide their grid resiliency in the cases of intermittency.

SunEdison went bust, it’s a big deal.

SunEdison stock price Bloomberg

SunEdison, the largest renewable-energy firm in the world went bust last week with $16.1 billion of debt, making it the biggest U.S. bankruptcy in more than a year. In a nutshell, they were victims of their own success, as they grew too fast and burned way too much borrowed money in the process.

Their bankruptcy says more about reckless investor strategy than about the solar industry as a whole.

Bad Strategy: Too much focus on Growth

In 2014, SunEdison created two subsidiaries, called “yieldcos”, to manage the projects that it built assets for. They are called TerraForm Power and TerraForm Global, both separate and publicly traded. The purpose of these “yieldcos”  was to purchase energy projects from SunEdison and other developers at lower capital costs and attract (read: lure) investors who expected reliable dividends based on long-term power contracts.

Unsurprisingly, not all of its their investments proved successful, which is the name of the game in the project development world, but SunEdison’s win to loss ratio was evidently lopsided. It ended up with a lot of money tied it up in projects at various stages of completion, which it needed to sell to realise the gains and pay back creditors.

In order to make sure that the yieldcos had projects to develop, SunEdison had to grow, quick. That took a lot of (borrowed) money.

Circling the Drain

Things turned sour in July 2015, after it announced that it would try to acquire Vivint, a residential solar roof-top company, at a 52% premium (!). That deal for residential assets deemed inferior to the commercial assets SunEdison usually bought (read: utility-scale projects) hinted to investors that SunEdison may not have as much liquidity as they thought. And investor appetite for the yieldco abruptly ended.

SunEdison vs. Creditors

Things are also ugly between SunEdisons first- and second-lien lenders who are fighting over who will give them the money they need to get out of the bankruptcy.

  • If the first-lien lenders win: they will fire sell all of SunEdison’s projects, which would be disastrous for the solar market because there would be many solar projects on the market, resulting in lower prices for these projects.
  • If the second-lien lenders win: they will attempt to get more value out of these projects, the first-lien lenders, which is better for the solar market.  There is a lot of value in the project pipeline, which ultimately comprises cash-generating assets not tied to the continued existence of SunEdison, and it would be a shame if they were sold below value. But this will take time since investors will take time to do the due diligence to value these projects before buying them.

This does not bode well

SunEdison started off as having an investment portfolio of utility scale projects backed by governments, to investing in residential solar roof-top backed by private investors, therefore substantially increasing risk. Their free cash flow was negative and their net debt skyrocketed and eventually led to the bankruptcy. But SunEdison is not unique in that regard. Solarcity, SunPower and First Solar have managed a develop-and-sell business profitably over the past three years and are engaging in similar growth strategies all in plain view.