Deal of the year: Intersect Power’s US renewables financing deal

Energy Risk Awards 2022: In new approach, energy firm deconstructs renewables financing to improve marketing and risk management

Nick Pape, Intersect Power

To meet the energy transition challenge, renewable energy infrastructure needs to be deployed on a massive scale. With this in mind, clean energy company Intersect Power has executed a deal designed to revolutionise how green energy is financed, marketed and hedged.

In November 2021, the company closed eight separate transactions totalling $2.6 billion in financing commitments for the construction and operation of a six-project US renewable energy portfolio. Intersect was the portfolio sponsor, leading and arranging the transactions, as well as the greenfield development, procurement, power marketing and permitting. The six underlying projects will all be in operation by late 2023 and are split across two US states – three solar farms in Texas and three solar plus battery storage projects in California – for a total of 2.2 gigawatts of solar with 1.4 gigawatt hours of storage.

Intersect disaggregated the various components of the capital structure into packages of optimal size and risk profile for managing the portfolio over time. The eight transactions consisted of term debt, which was financed at the portfolio level, and construction and tax equity financing, which were completed at the project level. By structuring the financings in this way, the company was able to take a more nuanced approach to power marketing and risk management compared with traditional renewables projects, according to Intersect Power’s chief financial officer, Nick Pape.

Rather than signing long-term power purchase agreements for the bundled renewable energy credits (RECs) and power capacity generated by the projects, Intersect has contracted these elements separately and will manage the former on a shorter-term basis.

It has split off the RECs to sell to corporates that want to offset their emissions. The Texas projects have already benefited from a recent increase in REC prices fuelled by corporate demand. The energy produced in Texas will be sold into the market and Intersect will manage the price risk via a series of put options ranging in tenor from six to 10 years. This will provide downside protection with unlimited upside exposure to power prices. For the California projects, the energy price risk will be managed via seven-year hedges and large co-located batteries that allow output to be shifted to the highest-value hours.

This distinctive combination of financing and power marketing is demonstrative of Intersect Power’s willingness to challenge the status quo and tackle large, complex projects at scale

Nick Pape, Intersect Power

Actively managing unbundled, shorter-tenor offtake contracts will also improve risk-adjusted returns for investors, Pape says, adding: “This distinctive combination of financing and power marketing is demonstrative of Intersect Power’s willingness to challenge the status quo and tackle large, complex projects at scale.”

Indeed, most participants in the renewables financing space have become accustomed to assuming that if an electron is not contracted, it’s worth nothing, Pape says, adding: “We have been able to start a different discussion with investors based on the idea that uncontracted energy has value across a distribution of outcomes.”

While the battery storage element of the California projects was a significant complicating factor when developing the financing packages and managing risk, it adds crucial flexibility to the output. “Intermittency is a key concern for renewables projects, so the battery, and the fact that we’ve retained full dispatch rights, rather than entering into tolling agreements, allows us flexibility to shift power and creates a much richer revenue stream,” Pape says. “It enables a risk-based analysis of potential revenue based on how the battery is going to perform and the market pricing for energy and ancillary services that will likely materialise throughout the day.”

Pape points out that much of the growth of renewables projects around the world has been based on long-term contracts signed with investment-grade counterparties designed to make financing as easy as possible. “Such deals typically give away quite a bit [of value] to the offtaker to provide that long-term risk reduction,” he continues. “And so rather than trying to take away all the risks and create what is almost a solar bond, we have tried to take a more mature approach to risk management. We believe renewables aren’t any different from conventional energy projects and should be financed the same way.”

Pape also believes this transaction could help break open the market and accelerate growth in the renewables sector. “There were many landmark project financings and platform transactions during 2021,” he says. “But these transactions represent a unique moment for the maturation of the renewables industry, when the approach to project financing of renewable assets was reinvented and executed at a massive scale.”