Himanshu Saxena’s Q&A with Financier Worldwide Magazine
December 10, 2021 in
Q&A: Outlook for renewable energy in the US
January 2022 | SPECIAL REPORT: ENERGY & UTILITIES
Financier Worldwide Magazine
FW discusses the outlook for renewable energy in the US with Chris LeWand at FTI Consulting, Inc., Dan Sinaiko at Allen & Overy LLP, Nuno Andrade at Santander, Himanshu Saxena at Starwood Energy, and R. Andrew de Pass at Vitol Inc.
FW: Climate change and infrastructure are key to the Biden administration’s agenda. What are the key measures that will be taken to encourage the growth that is needed to achieve the administration’s ambitious targets for the industry?
Saxena: We believe in an ‘all of the above’ strategy to meet these ambitious targets. On one hand, this includes incentivising renewable generation sources such as wind and solar, but it also should include support for carbon capture, utilisation and storage (CCUS) projects. Thermal assets, mainly gas-fired power plants, will be needed for decades to come, and identifying ways to reduce their carbon footprint will be crucial to achieving any decarbonisation objectives. Investing in transmission development will also be needed to serve states that are not as rich in abundant solar or wind. Additionally, investments in renewable natural gas (RNG), renewable diesel (RD), ammonia and hydrogen are all going to be necessary to achieve this goal. This is what we would call an ‘all of the above’ strategy.
FW: What would direct pay mean for the renewables sector and how would this be likely to be implemented in practice?
Saxena: The majority of renewable energy incentives are in the form of tax credits, whether PTC or ITC. For project owners that do not have a tax appetite, these tax incentives have to be monetised in partnerships with tax equity investors. Although the universe of tax equity investors has expanded somewhat over the years, the cost, availability and demands of tax equity investors remain a major hurdle for development of renewable energy assets. Additional demands on tax equity investors’ appetite, especially from 45Q tax credits for carbon capture, are likely to exhaust supply of tax equity capital in the market. Thus, as long as tax policy – as opposed to carbon tax and pricing – remains the primary tool for decarbonisation, simplifying this policy could be a game changer. One way to do that is to make these credits direct pay, which will reduce or remove the need for tax equity investors as intermediaries. It could be hugely beneficial to enable more projects to materialise. It could be implemented the same way as 1603 grants were implemented, and project owners, financiers and the Internal Revenue Service (IRS) all have significant past learnings to look to in order to ensure simpler implementation of direct pay.
“Although the universe of tax equity investors has expanded somewhat over the years, the cost, availability and demands of tax equity investors remain a major hurdle for development of renewable energy assets.”
— Himanshu Saxena
FW: The M&A environment for solar and wind projects has become extremely competitive. What are the factors that are most important to acquirers, how are they differentiating themselves beyond cost of capital considerations and how are they seeking to optimise returns?
Saxena: Many acquirers are looking to build scale and diversification in their portfolios. Despite strong advances in forecasting methodologies, renewable projects are still subject to volatile cashflows. Well-diversified portfolios provide more reliable cashflows and are more financeable. Additionally, acquirers are continuing to mix acquisition of brownfield assets with acquisitions of development assets or development platforms. Adding greenfield assets to their portfolios increases risk, but also increases the likelihood of better returns. Additionally, better operation of these projects has become even more critical to squeeze out every ounce of returns these projects can offer. Finally, for projects with market risks, strong price risk management has become even more critical in this volatile commodity price environment.
FW: The US dealt with its fair share of inclement weather in 2021, including a cold front in Texas, fires throughout the West and hurricanes in the East Coast and the Gulf of Mexico – and extreme weather events are increasing in frequency. How are developers, investors and creditors adapting and seeking to mitigate this risk?
Saxena: Extreme weather events have further highlighted the need for prudent operations and market price risk management for these assets. Owners have to ensure their assets can run in severe weather, and that might require further investments in weatherproofing these assets. We are seeing owners install cold weather packages for new wind farms even in milder climates, just as insurance against extreme weather events. Additionally, prudent implementation of insurance products is becoming critical.
FW: There has been much debate around green hydrogen and its potential role in the energy transition, although the sector is still nascent. How do you see this evolving? What are the challenges and opportunities?
Saxena: We expect not just green hydrogen, but also blue hydrogen – and blue and green ammonia – to play an important role in energy transition. This is critical not just for the power sector but also to decarbonise the transportation and industrial sectors. However, the cost to produce blue or green hydrogen is still prohibitive, and we are still a bit farther away from widescale commercialisation and use. Cost to produce has to come down, and the transportation and storage infrastructure has to be built before this will truly have an impact. The BBB bill that just passed the house has significant incentives for production of hydrogen, and we believe those incentives, combined with significant demand for hydrogen and ammonia, will enable this space to continue to evolve.
FW: Does platform M&A provide a more compelling investment thesis in the current market? What does the future hold for independent developers?
Saxena: Platform M&A is tricky for a number of reasons. You are not underwriting actual projects, but underwriting a developer or management team. It is a crowded market and we are seeing probably a dozen developers for sale in this market. I believe the key is to identify platforms that share the same view of development and market risks as the investors, otherwise the potential for misalignment is significant.
FW: The core premise behind sustainable investing is doing well while doing good, and that these are not mutually exclusive. How do you view ESG-driven investments – in particular with regard to the ‘E’ – and is it following this premise, or are lower returns to be expected by ‘doing good’?
Saxena: ESG-driven investments can produce decent returns, but investors have to pick their battles wisely. Investing in conventional renewables, namely contracted wind and solar, has become a race to the bottom for returns. However, folks with some appetite for merchant risks can selectively make better returns if they pick the right projects in the right markets. Given the amount of capital flocking to the ESG space, we do expect returns to continue to compress, thus investors will have to be taking incrementally more risk to keep up with their target returns. This risk taking would come in the form of more development risk or more market risk. Also, investors that can operate assets better and can be opportunistic in areas such as repowering and recontracting will earn better returns than more passive or purely financial investors.
FW: What are the most exciting trends, developments or opportunities that you are seeing in clean energy? How will they be impactful in the years ahead?
Saxena: We are excited about the global push toward renewables and sustainability. Numerous stakeholders, including corporations, governments, investors and developers, are pushing together to move this forward. It is an exciting time to be in this space, with tremendous tailwinds. We expect to continue to make investments across the board in clean energy, including buying or building conventional wind and solar, battery storage, RNG, RD, CCUS, ammonia, hydrogen, EVs, microgrids and fuel cells, and so on. We also expect to continue to see investments in developing transmission solutions to meet the needs of this new economy. The investment opportunity is immense and we remain excited about the prospects.
Himanshu Saxena is chief executive officer of Starwood Energy and is responsible for supervision of the firm’s investment programme and strategy, as well as overall management of the firm. Mr Saxena sits on both the investment committee and the boards of portfolio companies. Mr Saxena is also responsible for the development and management of the investment team. In addition, he maintains responsibilities for origination, structuring, execution, monitoring and exiting investments across the energy industry. He can be contacted on +1 (203) 422 7878 or by email: [email protected].
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