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May 27, 2022updated 08 Jun 2022 10:54am

The rise of solar project financing in Australia

Labor’s election win in Australia is tipped to drive a rebound in renewable energy projects. The recent refinancing of Foresight Solar’s Oakey and Longreach solar farms in Queensland is an example of how such deals work.

By Adrian Murdoch

New Australian prime minister Anthony Albanese is a strong backer of renewable energy. (Photo by James D. Morgan/Getty Images)
  • Financial commitments for new, large renewable energy projects in Australia fell 17% last year, but the new government offers cause for optimism in this area.
  • Solar is a bright spot in the Australian renewables sector, with generation capacity still growing steadily.
  • In April, Foresight Solar Fund refinanced two big solar farms with a project finance loan of A$59m ($41.9m) via ANZ Bank and Deutsche Bank.

Last weekend’s Australian elections saw the Labor Party come to power after almost a decade of Conservative rule, with expectations that new prime minister Anthony Albanese will bring much stronger climate policies than his coal-championing predecessor Scott Morrison. Albanese has long been a proponent of solar energy. In his post-victory speech on Saturday night (21 May), he vowed to make Australia a renewable energy “superpower”, having tweeted in October last year that renewables would mean cheaper electricity.

Indeed, the new government is “likely to herald a suite of changes to Australia’s climate change laws and policies” and “significant investment in renewable energy and the energy transition”, wrote Australian law firm Gilbert + Tobin in a note this week.

The report argues that this is the result of continued policy uncertainty combined with the challenges associated with connecting renewable energy projects to the grid. An Australian sustainable finance taxonomy would help drive development in this area and support the transition to a net zero economy in he country, says the Australian Sustainable Finance Initiative.

Still, solar has bucked the overall trend, with installed capacity sharply up since 2017, says the Clean Energy Council report (see chart below). What’s more, 68 large-scale projects (42 of them solar farms), representing at least 9GW of new capacity, were under construction or financially committed as of the end of last year – a rise of 38.7% on 2020. And last year another 400,000 homes bought solar panels, adding 3.3GW of new capacity, the fifth year running of growth on that front. It’s a similar story elsewhere; solar is also the main component of renewables expansion in the US, for example, as Capital Monitor has reported.

Refinancing solar

Australia's new policy environment is, then, likely to spur the creation of more projects such as those recently refinanced by Foresight Group, a London-based sustainability-led alternative asset manager with £8.7bn ($10.9bn) under management.

In early April, the group’s Foresight Solar Fund, which has a portfolio of solar and battery storage assets in the UK and internationally, refinanced two big solar farms in Queensland with a project finance loan of A$59m and a debt service reserve facility of A$1m via ANZ Bank and Deutsche Bank. Both projects have power purchase agreements (PPAs) with the Queensland government.

The 30MW Oakey 1 Solar Farm and the 17MW Longreach Solar Farm are two of 12 large solar projects supported by the Australian Renewable Energy Agency (Arena). They are expected to triple the amount of electricity produced from big solar – systems larger than 5MW – in Australia and add almost 500MW of new generation, according to Arena. That is enough to power 150,000 homes.

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The Foresight Solar Fund originally bought into the two projects in 2017 when it became a 49% owner with an original loan of A$65m from Bank of Tokyo-Mitsubishi and Australian government-owned green bank Clean Energy Finance Corporation. The remaining 51% was held by contractor and developer Canadian Solar until January this year, when Foresight Solar bought out the company. Ross Driver, director of the fund, says Canadian Solar had planned to exit once the projects become fully operational.

The refinancing was needed because long-term debt in the Australian market for infrastructure projects is almost unheard of. They are funded under so-called ‘mini-perm’ structures, with tenors of typically five years. For its part, the Foresight transaction is also “fully aligned” with the EU Taxonomy, says Rachel Chia, head of project finance for Asia-Pacific at Deutsche Bank.

Foresight declined to disclose the financial terms, including the cost of the loan, but Driver says visiting the market every five years has advantages for borrowers. It enabled Foresight Solar to find the banks offering the best rates and those with a “good appetite for these assets”, he adds, especially given the PPAs in place.

Rachel Chia of Deutsche Bank says substantial due diligence is required for green trade finance deals. (Photo courtesy of Deutsche Bank)

Project finance due dilligence

From a lender’s point of view the upfront work on project finance projects is “quite substantial”, says Deutsche Bank's Chia. Multiple due diligence processes are needed, sometimes including a site visit. In the case of green transactions, this includes due diligence on the technical aspects, such as to understand the solar energy yield and grid connection to provide a view around the technical and cost assumptions for the financing when it is operational; on the legal aspects, to ensure there are the right permits to operate; and on market, tax and insurance aspects. 

Due diligence is typically a three-month process, but it took slightly longer in the Foresight case – from December to April – because of Covid-related obstacles.

The borrower must then provide quarterly financial numbers under compliance requirements, for validation internally by the arranging banks.

With a brownfield site – land that has been used previously – funds are typically used to repay existing financing, as in this case. Had the loan been for a greenfield site – land that has not been built on before – the borrower could only draw down funds based on when a milestone had been fulfilled according to the construction schedule.

The final part of the deal for Foresight Solar is a A$1m debt service reserve facility. This acts as a safety net, commonly seen in project finance deals, to allow the borrower to meet the debt repayment schedule and avoid default. Typically, they give the customer “a breather to meet the scheduled repayment for that quarter”, though they are rarely used, says Mark Clover, Melbourne-based head of ANZ’s renewables project financing lending business.

Ultimately, Australia is “going to take quite a long time to transition” away from fossil fuels and there will be “a few bumps along the way”, Driver says. But with increased government support now expected, the road should be smoother.

“We are well-placed to be a renewable [energy] superpower in the region,” says Wesley Morgan, a researcher at the Sydney-based climate change communications organisation Climate Council and research fellow at the Griffith Asia Institute in Queensland, pointing to the country’s sun and wind.

And with several coal-powered plants in Australia likely to close earlier than expected – the country’s largest 2.9GW Eraring coal plant announced in February that it plans to cease operations in 2025, seven years ahead of schedule – solar farms with reasonable life expectancies of 30 years are only likely to look more attractive.

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