According to a recent analysis conducted by S&P Global Commodity Insights, the task of securing new debt for capital-intensive energy infrastructure is becoming progressively challenging. The report highlights the intersection of growing demand for project financing and headwinds faced by the US banking sector as key factors contributing to this difficulty.
The study identifies ongoing volatility within the banking sector and heightened regulatory scrutiny following the failures of Silicon Valley Bank and First Republic Bank as major deterrents to risk appetite among lenders. Consequently, energy transition initiatives like hydrogen, offshore wind, and carbon capture, which heavily rely on substantial debt financing from traditional lenders, face mounting obstacles in reaching financial close and final investment decisions. This situation persists despite the inclusion of significant funding under the Inflation Reduction Act (IRA).
Peter Gardett, Executive Director of Research and Analysis at S&P Global Commodity Insights, expressed his concern over the tightening credit availability and its impact on energy infrastructure projects. He explained, “Lending capacity continues to tighten with banks concerned about everything from regulatory oversight to the capacity for deposits to drain away in a potential recession. The tightening credit availability is concentrated at the largest commercial banks, which are the traditional sources of financing for this type of large-scale energy project.”
In contrast, the IRA incentives have sparked a surge in private capital investment for energy transition projects that can leverage a higher proportion of equity than debt, such as solar and onshore wind. Private capital firms injected approximately $80 billion into IRA-qualifying investments between August 2022 and April 2023, buoyed by proven technologies, clear tax credit provisions, and lower capital expenditure per unit of energy.
The report also highlights a shift in investment patterns within the US renewable electricity sector. The number of funded solar projects, which can rely more heavily on equity, has witnessed substantial growth over the past year. Meanwhile, numerous offshore wind projects, which are more reliant on debt financing, remain in the pre-final investment decision stage.
With traditional bank financing diminishing for energy transition projects, non-traditional sources of debt, including private debt funds and the US Department of Energy Loan Programs Office, may face added pressure to bridge the funding gap. Gardett emphasizes the potential role of these alternative sources, stating, “The more that energy transition infrastructure projects fail to find sufficient bank debt backing for project finance in traditional markets, the more likely it is that the LPO will be pressured to replace banks in financing of big projects with relatively low technology risk but high levels of stakeholder and regulatory complexity, as well as a long time lag before first cash flow.”
As the energy sector grapples with the challenges of securing financing for capital-intensive projects, the future of energy transition initiatives may increasingly depend on alternative funding mechanisms beyond traditional banking institutions.
