KBRA Europe Releases Research ? Demand for Environmentally Friendly European Power Assets Risks Weakening Credit Profiles

Kroll Bond Rating Agency Europe Limited (KBRA) releases research on developments in renewable project finance. KBRA has observed several trends that place a spotlight on merchant risk in European renewable project finance. Incentives provided for environmental, social, and governance (ESG) projects have encouraged the development of a competitive market by subsidising pricing as well as driving developments in the funding markets. KBRA has observed an increase in the number of project finance transactions more directly exposed to the power markets and risks weakening credit profiles without effective structural support.

Key Takeaways

• Factors that influence the quality of projects (supply) and their exposure to power market risk include: (i) the phasing out of renewable energy subsidies by European governments, (ii) lower pricing support provided by contracts for difference (CfDs) as auction prices decrease, and (iii) a rise in the number of renewable energy projects.
• Factors influencing the demand for project finance transactions, which in turn further increase the exposure to power markets, include: (i) investors increasingly chasing ESG-focused assets with renewable energy style funding, (ii) supplier demand for renewable energy projects to meet demands from clients, and (iii) financial innovation to meet the need for higher yields from investors.

These factors have created an environment that is increasingly exposed to power price volatility, refinancing risk, and liquidity risk. This raises questions around renewable project financing credit risk and how it is mitigated. In this report, we outline the various factors at play and how funding methods are adapting to these risks.

Click here to view the report.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA's ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.