by Danny Touma, PwC Australia’s Integrated Infrastructure team – Environmental Transactions & Advisory
When the ground is shifting or the going is tough, joining forces can make a lot of sense. The booming Australian renewable energy market is a changing and challenging environment, but it also holds out enormous opportunity for developers and investors willing to work together for mutual benefit.
For renewable energy developers, a combination of challenges is increasing the cost and complexity of projects and making it harder to reach financial close.
Connecting to the grid and securing offtakes is not as simple as it was, so the benefit of having the ultimate project owner involved in key project development items is becoming more pronounced.
For developers, partnering with an investor may offer early access to capital and credit, greater financial security, and support to secure power purchase agreements.
Developers may also benefit from an investor’s expertise and networks that can be leveraged in lobbying and advocacy to successfully bring projects to financial close and commercial operations.
For investors, partnering with a renewable energy developer is an effective path to better carbon credentials. The world’s biggest utility giants, oil/gas majors, and financial investors are keen to capitalise on the renewables boom, with its potential to improve their ESG bottom line as well as deliver growth.
The dynamic forces at play in Australia’s renewables sector are transforming the structure of deals. We expect to see continued market consolidation, with renewable developments increasingly steered by large strategic investors and infrastructure funds.
The investor/developer partnership
While every deal is unique, they are usually built on one of two structures. In the first model, the investor purchases all or part of the development company, gaining access to the expertise of the developer’s team, and part or all of the portfolio of projects.
The investor benefits from spreading asset-specific risks across a portfolio, and the developer benefits from upfront payment and pipeline funding. They may also benefit from access to the resources of a large enterprise (e.g. governance, technical, construction, and government relations expertise).
The second model involves a large strategic investor buying all or some projects in a developer’s pipeline. Set milestones are agreed upon for each project, and responsibilities are allocated between the investor and the developer.
These arrangements can be an effective way for investors to mitigate risk, and for developers to retain a greater degree of autonomy.
Having a clear understanding from the start
It is always better to identify misalignments between the two parties during due diligence, rather than rushing in and discovering fatal problems too late. Investors and developers need to enter negotiations with a realistic view of one another’s expectations, capabilities, and risk appetites.
Communication, honesty, and trust are at the core of the strongest partnerships. Both parties should clarify their levels of influence, responsibility for delivering key project milestones, and the funding arrangement (process and amounts) for development capital and developer profits.
It’s also important to identify non-financial synergies and examine how compatible each organisation is in terms of management and culture. A good cultural fit can make a tremendous difference when the pressure is on.
To build an effective, mutually beneficial partnership, there are several important actions that each party should take:
Developers should begin with an objective look at their own organisation and portfolio. This will enable developers to articulate their strengths and capabilities, identify areas that could benefit from a large investor’s input and expertise, outline realistic project timescales and expectations for connecting to the grid, and clarify non-negotiable features of any prospective deal.
Developers that can take a clearly identified product to the market will be in a good position to execute a transaction with the right investor.
Developers need to be asking, are we more likely to succeed by entering into his relationship? What is unique about this potential investor?
What resources, networks and expertise might we gain from being part of this group? How does this investor’s strategy, culture and governance align with our organisation?
Also, how would we fit within this investor’s portfolio and broader strategy? How can we ensure our projects remain a priority? What is our competition internally for capital? What level of governance and reporting will the investors require, and can we deliver on these requirements?
Investors should enter any negotiation with respect for the developer’s expertise, skills, and methodology – and with clarity about what they can offer the developer beyond access to capital.
How and when does the investor expect to be involved in decision-making, and what accountabilities, delegations, checks, and balances will they establish? Investors should also seek to validate the developer’s proposals and understand the risk profile of the transaction.
Foreign investors will increase their likelihood of success if they attempt to understand the regulatory landscape and local energy market, and develop a clear strategy for government interaction and engagement.
Investors should also be prepared to authentically engage with the local community. Key questions investors need to be asking include, what is the developer’s history of successful projects? What differentiates the developer from other competitors?
How is the developer internally resourced and structured? How can we support the developer? Does the developer expect our assistance to reach grid connection and financial close?
What are the gaps in development capabilities after considering both our capability and the developer’s capability? How can these gaps be filled?
What are the developer’s expectations for price and value from its portfolio? How does this developer’s culture align with our organisation?
When developers and investors work together, a complex environment can be managed, even harnessed, for mutual benefit.
Taking the time to consider the steps and questions outlined here – and seeking the right advice and support – will set you on the path to successful partnerships and long-term rewards.