Fitch ratings for wind, solar project finance diverged on volume risk in 2022

Solar project finance credit ratings outperformed wind across the globe in 2022 thanks to more predictable power production and cash flows, according to Fitch Ratings.

"Electricity production from solar projects tended to meet or exceed initial independent estimates, while wind projects more often underperformed expectations," the rating agency wrote in a March 31 report. "This underperformance is the leading cause of ratings volatility for wind projects. For solar projects, volume risk had a minimal negative effect on ratings."

Of the solar projects that Fitch rates worldwide, 38% performed better than the debt service coverage ratio rating case forecast by over 20%, while 32% of wind projects outperformed the same forecast by more than 20%. When it came to underperforming the forecast, 14% of solar projects and 15% of wind projects missed it by over 10%.

In 2022, 91% of Fitch's rating actions for wind and solar project finance were affirmations, with ratings "clustered at BBB-," one notch above junk.

Fitch acknowledged that "offshore wind projects must withstand harsher operational stresses in our financial analysis" because of their nascent performance history and a "more challenging operating environment."

Added offshore wind challenges

The offshore wind industry also faces challenges from inflation and moderating power prices.

Vestas Wind Systems A/S, Siemens Gamesa Renewable Energy SA and General Electric Co. have responded to inflated materials and logistics costs by increasing wind turbine prices, while some individual projects are struggling financially.

Offshore wind's "toughest year, especially on cash" will be 2023, GE Power CEO Scott Strazik told investors March 9.

Those costs have trickled down to project developers, forcing Portugal's EDP Renováveis SA to renegotiate power purchase agreements (PPAs) and Iberdrola SA subsidiary Avangrid Inc. to ask Massachusetts regulators to terminate contracts associated with its 1,232-MW Commonwealth Offshore Wind Project.

Eversource Energy, meanwhile, is hoping to find a buyer for all or part of its company's 50% stake in a joint venture with Denmark-headquartered Ørsted A/S, which includes three contracted projects with a total capacity of 1,758 MW. Orsted itself wrote down the value of its stake in one of those projects, the Sunrise Wind Offshore Farm in New York, by 2.5 billion Danish kroner in the face of cost inflation and rapidly rising interest rates.

Exposure to wholesale power price volatility through merchant transactions is increasing for wind and solar, Fitch said.

"Reliance on merchant revenue is a growing trend among renewable projects as PPA terms, particularly those with corporate counterparties, shorten and the expiration of subsidies nears," the report said. "With PPA terms generally shrinking, we expect to see more projects financed with debt repayment, beyond the contracted period, introducing potentially substantial merchant risk."

Still, investment-grade projects usually have built-in mitigating mechanisms like "reduced debt service during the merchant tail, flexible amortization, merchant reserves, cash traps, increased lock-up covenants and mandatory cash sweeps," according to Fitch, with cash sweeps allowing the borrower to prepay loans using excess cash and cash traps funneling extra cash into a blocked account if the borrower does not meet debt covenants.

Canadian renewable energy developer Boralex Inc. in December 2022 agreed to acquire EDF Renewables Inc.'s 50% stake in five wind farms serving the Electric Reliability Council of Texas Inc. and Southwest Power Pool. Executives said at the time that owning merchant power facilities like the Hereford Wind Farm I and Milo Wind Project installations could act as a hedge against inflation.

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