“Renewable projects are not insulated from geopolitical shocks during the development phase, even if operational assets are less exposed.”
As a result: renewable projects are not insulated from geopolitical shocks during the development phase, even if operational assets are less exposed.
What this means for project finance
Technology selection as a bankability factor
Historically, equipment selection has been driven primarily by technical and commercial considerations.
That position is changing. For projects seeking EU-linked financing:
the use of certain suppliers may affect financing availability;
lender appetite may vary depending on supply chain exposure; and
financing terms may be influenced by perceived policy or geopolitical risk.
This introduces a new dynamic at development stage, particularly where procurement decisions are taken ahead of financing.
Cost, timing and execution risk
The interaction between policy constraints and geopolitical disruption is likely to result in:
upward pressure on CAPEX, driven by commodity and logistics costs;
reduced flexibility in procurement, where certain suppliers are effectively excluded; and
increased risk of delay where substitution, redesign or re-certification are required.
This is particularly relevant for more complex projects, including offshore wind, and hybrid solar and storage assets, where systems are closely integrated.
From a project finance perspective, these pressures translate into:
heightened completion risk;
greater sensitivity to programme delays; and
potential exposure under subsidy or offtake regimes.
A changing approach from lenders
Lenders are beginning to respond to these developments, with a greater focus on supply chain risk.
In practice, this is likely to include:
enhanced due diligence on equipment origin and supply chain resilience;
conditions precedent linked to compliance with applicable policy frameworks;
increased use of approved supplier lists; and
closer scrutiny of procurement strategy as part of credit analysis.
Over time, this may lead to a closer alignment between technical design and financing requirements at an earlier stage in the project lifecycle.
Contractual considerations
These developments also raise a number of issues across project documentation.
Construction contractual arrangements
Renewable energy projects across Europe typically structure their construction arrangements either through a full wrap turnkey EPC contract, or – more typically – through a multi-contracted structure including two (or often many more, in case of offshore wind) contractors who hold responsibility for certain parts of the delivery of the construction arrangements.
Where procurement strategies evolve, or equipment selection changes are required (whether due to financing constraints or supply disruption) key questions include:
the management of potential delays to project timeline that will be created by either the need to:
• retender for key project components; or
• terminate supply chain participants and replace them with other contractors,
(both of which are inevitably lengthy and complex processes);
the impact of revised procurement strategies on interface arrangements for construction contractors, and the overall structure of the project delivery consortium;
the extent to which existing contractual arrangements appropriately manage and apportion risk in times of uncertainty, e.g. force majeure relief, specific ‘Iran War’ relief, change in law relief, and wider delay relief; and
the flexibility of existing termination provisions, and whether sponsors can exit or restructure contracts to facilitate retender contracts.
Other considerations include:
in a multi-contracted structure, whether substitution of parts within the supply chain will create gaps in the project design assumptions, potentially undermining other contractor performance guarantees in relation to the delivery of their scope;
the degree to which contractors are insulated from pricing and commodity volatility, and the overall impact of this on project price;
how major solar and BESS projects seeking EU funding can deliver projects affordably given the reliance of these projects on the globalised supply chain from certain jurisdictions (e.g. China); and
whether sponsors will start requiring even stricter obligations on their EPC contractors and wider supply chain to mitigate potential loss of access to EU funds.
Financing and M&A
Technology origin is also becoming a more prominent diligence issue in financing and transactional contexts.
Key considerations include:
whether projects remain financeable under current or anticipated policy frameworks;
the extent of reliance on suppliers that may be subject to restriction; and
the potential impact of delay, substitution or cost increases on project economics.
In financing structures, this may lead to:
additional diligence requirements (including reporting and monitoring);
drawstop conditions linked to equipment origin; and
increased contingency or equity requirements in certain cases.