Transmission projects have a spectrum of financing available to them, but risk aversion will limit that availability during the construction phase, said a banker at the Platts Transmission Planning & Development Forum on Sept. 12.
“Overall, relative to other assets, including generation, people are very uncomfortable financing against the construction of transmission,” Barclays director Chip Lewis said.
However, transmission projects are viewed as highly financeable after certain elements are in place, such as siting and an engineering, procurement and construction contract, he said.
For this reason, most of the projects in Texas’s Competitive Renewable Energy Zone are financed in the bank market, Lewis told this news service on the sidelines of the conference. However, once the projects exit the construction phase, bank financing likely will be taken out and replaced with more permanent financing through the capital markets.
“Typically the capital markets like financing projects in place, but the bank market allows you to draw down over time,” Lewis said. “With the bank market, you only carry the cost of what you fund so that difference really lends itself better to doing bank financing during construction.”
With billions of dollars projected to be invested in transmission with upgrades, sustainability and renewability projects, among others, it is unsure how developers will choose to finance their projects, he noted.
Financing sources for transmission projects range from the US Department of Energy to joint venture partnerships. “There’s a lot of optionality, which is helpful from the standpoint of a developer or utility looking to finance it,” he said.
Merchant lines pose more challenges, he said, but projects are financeable to the extent there is a contracted counterparty with good credit quality and a long offtake agreement.
Because transmission and cost-in-service in particular create a very stable cash flow stream, incremental leverage is available, Lewis said.
Partnering on transmission projects may provide access to capital, the banker noted. “Given the attractiveness of [transmission] assets from a stability of cash flow perspective, there are lots of opportunities” for investors interested in transmission, Lewis said.
Utilities may be interested in spinning out their transmission businesses, but may come up against opposition from local regulators reluctant to lose oversight of the assets, Lewis said.
With utilities separating out transmission financing on a separate basis, joint ventures, and independent developers financing projects on a standalone basis, there is “a lot of new transmission on the horizon,” he said.