Part 1 of the Energy Customer Investment-Grade Credit Support Blog Series

Clean energy projects are one of the most impactful tools that corporate energy customers have to meet their sustainability goals and the Power Purchase Agreement (PPA) remains the most popular offsite deal structure. Energy customer creditworthiness plays a critical role in enabling these deals, but the market’s high credit requirements are shutting out most U.S. companies and stalling decarbonization.

Why is sufficient credit so out of reach, and how do we fix that?
By signing a PPA, large energy customers, or offtakers, provide guaranteed revenues to an energy project, which enables developers to secure project financing. Project financiers need assurance that their investments will be repaid and typically require that the offtaker have investment grade credit. This serves as an indicator of the offtaker’s ability to continue paying their bills and provide project revenues.
According to CEBA’s Deal Tracker, 89% of the offtakers for PPAs in 2022 had investment-grade credit. Unfortunately, according to Energetic Capital, of the nearly 80,000 companies tracked by S&P, less than 5% are investment-grade. As more companies begin to set sustainability goals and require their supply chain partners procure clean energy, there is a growing demand for market access from non-investment grade companies.

The primary reasons that a company may lack investment-grade credit could fall into one of the following categories:

• Public Rating Requirements: Credit Ratings are primarily used to determine whether a company issuing a bond or other financial instrument is likely to meet its obligations. To demonstrate likelihood of future success, companies submit multiple years’ worth of audited financial statements to a rating agency like S&P, Moody’s, or Fitch. The cost can range from a few hundred thousand dollars to millions. Most U.S. companies do not issue bonds and do not need a public credit rating for their core business activities, so getting rated solely to transact in the clean energy space would result in a significant increase to the PPA’s per MWh price. In most cases, companies may judge that it is not a pragmatic use of resources.
• Company Relationship to Parent: Subsidiary companies may not have robust enough records of financial success to qualify for their own credit rating. In some cases, their parent company may provide a parent guarantee, but it is often the case that they do not want to be held liable for a subsidiary, especially if they are not the sole owner of the brand.
• Company sector: Credit ratings are partially determined by an analysis of sector health and industry-wide risk, meaning that companies in volatile sectors (like commodity manufacturing) may be plagued by sub-investment grade credit regardless of individual business performance.
• Demonstrated reliability: Perhaps the hardest barrier to overcome, companies that cannot speak to their reliability may not be able to secure an investment grade rating. For example, companies that have previously defaulted on loans or have otherwise shown poor business performance are likely to be viewed as unreliable and therefore unable to receive an investment grade rating. This barrier also affects small and young companies, like startups, who often simply lack the financial track record to prove their reliability.

Building solutions to address these credit challenges requires collaboration between stakeholders across the deal chain – from customers and developers to tax equity companies and financiers. At the moment, these entities are largely siloed.

The Clean Energy Buyers Institute works to bring together key stakeholders along the project chain to expand credit access by scaling existing solutions- like credit insurance and surety bonds- and exploring new deal structures and products born out of cross-functional collaboration.

Is lack of credit support an issue you face? If so, our team is always looking to engage stakeholders who have experience with credit access barriers and/or thoughts on how to bridge them. If you or anyone at your company has a perspective on this issue you would like to share, please reach out to us at disc-e@cebi.org.

This is Part 1 of the Credit Support Blog Series. Stay tuned for an educational primer on this topic

Authored by Chandni Sinha Das, CEBA