News Analysis: Bursting the US developer bubble | Inframation News NEWS ANALYSIS: BURSTING THE US DEVELOPER BUBBLE 11 November 2021 | 21:58 GMT Amid a barrage of sale processes for solar and storage developers in recent months, some investors are privately concerned about sellers’ ability to realize the ambitious pipelines they are marketing. Onofrio Castiglia reports USA & Canada Sector: Energy Power Renewables Geography: USA France Sweden United Kingdom China Published: 11 November 2021 Author: Onofrio Castiglia and Kyle Younker SparkSpread P&E SparkSpread Renewables Print article https://www.inframationnews.com/analysis/9481481/news-analysis-bursting-the-us-developer-bubble.thtml[11/15/2021 2:03:43 PM] Submit/Feedback Advanced search.... News Analysis: Bursting the US developer bubble | Inframation News The market for US renewables developers is hot – some say too hot. As many as 10 US-focused developers are currently for sale, spurred on by sky-high valuations and seeking to capitalize on a hungry field of infrastructure and energy investors. But some market participants are increasingly skeptical of renewable development timelines due to supply chain problems and the prospect of higher input prices. Since September, according to SparkSpread reporting, the list of forsale signs has grown to encompass large solar and storage developers Pine Gate Renewables and Southern Current, in addition to Savion, a process that launched over the summer. Relatively smaller solar developers like Summit Ridge, OneEnergy and NARENCO have also hit the block along with BlueWave Solar. And energy storage developer esVolta launched a process, trailing still-to-close auctions from Broad Reach Power and Glidepath. Taken together, the developers for sale are marketing 77.2 GW of goforward project pipelines going out between three and five years. For comparison, the entire US brought on 10.5 GW of utility-scale solar power in 2020, and the Energy Information Administration forecasts an additional 15.7 GW in 2021 and 18.2 GW for 2022. Those ambitious pipelines could be thwarted or delayed due to https://www.inframationnews.com/analysis/9481481/news-analysis-bursting-the-us-developer-bubble.thtml[11/15/2021 2:03:43 PM] News Analysis: Bursting the US developer bubble | Inframation News percolating supply chain problems and construction cost inflation, experts say – a dynamic that would have a knock-on effect of crimping valuations and returns. “There are so many things that can go wrong in some of these platforms,” said one longtime renewables investor, noting that it’s especially true for platforms with a large size discrepancy between what they have built and what their pipelines propose. “I don’t think anything is being built in the next 24 to 36 months unless you’ve got equipment nailed down.” Still, the sheer number of developers for sale coincides with an infrastructure and energy fund market that is breaking fundraising caps and eager to put dry powder to work in the US energy transition, pushing up valuations for renewable developer platforms. One US-focused developer, Origis Energy, sold a 20% stake to Global Atlantic for USD 38m in 2018, according to Infralogic, implying a USD 190m valuation back then. But the company recently sold a majority stake to Antin Infrastructure at a valuation in excess of USD 1bn, according to two sources familiar with the matter. Getting what you want Despite the investor frenzy, not all developers have gotten what they want. “I find it difficult to believe that all of these processes will find buyers,” said one industry banker, who noted that, while investors want exposure to US renewables, most are still behaving rationally. “Some people will walk at these valuations.” Apex Clean Energy, for example, launched a process earlier this year seeking a minority investment. But the transaction was ultimately revamped, and Apex – which has a 30 GW pipeline and is considered best in class – brought in Ares Management as a majority investor in a deal announced in October. And Cypress Creek investors HPS Investment Partners and Temasek in 2020 exchanged a substantial portion of their mezzanine investments for common equity before the developer eventually sold this year to EQT Partners. Now, with global supply chain and shipping blockages wreaking havoc on multiple facets of the US economy, including renewables https://www.inframationnews.com/analysis/9481481/news-analysis-bursting-the-us-developer-bubble.thtml[11/15/2021 2:03:43 PM] News Analysis: Bursting the US developer bubble | Inframation News development, some developers simply are not going to be able to execute on their pipelines as advertised, sources said. Engie North America recently backed out of a planned 240 MW solar plus storage project with Hawaiian Electric Co. over cost concerns, while behind the scenes at least one bidder has dropped out of the process for 8minute Solar’s Nevada solar plus storage portfolio because of panel-sourcing concerns, according to a source familiar with that process. Building value Valuing a developer usually comes down to accounting for operational projects, management teams, land positions, O&M and asset management, and other faculties, multiple sources said. But valuation methods break down for go-forward pipelines, for which there is no standard measure, and which is further complicated by the overlay of macroeconomic uncertainty. “It’s hard to think about what you’re valuing,” one banker said. “Are you valuing the existing portfolio? Are you evaluating the pipeline in terms of how much of it is ready to build, might get built, might be harder to get built? There’s not a traditional metric for that.” Meanwhile, signed offtake agreements are typically a benefit when selling an asset. But they lock a developer into a particular revenue picture, which can potentially mean PPA renegotiation in an inflationary market. An investor who looked at Origis but ultimately decided not to pursue the opportunity said a large part of the reason was the 3 GW of signed PPAs the company had, which would normally be a selling point but became a sticking point amid inflating EPC and module pricing. “I looked at it more like a USD 200m liability rather than a benefit,” that investor said, addressing the burden of potentially having to renegotiate those agreements. Origis CEO Guy Vanderhaegen said in an interview that he is confident the company will be able to execute on its PPAs. He declined to comment on valuation. For some investors, the drama and associated reputational risk of renegotiating PPAs could prove too much risk, one banker said. But https://www.inframationnews.com/analysis/9481481/news-analysis-bursting-the-us-developer-bubble.thtml[11/15/2021 2:03:43 PM] News Analysis: Bursting the US developer bubble | Inframation News a buyer with more efficient financing and lower cost of capital than previous owners might see a pathway to getting those PPAs to work and use that as an advantage when pricing their bid. Locked in More than ever, potential buyers should be focused on having a thorough understanding of how a potential target will source its materials, especially if the project pipeline is a large part of the value calculus, sources noted. And if a seller does not have supply chain nailed down, those projects are going to take longer and cost more than perhaps some buyers are pricing into their bids. "If you bring a pipeline of development opportunities to the market, the thing people are thinking about right now is, how much of that is locked in and how much of that is still at risk?” the first banker said. “The at-risk portion is hard to have an answer – is the supply chain going to get rectified soon? Is it going to continue for a while? And where do costs ultimately end up? I don’t think anyone has an answer for these questions.” Still, with the prospect of new tax incentives for solar in the form of the production tax credit, there’s more value to these platforms today than there was historically. But market participants are still riskweighting PTC for solar, since it’s not yet signed into law. “The prospect of solar PTC is a game changer for folks that are in high solar radiance areas, the West and Southwest in particular,” the banker said. Some sellers are justifying valuations by insisting input costs are going to go back down, but there’s no guarantee that will happen, the investor said. One CEO speaking on the background – because his company is amid a sale – said investors must be able to tell the difference between mature developers that can overcome pipeline challenges and smaller companies that may have bitten off more than they can chew. “If they don’t have a track record completing large projects but are marketing a pipeline that includes large projects, definitely that deserves scrutiny,” the CEO said. “I think that’s obvious.” https://www.inframationnews.com/analysis/9481481/news-analysis-bursting-the-us-developer-bubble.thtml[11/15/2021 2:03:43 PM] News Analysis: Bursting the US developer bubble | Inframation News Deal Profile Apex Clean Energy Majority Stake Sale (2021) USA Renewables Portfolio M&A CohnReznick Capital, Lazard Orrick Herrington & Sutcliffe Nomura Greentech Kirkland & Ellis Seller Financial Advisor Seller Legal Advisor Acquirer Financial Advisor Acquirer Legal Advisor Cypress Creek Renewables Sale (2021) USA Renewables Solar PV M&A Morgan Stanley Kirkland & Ellis Barclays Simpson Thacher & Bartlett Seller Financial Advisor Seller Legal Advisor Acquirer Financial Advisor Acquirer Legal Advisor Investor Profile Antin Infrastructure Partners GP FRANCE Unlisted EQT Partners GP SWEDEN Unlisted Ares Management GP USA ENGIE OTHER FRANCE Other HPS Mezzanine Partners 2019 FUND USA Unlisted Closed-ended Equity fund Debt fund Temasek Holdings INSTITUTIONAL SINGAPORE Sovereign Wealth Fund Advisor Profile Goldman Sachs USA Financial Deal count: 310 Morgan Stanley USA Financial Deal count: 277 Canadian Imperial Bank of Commerce (CIBC) https://www.inframationnews.com/analysis/9481481/news-analysis-bursting-the-us-developer-bubble.thtml[11/15/2021 2:03:43 PM] News Analysis: Bursting the US developer bubble | Inframation News CANADA Financial Deal count: 73 Financial Deal count: 100 Scotiabank CANADA Lazard UNITED KINGDOM Financial Deal count: 194 Guggenheim USA Financial Deal count: 34 Marathon Capital USA Financial Deal count: 75 Related Content Pine Gate Renewables launches platform sale 21 October 2021 Solar and storage developer Southern Current in platform sale 22 October 2021 Solar and storage developer launches sale 15 September 2021 Battery developer hires advisor for sale process 25 October 2021 Virginia solar developer reviewing sale options 29 October 2021 Seattle developer pursuing full company sale 1 November 2021 US developer pursuing sale of solar wing 2 November 2021 Savion to take refreshed bids before final round 21 October 2021 Origis to pursue split greenfield-brownfield strategy post-sale 8 November 2021 Apollo secures exclusivity with Broad Reach Power 8 October 2021 Quinbrook kicks off sale of GlidePath 23 April 2021 Trending News for USA & Canada Stonepeak hires former Macquarie Capital co-head to launch core strategy 10 November 2021 Macquarie in second close of global infra fund 9 November 2021 JPMorgan resigns as Talen revolver agent 10 November 2021 Blackstone acquires majority stake in Carrix 12 November 2021 EDPR NA chief executive and EVP departing firm 10 November 2021 https://www.inframationnews.com/analysis/9481481/news-analysis-bursting-the-us-developer-bubble.thtml[11/15/2021 2:03:43 PM] News Analysis: Bursting the US developer bubble | Inframation News EMEA London Helpline: +44 (0)20 3741 1259 AMERICAS New York Helpline: +1 646 412 5333 AUSTRALASIA Sydney Helpline: +61 2 9513 2649 ASIA-PACIFIC Hong Kong Helpline: +852 2158 9790 Terms & Conditions Privacy Policy Terms of Use © 2021 Acuris Group. 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