Reflections on the Sunraysia solar farm
The rise of renewable energy in Australia shows no sign of abating, with the financial closing of the Sunraysia solar farm project breaking new ground in this increasingly competitive market for developers and investors. By Rob White, partner and Lisa Koch, senior consultant, Norton Rose Fulbright Australia.
On October 8 2018, Maoneng Australia and John Laing announced that the 255MWp Sunraysia solar farm (the project) located in rural New South Wales had reached financial close.
This milestone, for then the largest single stage solar farm under construction in Australia, reflected a carefully choreographed completion for a simultaneous equity investment, land acquisition and debt close.
Aspects of the transaction and the journey to financial close reflect some of the key trends in the Australian renewables market in 2018, which continues its boom despite political and regulatory uncertainty.
Looking towards Australia
UK-based John Laing’s investment in the Sunraysia project was its first solar investment in Australia, and highlights the appeal of Australia as a renewables investment destination for global infrastructure and energy players.
Typical of the approach taken in other recent renewables deals in Australia, where the developer offers the market a significant equity interest in a “shovel ready” project, John Laing acquired 90.1% of the equity in the project from the Maoneng Group on the day of financial close.
John Laing was selected by Maoneng following two rounds of bidding, after the shortlisted bidders in the first round failed to satisfy Maoneng’s requirements for a project partner.
Despite the project financing following a traditional non-recourse structure, two rounds of equity bidding conducted in parallel with the project financing negotiations showed the impact of the identity of the sponsors on the bankability of the transaction. Lenders took a level of comfort from the investment in the project by John Laing, an internationally experienced and successful sponsor.
The diverse lender group itself reflected the interest of the international financing community in Australian renewables projects. This is not surprising as the slowdown of renewables projects in Europe and other historically strong global markets is in stark contrast to the boom in Australia.
Unlike many of the renewables deals to reach financial close in recent years in Australia, which more often than not have been exclusively or partly financed by the government-backed Clean Energy Finance Corporation, particularly where there is a significant element of merchant risk, the project’s debt was sourced entirely from commercial banks.
The syndicate comprised Nord L/B, Bank of China, Mizuho, ING and National Australia Bank. The tenor of the debt, at five years, reflected the short-term tenor that is typical of commercial project finance in the Australian market.
Currency and interest rate hedging was provided by a subset of the lender syndicate, who were initially selected by Maoneng on an n-2 basis.
One of the distinct challenges for the project in reaching financial close was that the allocation of debt and hedging among the lenders was only settled in the weeks just prior to financial close.
This meant that key commercial issues, such as currency hedging capacity for the US dollar portion of project costs, and legal issues, such as potentially bringing on board third-party agency providers, were not fully addressed until almost the last minute.
The Maoneng Group used proceeds from its divestment to John Laing to fund its portion of the equity, and to acquire ownership of the project site from the third parties who had previously granted Maoneng an option over the site.
The parallel closing of the equity, land acquisition and debt transactions required a carefully orchestrated closing day to provide lenders with certainty that equity contributions to the project were available in a secured account and that the ownership of the project site had been acquired from the third-party landowners, before hedges were placed and financial close could occur.
The bankable corporate PPA
The project was underpinned by two world-class power purchase agreements (PPAs), one with the University of New South Wales (UNSW) for 25% of the project’s generation, and the other with “gentailer” AGL, for 50%. Both PPAs have a tenor of 15 years.
The UNSW PPA was the first deal of its kind in Australia, with UNSW contracting with the developer, and separately with a retailer to firm its supply, for its total expected energy requirements to ultimately achieve its goal of becoming carbon-neutral in its energy use by 2020.
The project was awarded the bundled, supply-linked PPA with UNSW as part of a competitive process run by UNSW in late 2017. As part of that process, UNSW required additional security from the project, which meant lenders came into the deal prepared to negotiate a priority agreement with UNSW.
Financial close took place against the backdrop of a tightening timeline to start construction to achieve the delivery obligations under the PPA with UNSW.
The PPA with UNSW put to rest any doubt in the Australian market that a corporate PPA can be a bankable revenue stream for a project and has paved the way for other Australian universities, including the University of Melbourne and the University of Technology Sydney, to strike their own PPA deals.
The project’s PPA with AGL forms part of a PPA portfolio the Maoneng group has entered into to supply up to 800,000MWh of renewable energy per year to AGL. The AGL PPA makes a significant contribution to AGL’s plan to transition towards renewable power generation, a particularly hot topic for the company in light of the planned closure of its Liddell coal-fired power station.
In their due diligence and approach to structuring, one of the lenders’ key focus areas was the project’s contractor, Decmil. The EPC contract for the project is Decmil’s largest undertaking in the renewables sector.
With fresh lessons from the collapse of UK-construction giant Carillion, and now, with hindsight, the appointment in November 2018 of administrators to Australian engineering contractor and renewables specialist RCR Tomlinson, lenders sought direct contractual protections from the project’s key subcontractors and suppliers.
A number of parallel negotiations took place with shortlisted sub-contractor counterparties, with the final selection of some of the subcontractors taking place in the days leading up to financial close. It remains to be seen whether this approach will start a trend in the market, as lenders actively seek to deal with potential Armageddon scenarios with contractors in the upfront financing negotiations.
It could be said that a solar farm by its very nature ticks the “sustainability” box and contributes to the next generation. However, a couple of features of the project reflect that the partnerships created in this kind of transaction can go further than the contracts to provide novel models for sustainable education and environmental protection.
The project’s connection with tertiary education is a clear example, and the partnership between the project and UNSW provides an obvious opportunity to develop the next generation. The project has established three annual scholarships for 10 years for students from a local rural school, the Balranald Central School, to attend tertiary institutions.
One scholarship each year, worth A$10,000, is included in the UNSW PPA for students from the school to attend UNSW. The sponsors and UNSW are also using the project as a platform to encourage learning and development associated with renewable projects and technologies.
The project will include a visitor’s centre and weather monitoring system, with UNSW staff and students having site visit access for data-sharing, research and case study purposes. UNSW will also have opportunities each year to present to the school both onsite and via webinar on renewables technology and industry.
Another example is the approach the project has taken to its biodiversity offset obligations. The project’s development approval requires it to offset the impacts of the development on biodiversity.
Rather than simply making payments into a biodiversity offset fund or acquiring credits from the market, the project’s landowner, an entity in the Maoneng Group, has applied for biodiversity credits to be created on a portion of the project site.
This recognises the high conservation value of that portion of the site, which will be permanently set aside from the impacts of any construction and actively managed by the landowner. The credits created may be in excess of the project’s legal offset requirements, allowing the credits to be sold into the market.
In anticipation that the current technical, commercial and regulatory risks of large-scale battery storage will be addressed, and that dispatchable capacity will become increasingly important as renewables make up a greater proportion of Australia’s power generation, the project’s documentation provides flexibility for the development by the Maoneng group of a battery storage facility on a site adjacent to the project. Both the UNSW and AGL PPAs incorporate options for the offtakers to participate in the battery project.
The lenders’ approach to the battery facility was aligned to the typical lender approach to a potential project expansion while financing the construction of phase one – come and speak to us when you are ready.
If and when the Maoneng group decides to pursue this storage solution, it will need to implement arrangements with, among others, TransGrid – the manager and operator of the high voltage electricity transmission network in New South Wales and counterparty to connection contracts with the project – and the project lenders to deal with issues such as interfaces and the use of shared infrastructure.
Dealing with uncertainty
The project reached financial close at a time of significant regulatory and political uncertainty in Australia, with the market waiting for the Federal Government to provide clarity around its proposed national energy policy, the National Energy Guarantee.
Although that policy was ultimately abandoned following the change of Prime Minister in August 2018, renewable energy targets at a state level and declining costs have continued to bolster the market, with the project exemplifying the latest wave of transactions.
However, a number of factors are impacting the Australian renewables market, in particular grid capacity constraints resulting in a higher risk of curtailment, and the risk of a decrease in marginal loss factors.
While, for the project, the lenders’ approach to modelling these scenarios was one of conservative optimism, the lack of clarity around the future regulatory environment and the financial impact of electricity grid congestion may result in a more cautious debt and equity market going forward. In theory, this may make it harder for proposed projects currently preparing for development to obtain finance.
On the other side of the coin, however, is the focus on sustainability, increasingly on the agenda for large organisations.
For corporates, universities and governments, there are obvious benefits in capturing the green credentials of a renewables project by purchasing its green products, in addition to the benefits of putting in place a price hedge for energy consumption costs. This is evident in the growing corporate PPA market, and the trend is likely to underpin ongoing investment into the renewables sector.
At the end of 2018, the Australian renewables market shows no signs of slowing down.