Enlight eyes merchant renewables

PFI Yearbook
11 min read
EMEA

Enlight Renewable Energy is progressing the financing of a number of merchant deals and has recently completed hedges in Spain and Sweden. Rising natural gas prices have driven up European electricity costs, with merchant exposure proving a boon for some. By Jordan Bintcliffe.

A number of European countries have seen electricity spot prices soar this year, providing a favourable price environment for generators with merchant exposure. Forward prices for coming years are also raised, with S&P Global Platts Analytics’ recent five-year forecast putting average European prices at €100/MWh in 2022 before dropping to €80/MWh in 2023 and 2024.

The rise in forward prices is enabling investors to lock in some of the price increases through hedge agreements. Israeli investor Enlight Renewable Energy in recent months put short-term hedges in place on two of its merchant wind projects – the 312MW Gecama plant in Spain and the 113MW Malarberget plant in Sweden.

The deals raised Enlight’s revenues from the projects by more than €8m through to the end of the hedging period. And it is looking to finance a number of other merchant deals both in Europe and the US. Although auctions have provided a route to market for many renewable energy projects in the past, increasing appetite for merchant exposure is opening new doors for investors.

“In principle, we are less interested in auctions where there are very low prices and bidders secure a floor for returns,” said Zafrir Yoeli, SVP of business development and co-founder of Enlight Renewable Energy. “We would rather focus on leveraging Enlight’s development capabilities to promote development projects and more merchant exposure, and utilising it like we did in our projects in Spain and Sweden, rather than getting a floor in an auction and fixing your returns at low levels.”

The company prefers to develop a blend of power purchase agreement (PPA) backed revenues along with merchant sales when opportunities arise.

“We prefer to create a mixture, for example in the US we have projects with long-term PPAs which are also good as they provide a good basis,” Yoeli said. “But we also look for further merchant exposure in a good liquid merchant market because it provides a very good upside for those that can finance under those terms as we have done in Spain and the Nordics.”

Recent months have seen Enlight put a number of hedge deals in place, including for the 329MW Gecama wind project in Spain and the 113MW Malarberget wind project in Sweden. Gecama was debt-financed last summer on a fully merchant basis, with lenders Sabadell and Bankia providing non-recourse senior debt for 50% of the €320m cost. The project is expected to be operational in the second quarter.

Enlight is hedging around 36% of the project’s production from October 2022 to the end of 2023. The hedge was completed at a weighted average price of €76.90/MWh and uses a contract-for-difference (CfD) structure where if market prices fall below the €76.90/MWh, the hedging provider will pay the project company the difference. If prices rise above that level, Enlight will pay the hedging provider the difference. It will increase the company’s revenues, during the hedging period, by about €4.11m compared with previous estimates.

Enlight in September hedged 31% of Malarberget’s output, fixing prices at a weighted average of €63/MWh until the end of 2022. The deal increases Enlight’s revenues from the project by €4m through to the end of the hedged period. Sweden’s future price is around €40–€45/MWh for 2022.

Despite the focus on merchant deals the company has also had success in recent solar/storage auctions in Israel, where the sponsor picked up approximately 300MWdc of photovoltaic (PV) capacity coupled with 520MWh of storage. The company intends to project-finance the plants, is talking to Israeli lenders, banks and institutions, and is in the process of selecting financing partners, Yoeli said.

The capacity is split across two projects requiring total capex of US$350m. Enlight is the majority owner and is aiming for around 75% to 80% gearing on those plants. Some of the projects have minority equity participation from local communities.

“We’re now engaging with suppliers and getting ready to deploy those projects,” Yoeli said. “So this is pretty massive storage capacity we will be deploying over the next year and a half.”

The Israeli state will provide a long-term PPA accounting for the project’s generation, usually around 23 years from the plants’ commercial operations beginning. Government-owned Israel Electricity Corporation is the PPA counterparty. The tariff is linked to Israeli CPI and is valid for 23 years from commercial operation of each facility.

Enlight has 160MW of capacity operating in Israel along with a further 670MW in or close to construction. Another 1.27GW is under development. Among the projects the company has under construction are the US$390m Genesis wind plant with a total capacity of 189MW, and the US$220m Emek Habacha wind project totalling 109MW, which is undergoing testing and commissioning. Both are located in the Golan Heights.

Enlight is looking to add storage to projects in other markets too. “In Europe, Spain and Italy we are constantly looking at combining storage in our development and wherever it makes sense we will do that,” Yoeli said. “Long-term we will see storage being introduced to these projects as well.

“Plus we’re also making improvements and efficiencies in our projects, for example in Spain you have the ability to go hybrid and combine wind and PV over the same grid connection, which we intend to do as we have wind and solar projects in the same locations. This adds a lot of efficiency to the portfolio.”

Enlight this year expanded into the US with the purchase of a 90% stake in Idaho-based solar and storage developer Clenera in a deal that valued it at up to US$433m. Clenera has a portfolio of 12GW of solar and 5.5GWh of energy storage in 20 states. The company has a total 1.6GW of utility-scale solar developed or in construction. Clenera’s founders, Jason Ellsworth and Adam Pishl, have retained a 10% interest.

Construction will begin soon on an initial 350MW from Clenera’s pipeline with a debt package to be put in place later. The projects comprise the 88MW Babacomari North project in Arizona, the 92MW Apex Solar project in Montana, and the 120MW Coggen project. Coggen will cost US$125m in total and is expected to begin construction shortly.

The three plants will be financed with around 40% debt and 30% equity from Enlight. A tax equity partner will provide the remaining 30% in a mezzanine-type structure, benefiting from the tax shield of the investment and receiving a portion of the cashflow, Yoeli said.

Clenera’s Apex project in Montana began construction on November 30, according to Yoeli, and will require total investment of US$105m to US$115m. Enlight has started it on-balance sheet but is now working to arrange a financing package. That is expected to take place in the next quarter or so, he said.

The sponsor is managing a process to pick a tax equity partner and is talking to potential partners, Yoeli said. The project is backed by a 20-year PPA but beyond that, for the remaining life of the project, will sell its production on the merchant market for a further 15 years or so, he said.

Clenera has a number of PPAs signed and ready to be executed. “The advanced portfolio is mostly PPA-backed,” Yoeli said. “But moving further into the portfolio there may be deals that are not necessarily fully PPA-backed or enjoy further revenue streams, such as capacity payments for storage.”

Since September, the company has entered a 150MW PPA with Michigan’s Wolverine Power Cooperative covering the output of Clenera’s Gemstone solar project. It also signed a PPA with Arizona utility Salt River Project for 400MW of solar power, and with Hoosier Energy for the output of the 120MW Rustic Hills Solar Facility in Indiana. All three PPAs have 20-year terms.

Enlight’s operations in Spain have seen it agree in August to acquire 490MW of development-stage PV for €49m from an affiliate of investment fund Cerberus Capital Management. Enlight is looking to finance the capacity on a fully merchant basis. When structuring the Cerberus portfolio, Enlight intends to take merchant exposure as it “provides a lot of upside” and the company will apply hedges “as we see fit”, Yoeli said.

“Combining merchant with hedges is proving itself and the financiers are also acknowledging this,” Yoeli said. “It’s not only the spot that is rising but also the forward. The forward is a direct way to get the hedges and that’s what we did with Malarbarget.”

Projects in the Cerberus portfolio are expected to start reaching ready-to-build status and hitting financial close towards the end of 2022. “We see financial institutions and banks being able to finance more on a merchant basis,” Yoeli said. “It’s not just banks but also institutions. It’s becoming more and more available and sophisticated.”

Enlight’s 490MW portfolio includes 10 projects in Andalusia and Valencia in various stages of development. Renovalia Energy Group is developing the projects, which are held through special purpose vehicles that have most of the rights to the land for construction and approvals to connect to the grid.

Founded in 2008, Enlight Renewable Energy is listed on the Tel Aviv Stock Exchange and is part of the Tel-Aviv-125 index. Around 97% of the company’s shares are publicly traded, with institutional investors accounting for around 43% of the overall structure.

The company has operations in Israel and Europe. Enlight’s portfolio comprises 2GW of operating capacity as well as 2.8GW of generation capacity and 500MWh of storage capacity in construction and pre-construction. The company’s total pipeline is around 14.8GW of generation capacity and 6.9GWh of storage.

It is active in a number of Eastern European countries including Bosnia, Serbia, Hungary and Croatia. The company’s 105MW Selac wind plant in Kosovo is undergoing commissioning. It was financed in December 2019 with a €115m non-recourse project financing. The debt covers the construction period plus 11 years from its commercial operation date.

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