More and more investment has flowed towards renewable energy projects in recent years. But following Russia’s invasion of Ukraine and the ensuing supply crisis, the desire to invest has accelerated greatly. Not only are the projects growing in size and number, the conditions surrounding the investments and their financing are also changing.

Lars Lüneborg is a partner in Horten, and has many years of experience with the conditions in the financing market. He notes that the key issue is who has the upper hand at present in the negotiations on how the investments will be financed.

"It has typically been lenders, in the form of banks, pension funds and large debt funds, who have had the best conditions for negotiating financing, such that their requirements are met. But renewable energy companies and their projects have become such good business that the bargaining dynamics are now very different. There are many more sources of finance ready to provide capital, and this gives companies better opportunities to find the lender that will offer them the most advantageous and flexible financing. The recipient companies are primarily interested in flexibility, a reasonable debt/equity ratio, the interest rate level and repayment profile, minimum interference in the business by the lender and limited requirements for resource-intensive reporting back to the lender."

Lower risk financing

The primary reasons that renewable energy projects have become a good business case are the fact that oil and gas prices soared as a result of the war in Ukraine, and the great determination throughout Europe to become independent of Russian energy supplies.

"While the background is not a happy one, it has boosted demand for investment and financing, and an unprecedented array of potential lenders. The largest banks and pension funds are now coming forward and are willing to lend large sums to developers of renewable energy projects. But this is not necessarily because lenders have suddenly become risk-tolerant enough to enter this particular market. Rather, the risk has decreased considerably as developers have become much more experienced, and renewable energy has become significantly more profitable," says Lars Lüneborg.

The trend towards renewable energy being a good business may have accelerated during 2022, but it has been underway for some time.

"In Denmark, in particular, we have been working with renewable energy for so many years that companies have reached a stage of maturity whereby they can point to quite a history of similar projects. In other words, they can better demonstrate that they have succeeded before, and have empirical data to back this up. This makes the issue of risk and due diligence less complex – and negotiations more precise and efficient. Lenders have also reached a stage of maturity where they are clear on what is central to them in contract negotiations, and what questions they need to ask to get the right information and identify the key case risks."

International complexity

The maturity stage of the Danish companies is evident by the fact that the they have become very good at doing business in a field that has been far from straightforward for many years.

"They have been enterprising and have accumulated expertise that makes them well equipped to build a good investment case around the projects. The fact that part of the loan proceeds often are to be used outside Denmark makes it more complex to negotiate, but also further broadens the horizon for us, as we adapt to the new reality in the financing market for renewable energy," says Lars Lüneborg. Before joining Horten, Lars worked with finance law at London law firms.

Next major leg up

Lars Lüneborg believes that the rising number and scale of investments paint a picture of a market for renewable energy that is poised to do even more soon.

"The renewable energy investment market appears to be moving in only one direction, and more and more money will be invested in ever larger projects over the next few years. With this trend, interesting new business areas will also emerge. Without knowing exactly when it will occur, there are many indications that the next major investment area will be in Carbon Capture and Storage. Many institutional investors are currently waiting for the technology and the framework conditions to be developed sufficiently to make it clearly profitable. Once this area reaches the right stage of maturity, we will see billions being invested in concrete Carbon Capture and Storage projects, for example on the North Sea seabed."


Lars Lüneborg