Solar Companies Forced To Borrow To Finance Growth

By Alex Kimani - Jul 21, 2024, 

Solar companies raised $12.2 billion across 50 debt financing deals in the first six months of 2024.

Solar IPOs have recorded the biggest decline, with public market financing raising just $1.7 billion across eight deals in the first half of 2024.

The renewable energy sector tends to be highly sensitive to interest rates because clean energy developers usually borrow lots of capital upfront to build projects.



Solar companies recorded the highest amount in debt financing in a decade during the first half of 2024, Mercom Capital Group has reported.

Solar companies raised $12.2 billion across 50 debt financing deals in the period, marking a 53% increase from the $8 billion raised in 33 deals during the first six months of 2023.

According to Raj Prabhu, CEO of Mercom, solar companies are increasingly being forced to borrow to finance growth while investors sit out due to several industry headwinds including high interest rates, a renewed push for tariffs on Chinese imports, and the upcoming U.S. presidential election.

“Financing activity in the solar sector remains restrained despite tailwinds from the Inflation Reduction Act and favorable global policies,” Raj Prabhu said.

The Mercom report shows that total corporate funding in the solar sector clocked in at $16.6 billion in the first half of 2024 (excluding China), good for a 10% Y/Y decline in the first half of 2023. Total funding includes debt financing, venture capital/private equity funding and public market (IPOs). U.S. companies accounted for $8.6 billion, or nearly half, of total funding, including $6 billion in new debt financing. The number of deals increased 9% year on year to 87; however, the size of the deals was considerably smaller than the industry has seen in the recent past, while the pace of mergers and project acquisitions has slowed.

VC funding activity decreased 29% y/y with $2.7 billion raised in 29 deals. There were 40 solar M&A transactions in the first half of the current year, down from 48 in the same period of 2023 while project acquisitions dropped to 18.5 GW from 25.5 GW. The largest M&A deal in the space involved Canada’s Brookfield Asset Management acquiring a majority stake in French renewable company Neoen for over $6.5 billion

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However, solar IPOs have recorded the biggest decline, with public market financing raising just $1.7 billion across eight deals in the first half of 2024, down 75% from $6.7 billion across 14 deals in the first half of 2023. A big reason why few private solar companies are seeking to go public at this time is due to the poor performance of solar stocks. The sector’s favorite benchmark, Invesco Solar ETF (NYSEARCA:TAN), is down -22.1% in the year-to-date and -42.8% over the past 12 months.



Source: Mercom Capital Group

Interest Rate Cuts



Source: Y-Charts

The renewable energy sector tends to be highly sensitive to interest rates because clean energy developers usually borrow lots of capital upfront to build projects. Further, the cost of electricity generated from renewable energy tends to be impacted more negatively by rising interest rates compared to electricity generated from oil and gas. Indeed, a 5% rise in interest rates increases the levelized cost of electricity (LCOE) from wind and solar by a third but only marginally for natural gas plants.

Thankfully, U.S. inflation has been cooling, with June inflation clocking in at 2.97%, a 12-month low. And now Federal Reserve officials have signaled they are"closer" to cutting interest rates given inflation's improved trajectory and a labor market in better balance. Fed Governor Christopher Waller has listed September through December as the potential time frame when conditions for a rate cut could be right. Traders are now betting that the Fed will cut borrowing costs in November and December, bringing the benchmark policy rate to the 4.50%-4.75% range by the end of 2024.

Other than falling interest rates, the solar sector is riding another powerful secular trend: falling costs. Last year, a report by Ernst & Young (EY) showed that solar remains the cheapest source of new-build electricity despite high inflationary pressures. According to the EY report, the global weighted average levelized cost of electricity (LCOE) for solar PV is now 29% lower than the cheapest fossil fuel alternative. Solar LCOE has declined rapidly from more than $400/MWh in the early 2010s to about $49/MWh in 2022, a huge 88% decline. Wind power LCOE has fallen roughly 60% over the same period.

Last year, the International Energy Association predicted that the solar sector would attract more capital than oil and gas:

‘‘There’s a growing gap between the investment in fossil energy and investment [in] clean energy. Clean energy is moving fast--faster than many people realize. This is clear in the investment trends, where clean technologies are pulling away from fossil fuels. For every dollar invested in fossil fuels, about 1.7 dollars are now going into clean energy,” the IEA’s executive director Faith Birol said.

By Alex Kimani for Oilprice.com