Welcome to Grid Brief! Here’s what we’re looking at today: bankers worry over financing renewables in US, weakened industry keeps gas prices low in Europe, China and Russia lead the world in nuclear energy, and more.

Wells Fargo: Financing Renewables Could Stress Banking Industry

According to banking executives who spoke at the American Council on Renewable Energy’s annual Finance Forum, tax credits provided by the Inflation Reduction Act (IRA) have improved the long-term economics of the renewable energy industry. But the news isn’t all good.

Rising interest rates and instability in the banking sector are causing concerns for project financing. While developers are diving into the renewables industry to benefit from IRA tax credits, the capital markets have yet to fully embrace the industry, shouldering banks with the majority of project debt.

“To finance those types of numbers, I think it’s going to stress the entire banking system, unless we start to bring in other investors like insurance companies and other bondholders into the mix,” said Alok Garg, head of renewables and asset finance at Wells Fargo.

Garg added that capital markets will play a crucial role in the future of the renewables industry. While investors want to finance the energy transition, the dominance of banks has made them skittish. The recent rise in interest rates and stressors faced by banks have caused a shift in project funding. Garg noted a lack of liquidity in the market, leading to increased pricing and difficulties for clients in finding capital.

Lastly, Garg stressed the transmission issue. If there aren’t enough power lines to carry the electricity from wind and solar projects, the nature of the investment changes. “Is there a worry that unless you have a true transmission build, that some of these markets become more of a tax play versus true cash play?” Garg said. “We’ve seen that in the past, where solar and wind generate just because they get the [production tax credits,] though prices get negative.”

“Alain Halimi, managing director of Japanese investment bank Nomura, said he’s noticed several trends emerge in the market as a result of the IRA: accelerated transactions, deal sizes increasing and requiring more capital and complexities resulting from the IRS not yet having provided guidance on some aspects of the law,” reports Utility Dive. “In addition, developers have been looking for more bespoke structures for financing and approaching banks with specific plans regarding project aspects like equipment and interconnection, Halimi said.”

Weak Industry Keeps EU Gas Prices Low

Gas prices are low on the Continent. But should Europe rejoice?

“Demand for the fuel in Germany, Italy, the Netherlands, France, Spain and the UK fell 9.7% in May from a year earlier, according to data from S&P Global Commodity Insights,” reports Bloomberg. “That means consumption is lower than levels last year, when the European Union was trying to conserve gas ahead of the winter.”

Germany’s price drop in May was a particularly dramatic 15%.

What happened? A combination of factors, but the most salient is a hobbled industrial sector. Heavy industry has been hesitant to roar back after last year’s energy prices put it in a vice. That alone slashed natural gas prices by 60% on the continent.

Inflation has also pushed the EU into a recession, slashing demand. “Due to continued high inflation, Germany—Europe’s biggest economy—entered a recession, with GDP contracting by 0.3% in the first quarter of 2023 and by 0.5% in Q4 2022, government data showed at the end of last month,” reports Oilprice.com. “Updated figures for Germany and Ireland from Eurostat showed on Thursday that the Eurozone also slipped into recession, with GDP contracting by 0.1% in the first quarter of 2023 after a 0.1% contraction in Q4 2022.”

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China and Russia Lead World in Nuclear

China and Russia continue to dominate international nuclear power development. Together, they make up 70% of nuclear plants planned or under construction worldwide.

“China accounts for the most [reactors being built], with 46, followed by Russia with 30. The two countries account for 69% of the total,” reports Nikkei. “Notably, 33 of the reactors are being constructed or planned outside each respective country. Russia has the largest number of overseas reactors with 19, and despite growing opposition from Europe and the U.S. following its invasion of Ukraine, it maintains a strong global influence in nuclear power.”

Russia's nuclear power diplomacy continues to expand. In Egypt, Rosatom has commenced full-scale construction on Unit 3 of the Dabaa nuclear plant, marking the country's first nuclear power plant. Hungary's Prime Minister Viktor Orban met with Rosatom officials to discuss the construction of a new nuclear power plant. Developing countries view Russia and its nuclear power program favorably, especially because Russia accepts their spent nuclear fuel.

As for China, nuclear power diplomacy is strengthening its ties with Pakistan. The Pakistan Nuclear Regulatory Authority has issued an operating permit for the Unit 3 reactor of the Karachi nuclear power plant, which uses the Chinese-designed Hualong One reactor, developed by the state-owned China National Nuclear Corp.

Conversation Starters

• EU returns to renewable energy policy debate. “European Union countries will try again next week to pass a deal on new renewable energy targets, which have been stalled by concerns from France and other states that the law sidelines nuclear energy,” reports Reuters. “A group of countries including France lodged last-minute opposition to the EU's law on more ambitious renewable energy goals last month, putting on hold a main pillar of the bloc's plans to tackle climate change. EU country diplomats will attempt to approve the law on Wednesday, according to an agenda for the meeting published late on Friday.”

• Could deep sea mining come to Norway? “Norway’s government plans to submit to Parliament in the coming weeks plans to open a large area to deep sea mining as it seeks to access and extract critical minerals from the seabed,” reports Oilprice.com. “The government has prepared an impact assessment which was open for comments until the end of January this year. The Petroleum and Energy Ministry now plans to submit a report and a plan to open a Germany-size area to deep sea mining to Parliament, which is expected to vote on the proposal this autumn. The plan has drawn opposition from environmental groups and the fishermen’s association.”

• America’s largest natural gas power plant, located in Ohio, is now up and running. “What was an idea in 2016 then began construction in 2019 a few years later, a ribbon has been cut for the Guernsey Power Station in Byesville,” reports WTOV9. “The plant is an 1,875-megawatt natural gas fired energy generating facility costing $1.7 billion. The station will produce electricity for approximately 1.4 million homes.”

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