Source: Allens Insights (legal sector)
Establishing renewable energy platforms and capital partnerships 8 min read
As renewable energy developers look to expand their project pipelines and operational portfolios, many are turning to private capital sources to help fund their expansion plans. Increasingly, that capital is being sought through newly established platforms between developers and investors that jointly own the renewable projects through a legal ownership structure separate from the developer’s remaining business.
Establishing renewable energy platforms and capital partnerships requires a strategic balance of risk mitigation and the optimisation of growth opportunities in an increasingly competitive environment. Each platform and capital partnership is unique, necessitating customisation based on the objectives and risk tolerance levels of the parties involved. With robust planning and transparent communication from day one, these capital partnerships can help drive the energy transition while delivering attractive returns for investors.
In this Insight, we explore the key issues for developers and investors to consider when establishing a capital partnership for a new renewable energy platform.
Key takeaways
- Commitment to the platform: each party should seek a form of commitment to the platform from the other. We are increasingly seeing both developers and investors be willing to provide that commitment in the form of an exclusivity undertaking, pursuant to which the parties are prohibited from developing or funding projects outside of the platform (subject to certain carveouts).
- Operational model: new platforms are typically structured as either a standalone business or a simple ownership vehicle where operational functionality is outsourced back to the developer. Alignment between the parties on the preferred approach, and how it impacts key issues such as revenue strategy and exit, is a key to success.
- Funding obligations: the parties’ funding obligations to the platform should be designed to ensure the platform receives sufficient funding to develop, acquire and operate projects. However, while certainty of funding is important, the parties should avoid rigid frameworks (which set out precise financial and operational criteria for investment in new projects), which run the risk of stifling growth (particularly when dealing with seasoned developers with a track record of bringing projects to market).
- Governance and regulatory considerations: when evaluating potential investors/platform partners, developers should consider the regulatory implications relevant to each investor (in particular in relation to tax, FIRB, AFSL and ACCC requirements), and how those implications may affect the day-to-day operation of the platform.
- Debt financing strategy: the platform’s debt financing structure must be adaptable to accommodate new projects and multiple funding sources, ensuring room for future growth without excessive lender restrictions.
- Funding and compensation: any platform must be structured in a way that recognises the different initial and ongoing contributions from both the developer and the investor. In particular, developers should ensure they are properly compensated for the seed assets vended into the platform.
Key considerations
Commitment to the platform
Notwithstanding the specific technology focus of the platform, such as solar, wind, BESS, other forms of generation and storage, or all of the above, each party should seek a form of commitment to the platform from the other with respect to the relevant technology focus. While it might be expected that the developer provides a stronger form of commitment, limiting their ability to develop projects of the applicable technology outside the platform, investors are increasingly also willing to ‘put all their eggs in one basket’ and accept a form of exclusive commitment. This is often based on the understanding that, through diligence and alignment with the developer on key principles, the platform is their best means of investing in that technology in Australia. If an investor is willing to make such a commitment, establishing carveouts to ensure they are not inappropriately constrained is essential. Investors will often seek to ensure the commitment does not cover existing investments, projects outside the geography, investments via other funds and projects beyond a specific capacity range.
Structuring your operating model
When establishing a new platform, developers have two primary operational model options to consider: standalone platforms and ownership vehicles. Each model has distinct characteristics, benefits and challenges that can significantly impact the platform’s success.
Standalone platforms operate as independent businesses with their own management teams and operational autonomy. For standalone platforms, a key focus should be on selecting the right management team. This process typically takes time, so it’s important to establish a robust transition plan in which the developer provides the necessary support until the management team is fully onboarded.
Ownership vehicles function through a network of development and service agreements where operational functionality is outsourced back to the developer. This model leverages existing capabilities within the developer’s organisation but operates under a separate legal structure.
Whatever the operational structure, a key to success is ensuring alignment between the developer and investor from the outset—particularly on headline issues such as revenue strategy (especially important for BESS assets, which offer a variety of potential revenue options, eg tolling agreements, Capacity Investment Scheme agreements, system support agreements, merchant operations, etc) and exit strategy.
Certainty of funding
As a vehicle designed to fund both seed and future projects, funding obligations are often the most heavily negotiated elements of platform arrangements. In an ideal scenario for developers, they would retain full control over financial investment decisions (FID) and funding decisions, allowing them to call for capital as needed. Meanwhile, in a perfect world for investors, they would have complete discretion over which projects their capital is used to fund.
To avoid potential deadlocks with respect to funding decisions, including through the exercise of veto rights, one approach is for the investor to make an upfront capital commitment. This requires them to fund a pre-agreed amount (at a pre-agreed valuation) for a set of seed and pipeline assets, which they diligence at the outset. Once this initial capital is provided, future funding can be provided on a pre-emptive basis, potentially tied to target return criteria and procedural milestones that must be met before a project is onboarded to the platform or funded via FID.
While this strategy helps prevent deadlocks that could hinder platform growth, it’s important to recognise that a one-size-fits-all approach may not be ideal. In our experience, rigid procedures around project onboarding and funding may not serve the platform’s best interests, particularly when developers have a proven track record of managing development and construction risks in a more flexible manner. Retaining flexibility with regards to milestone requirements to take FID may enable the platform to reprioritise projects in response to shifting market demands and opportunities.
Managing governance and regulatory requirements
When evaluating potential investors, developers should consider a range of factors beyond simply choosing the one with the deepest pockets. Issues such as Foreign Investment Review Board (FIRB) implications (particularly whether an investor’s involvement will characterise the platform as a ‘foreign government investor’ or FGI), Australian Financial Services Licence (AFSL) requirements and complex competition law concerns can create significant challenges for the platform if not addressed and managed at the outset.
Tax implications must also be considered. For example, upcoming changes to the foreign resident capital gains tax regime in Australia—specifically how ‘taxable Australian real property’ is defined in the context of renewable energy assets—may affect after-tax returns for foreign developers and investors.
These changes, expected to come into effect on 1 July 2025, could have substantial impacts on renewable energy platforms and should be closely monitored.
Implementing your debt financing strategy
The initial debt financing required to establish the platform and transition seed and early-stage assets to the platform will depend on the number and characteristics of those assets, including the technology type and whether the assets are operational or under construction, merchant or contracted, etc.
Whatever the makeup of that initial financing, flexibility for growth is key. In particular, the debt financing structure must be flexible enough to accommodate:
- the inclusion of new greenfield and operating assets (with a focus on minimising lender consent rights);
- construction financing for greenfield projects, either within the portfolio financing structure or separately financed outside the portfolio through an excluded subsidiary mechanism and brought in once the project is operational (subject to risk tolerance on a case-by-case basis); and
- multisource financing options (including bank debt, private long-term credit and note issuance) with the necessary intercreditor mechanics.
Funding structure
The platform will need to be structured in a way that recognises the different initial contributions from both the developer and the investor. In most platforms, the developer provides seed and pipeline assets, while the investor supplies capital for the development and construction of those assets.
An investor’s capital contribution typically needs to be structured so that the platform can draw down the capital over time, on an as-needed basis to fund project capex. This can be achieved through various methods, such as partly paid shares or equity ‘catch up’ or ‘farm-in’ regimes, with the optimum approach usually driven by the investor’s requirement regarding governance rights from day one, FIRB considerations and any potential requirement to ‘return’ capital commitments in the future.
From the developer’s perspective, it is essential to ensure that they are properly compensated for the seed assets transferred into the platform. Whether that compensation takes the form of equity in the platform or proceeds from the transfer of assets, it would typically reflect (for each asset/project) all devex spent on the project, fees for the origination and development services provided and, where applicable, a development premium.
Key questions to ask
- Asset strategy: what technology should the platform focus on? Solar, wind, BESS, other forms of generation and storage, or all of the above? Whatever the technology, what level of commitment is each party willing to give to the platform and what carve outs to the commitment are needed?
- Operational model: should the platform be structured as a standalone business with its own management team and operational autonomy, or as an ownership vehicle that, through a network of development and services agreements, outsources operational functionality to the developer?
- Funding obligations: what level of capital commitment is required from both parties at the outset? How will future funding needs be determined and agreed upon? Are there predefined criteria or milestones that need to be met for additional funding to be provided?
- Governance and regulatory: are FIRB, AFSL, ACCC and tax requirements fully understood and planned for?
- Debt financing strategy: how flexible is the debt financing structure in accommodating new assets and various stages of project development? Are there multisource financing options (ie bank debt, private long-term credit or note issuance) and how will the necessary intercreditor mechanics be managed?
- Funding structure: how will initial contributions from both developer and investor be recognised within the platform structure? What methods (eg partly paid shares, equity ‘catch up’, farm-in regimes) will facilitate drawdown of capital over time? How will developers be compensated for seed assets transferred into the platform?