JLS Newsletter - Project Finance 2017
2017 BRIEF
For our final newsletter of 2017, JLS Capital would like to highlight a few of the year’s prominent energy sector trends that have affected the project finance industry. Through Q3 2017, global project finance investment volume totaled approximately $184 billion, with nearly two-thirds of this activity concentrated in Europe and North America (See Exhibit 1). This activity represents a decrease of 15% compared to the first three quarters of 2016.
Two more year-end 2017 points:
Ex-Im Bank got good year-end news when the Senate Banking Committee referred a quorum of Board nominees for full-Senate confirmation that did not include Ex-Im opponent Scott Garrett. Still, a potential Senate Floor delay threatens to continue the impasse. There are precedents for interim Chairs and Board members and no reason to delay Ex-Im’s return to full authority.
Check out a new thought leadership piece just published on our website and in Norton's Project Finance Newswire that we hope will provide entertaining and informative reading for your winter holiday titled ‘the Liberal Art of Project Finance’.
Three energy sectors, renewable energy, power, and oil & gas dominated project finance activity, accounting for three-quarters of the transactions and 70% of the total investment volume. Renewable energy led the way with over half of the deals and 25% of total global investment (See Exhibit 2). Energy economics continue to favor low-cost renewable and gas-fired power generation over conventional fossil fuels in most markets. Key factors driving fuel choices include persistently low oil prices, increasing global electrification rates, and a focus on a cleaner, more diversified energy mix in large emerging economies like China and India. An in-depth summary of these dynamics may be found in IEA’s World Energy Outlook 2017.
CLEANER ENERGY
In both emerging and developed markets, environmental concerns and increasing cost-competitiveness have made wind, solar, and other renewables more attractive. In much of the emerging world, large-scale government initiatives have been crucial drivers of clean energy investment.
In Latin America, commodity prices have continued to strain government budgets and pave the way for greater private financing and PPPs for infrastructure investment and greater use of auctions to award long-term power supply contracts. National power auctions held in 2017 by the governments of Argentina, Chile, and Mexico allocated some 2.6GW of renewable energy capacity—1,400MW in Argentina, 600MW in Chile, and 592MW in Mexico.
In the MENA region, wind and solar investment has accelerated as governments have sought to preserve domestic hydrocarbon resources for export and diversify their energy mix. Saudi Arabia commenced its $50 billion National Renewable Energy Program, holding its first auction and breaking the record for the lowest solar bid, previously set by the UAE, as EDF and Masdar submitted a $17.9/MWh bid price.
CONTINUED OPPORTUNITY - AFRICA
The African continent continues to lag behind its peers in other regions. Its 15 transactions worth $3.85 billion represent 3% and 2% respectively of the global market, whereas Africa has 15% of the world's population. African governments, local and global financial institutions, sponsors and equity capital must work together to change the risk paradigm on the continent to unleash the infrastructure investment needed to spur sustainable economic growth and opportunity. While each country is focused on the pursuit of an ‘all of the above’ energy mix, much of Sub-Saharan Africa—namely South Africa, Ghana, Botswana, Mozambique and Tanzania —continues to rely predominantly on coal-fired power and heavy fuel oil for its baseload capacity, supplementing other investments in cleaner but sometimes less reliable solar and hydropower technologies. Cheap domestic coal resources, coupled with abundant financing from China, offer an attractive way to electrify the drastically underserved African market, where more than 600 million people are still without basic power
THE SHIFTING WORLD OF LNG
The global LNG market continued to evolve as emerging and developed economies increasingly look to natural gas to support the transition to clean energy by replacing coal and nuclear base load power. A global supply glut, driven largely by production in North America and Australia, has been partially matched by growing demand in Europe and other emerging markets. Countries like Argentina, India, Turkey and Pakistan are increasingly turning to floating storage regasification terminals to absorb LNG imports. With many long-term offtake contracts soon to expire, a widening pool of buyers and sellers is driving a transition to small-scale, flexible and short-term LNG trading. Evidence of an emerging spot market can be found across Asia which should continue to spur increasing investment in the full supply chain of gas markets.