AUSTRALIA: An Introduction to Project Finance

Fewer and Smaller Deals 

The global trend of 2023 being a challenging year for project finance was reflected in the Australian market with volume and deal count down materially from 2021/2022.

In addition to global factors affecting the Australian market – such as rising costs of debt capital and continuing global supply chain issues – there were a number of issues specific to the Australian market which resulted in a more challenging market for project finance transactions in 2023. In particular, the Australian project finance market has, in recent times, been primarily driven by renewables transactions and government led infrastructure PPPs. Volume in each of these sectors was materially less than in 2023, for the reasons noted below.

As a general statement, volume in the Australian market in 2023 was driven by a number of refinancings. Australia is predominantly a mini-perm bank debt market with five to seven year debt tenors. This generally results in a continual flow of refinancings and 2023 was no exception to that rule, with a number of existing debt financings being refinanced. Of the 25 largest project financings in the market, 19 were refinancings. As noted below, a relatively new feature of the market was that a number of the refinancings in the renewable energy market were not driven by debt maturity, but by established sponsors with renewable energy portfolios of operational and development assets seeking to refinance into a more flexible portfolio financing package.

A notable exception to the above was the largest project financing to achieve financial close in the Australian market- the USD4 billion Perdaman Ceres Urea Project in Western Australia.

Several of the key sectors in the Australian project finance market are discussed below.

Renewables
There have been a number of challenges in the renewable energy sector. Some of these are reflective of the global market as increased borrowing and construction costs made a number of greenfield transactions more marginal. Other challenges are reflective of the unique nature of the Australian market, notably, being geographically large with a relatively small – but concentrated – population. This, particularly in the context of the intermittent nature of renewable generation, has made power delivery to population centres in Australia challenging with a number of operating projects facing connection constraints. Australia also has a wholesale electricity pool market that, in the context of intermittent generation, has led to negative pricing challenges that are not necessarily able to be adequately addressed in offtake arrangements. In addition, the Australian regulatory and approval process continues to struggle with the sheer volume of greenfield development projects in the pipeline – particularly in terms of connection approvals – with a number of projects delayed as a result.

This is not to say that greenfield renewable generation financings did not achieve financial close in 2023. There were some large scale projects -such as the 1020 MW MacIntyre Wind Farm, which achieved financial close, but the market has been – and remains – challenging.

However, as the market responds, these challenges have also created a number of opportunities, particularly in energy storage and transmission. In particular, there have been a number of large battery storage projects achieving financial close in 2023 including the 600 MW Melbourne Renewable Energy Hub Project and the 185 MW Koorangie Energy Storage System. In addition, the NSW and Victoria state government are responding to transmission constraints for renewables projects by the implementation of renewable energy zone projects to enable secure connection for renewables projects, including the Orana REZ Project.

Whilst there has been a material decrease in greenfield renewable generation projects achieving financial close in 2023, there have also been, as noted above, a number of portfolio refinancings in the market (Squadron Energy, Tilt Renewables, Intera Renewables, Atmos Renewables, Bright Energy Investments and NEOEN) with sponsors aggregating operating projects (in some cases, with a development pipeline) into a single corporate-style financing to provide more flexibility over terms and to be able to respond to development opportunities. This feature of the market is expected to continue in 2024 as the number of sponsors with multiple operational projects continues to increase.

Infrastructure
The volume of public-private partnerships (PPPs) dropped materially in the Australian market in 2023 with only one PPP of note – the Geelong Convention Centre – achieving financial close. This is reflective of a slowdown – particularly in economic infrastructure – of the Australian state governments traditionally active in seeking private sector participation in infrastructure projects – Victoria, NSW and Queensland – in coming to market with new deals.

The bulk of infrastructure financings in the market during 2023 have been refinancings of existing debt (such as Royal Adelaide Hospital PPP, Western Road Upgrade PPP, ConnectEast, Westconnex and Royal North Shore Hospital).

M&A
In addition, reflective of the general global slowdown in M&A, the traditional source of acquisition project financings in the market was down materially from 2021/2022. Whilst 2021/2022 saw a number of large energy and infrastructure acquisition financings (particularly in the telecoms sector), this has been less of a feature in 2023 with a limited number of transactions in the market achieving financial close.

Looking forward to 2024, it is expected that volumes of project financings in the Australian market will increase from 2023 levels. A number of the challenges in the renewables sector are being addressed – and as noted above – project finance opportunities are arising from this. In the infrastructure sector, whilst we would not expect to see a marked increase in economic infrastructure PPPs, there are a number of social infrastructure projects coming to market (such as hospitals and social housing).

As the world continues its journey to energy transition, there are a number of opportunities in Australia. There are a number of hydrogen/energy hub projects, critical minerals as well as sustainable bio-fuel projects, contemplated. Whilst a number of these are at an early stage, Australia’s opportunity as a material net exporter of green hydrogen, critical minerals and sustainable bio-fuels remains an exciting prospect.