Infralogic: Investors eye distributed generation amid US policy uncertainty

by Chuck Stanley and Andrew Vitelli


Amid a climate of policy and economic uncertainty for the US renewables sector, investors are increasingly looking to distributed generation for reliable returns, industry experts tell Infralogic.

As the US renewables sector scrambles to forecast the impact of Trump administration trade and economic policies on development costs, and with the looming threat that Congressional Republicans may look to carve out the costs of a major tax cut from renewable energy incentives passed under the Biden administration, investors tell Infralogic distributed generation (DG) looks increasingly attractive.

Experts who spoke to Infralogic noted the short development and construction times, low regulatory burden, distributed portfolios, and high margins of DG and community solar leave the sector well equipped to weather the current policy and economic environment, while riding the tail winds of growing US energy demand.

While no sector is immune from the impacts of changes to tariff and energy incentive policies, Don Dimitrievich, senior managing director for energy infrastructure credit at Nuveen, said the revenue profile of DG gives the sector more flexibility to maneuver in an uncertain environment.

"When we look at this, the combination of profitability of the projects do give you that margin for unpredictability and uncertainty," Dimitrievich said.

Nuveen recently joined Deutsche Bank in the upsize of an existing credit facility for DG solar and battery storage developer Dimension Energy to support pre-construction activities.

Jeremy Eisman, head of infrastructure and energy financing at Deutsche Bank, said DG’s short development and construction timelines fit within the bank’s focus on renewables projects expected to reach the Notice to Proceed (NTP) stage within two years or less.

That focus emerged as a way to navigate a post-COVID surge in component prices, as the task of derisking pipeline assets five years into the future became extraordinarily difficult. In today’s political and economic environment, the strategy continues to make sense, he said.

"What we’ve done in our development finance is try to really focus on the next 18 to 24 months of NTP-able assets. That focus on the near-term pipeline has withstood this political environment better than other methodologies," said Eisman.

Reversal of trends

‍Short development times for DG weren’t always seen as an advantage to investors in the space, said Nick Sangermano, President of DG-focused investor and developer GS Power Partners.

In previous years, when costs for components like solar panels were falling rapidly, the years-long pre-construction process of permitting and interconnection approvals for utility scale projects worked to the advantage of developers. Offtake agreements signed one year would tend to reflect a much higher cost environment than actual conditions by the time construction began.

But now, with uncertainty over the trajectory of component costs, the potential for a haircut to renewable energy credits, and demand projections that have off takers anxious to secure electricity supply, the speed of DG development has become a major advantage.

“It’s flipped now,” said Sangermano. “And DG actually can have a time advantage.”

The preference for rapid deployment of generation assets comes at a time when the DG sector has grown to a size where economies of scale and growing investor interest are also serving as tailwinds, he added.

The diversified nature of DG portfolios also serves to disperse project risk, Dimitrievich said.

“From a credit underwriting perspective, it derisks the overall financing,” Dimitrievich said. “You’re not taking single-project financing risk or regulatory risk that sometimes is the case when you’re doing utility scale solar. It’s a huge positive.”

With strain on energy lines a growing concern in much of the country, Eisman said DG’s low impact on the grid and close proximity to load make it a critical tool for addressing reliability concerns.

“We’re increasingly seeing transmission as something that everyone’s focused on. And one of the best options to manage that issue is DG,” he said. “If you locate generation closer to demand, closer to the load, the stress placed on the transmission system is far lower. That’s one of the reasons we like it.”

The ability for experienced teams to execute quickly on projects at a time when demand is expected to grow rapidly make the DG sector an area of significant focus over the near-term within the renewables sector for Nuveen, Dimitrievich said.

"The combination of risk mitigants allows us to be more willing to commit to this area and have a lot of conviction around it," he said.

Read the full article in Infralogic.

‍