The issues surrounding Northvolt have thrown into doubt the expansion of the project finance asset class into a new industrial age. A host of new types of schemes have been put forward to the structured debt market for finance and given the push for the green transition, many have received a favourable response, initially at least. Now, however, presumably more conservative principles will apply. Back to bread and butter.
Only two and a half years ago, we on PFI were heralding a new age for project finance saying in June 2022 "marrying project finance and industrial production processes was never an easy ask. The green, or greening, revolution, however, is forcing new thinking in the financial structuring business as private equity-style sponsors tie up with major manufacturers to produce projects that need plenty of cash upfront to build a factory but have just enough long-term contractual backing to pay for it in the long term."
Er yes, indeed. Now Northvolt is struggling to obtain emergency funding for its Ett battery project in north Sweden with reports suggesting the company could even go into Chapter 11. It is an extraordinary fall from grace.
At the start of this year it signed a new US$5bn debt package that would have taken out a €1.6bn debt package from 2020. It had raised US$9bn in equity for the project from an A list crowd including BlackRock, Canada Pension Plan Investment Board, Omers, Goldman Sachs, Volkswagen, Singapore's GIC and Hong Kong-based Chow Tai Fook Enterprises.
Of course the US$5bn project financing never got to financial close, suggesting perhaps the debt view of life was more sensible or cautious. And indeed the new project financing included only limited uncovered debt, just over one fifth with the rest provided by multilaterals and export credit agencies plus US$1.5bn from the Swedish government debt office Riksgalden.
Tough pricing competition from China was said to be one issue. However it appears the main problem is incredibly fundamental – a simple failure to build production levels up to target. Given the sums invested, this appears to be extraordinary.
Ok, the Covid pandemic impacted the early construction schedule of the project but even this week there was a report from Reuters suggesting the company was still missing targets and is nowhere near the 100,000 cells year-end target party, although this is apparently now due to the fact the company is no longer working on a 24/7 schedule.
There are plenty of new asset classes in the energy transition that need huge amounts of capital. Some have already made the breakthrough – offshore wind for instance. Despite issues now with the sector, it proved itself more than a decade ago.
Smaller projects became bigger projects, experience was gained and suddenly offshore wind was the thing. The shine has lessened of late but the concept does work, albeit with some turbine blades falling into the ocean. Solar is another proven sector. Costs have come tumbling down step by step and the sector has moved into the mainstream despite some issues with inverters. Battery storage longer durations are developing step by step.
Perhaps the problem with Northvolt was it simply jumped in at US$10bn with a lot of enthusiasm but little in-built scale-up knowledge. Still producing battery cells should not be that difficult. The Financial Times suggested problems ranged from incompetent management and poor safety standards to over-reliance on Chinese machinery but, essentially, doing too much too fast.
A host of follow on battery projects across Europe were financed after Northvolt. Some are carrying on, others have been scaled back.
A range of new transition technologies are seeking finance. Green steel is one, green hydrogen is another, carbon capture and storage is a further one.
Of late there has been plenty of discussion about the economics of these projects. They usually rely on subsidies of one kind or another. But do they work? The answer of course should be yes. Steel-making is steel-making, grey hydrogen production is tried and tested. So is carbon capture, albeit not on the scale now envisaged. Still the oil company sponsors think it is within their vast technical expertise. Direct air capture? Interesting.
Such is the leap required by the transition that the role of the technical adviser on these projects now appears as important as that of the financial and legal advisers. For a simpleton to analyse, ie a banker, perhaps it would be wise to start small if possible, prove the developer and the concept is bankable and then go large.
Obviously if you have Air Products wrapping the construction and offtake of the first global hydrogen scheme in Saudi, it makes things a little easier from a credit perspective. But there are few trophy schemes like that around.
In the meantime, with Donald Trump expected to cut back the ambitions of the Inflation Reduction Act, it might be back to solar, wind and batteries with the odd monster electricity cable thrown in. Hopefully they work.
