Renewable energy market trends in 2023: growing demand for financing

2023-01-13

Jonas Urbonas, Head of Corporate Banking at Luminor Bank

2023 is projected to be a breakthrough year for renewable energy in Lithuania, as the projects that were granted development permits in 2022 or at the beginning of 2023 are expected to gain momentum. Luminor Bank projects a significant spike in demand for financing such projects.

Last year alone, Luminor Bank granted nearly EUR 100 million of loans for financing renewable energy projects. Such a significant rise in financing volumes was driven by the investors piling into renewable energy sources and doubling the installed renewable generation capacity up to 1.6 GW (up to nearly 36% of the total electricity generation capacity in Lithuania) compared to 2020. Over the past two years, solar parks have more than tripled the installed renewable capacity, reaching 0,53 GW and accounting for the largest share of the total installed renewable capacity. Experts of Luminor Bank predict a significant spike in financing next year.

“Soaring inflation and Russia’s war on Ukraine have spurred an increase in energy prices, thus putting renewable energy in the spotlight. Last year, businesses were eager to get permits and design projects. This year, their main goal is to implement their projects and seek financing solutions. That means that they will certainly shift their attention to the energy sector,” Jonas Urbonas, Head of Corporate Banking at Luminor Bank, said.

According to Urbonas, a significant growth of Luminor portfolio for the development of renewable energy projects is expected next year. “As the development of sustainable projects is one of our strategic objectives, we attach a high priority to the renewable energy projects. I am very happy that our efforts were noticed by the global leader in ESG ratings, Morningstar Sustainalytics, and we were awarded the best ESG risk rating among all major banks in the Baltics in 2022,” said Urbonas.

While investment flows continue to accelerate, challenges, however, remain. It is expected that renewable energy project developers are going to face further increase in interest rates. Due to rising costs of loan servicing, banks are finding it increasingly difficult to finance projects at the usual pace; therefore, customers may need to invest a bigger portion of their own funds.

“The limit of 2 GW for the total installed capacity of solar power plants was introduced last year and caused a great deal of confusion among commercial solar park developers. They rushed to access the network as soon as possible and reserve grid energy. After making significant investments in the solar energy projects, some of them were taken aback by the news that they might not be issued the permit to connect to the network after all. Such decisions of the Government undermine trust in the investment environment, complicate access to the financing opportunities for the businesses, and are seen as downside risks that could weigh on the development of renewable energy projects“,

added Urbonas.

According to him, despite common challenges, we have finally reached the point where the solar and wind energy projects could be financed without additional state aid and special fares. Currently, most projects are financed through power purchase agreements (PPA). This way, parks can secure up to 60–70% of their output they plan to sell to other market participants over the period of five to ten years. To diversify its investments in sustainable energy, Luminor also finances other than PPA-based projects.

Now that market participants are trying to maximise the full potential of available recourses and infrastructure, hybrid renewable energy projects combining solar and wind power technologies are becoming increasingly popular. This adds to the range of new energy projects and expands the share of renewable energy in electricity production in Lithuania.