By Mark Jaffe, EUCI energy writer
Global energy project financing – with a few areas of risk such as aging wind farms, data centers, and trade impacts for solar – will be largely stable in 2025, according to report from the investment research company Morningstar.
The Morningstar analysis covers its portfolio of wind, solar, river hydro, thermal gas generation, midstream pipeline assets, digital infrastructure, and bespoke assets.
“We anticipate that our existing portfolio of credit ratings will remain relatively unchanged in 2025 on a structural basis, as project finance transactions generally are designed to shield cash flow and credit metrics from macroeconomic volatility,” Victor Leung, Morningstar senior vice president, said in a statement.
Many of these projects rely on long-term take-or-pay contracts that “mitigate pricing or volume risk,” Leung said.
Nearly 90% of Morningstar’s ratings were confirmed across all asset classes, while 12% experienced some form of positive or negative rating action.
There are some sector-specific risks, such as aging wind assets in the portfolio.
Over the last two years, rated wind contracts in several Ontario wind projects underperformed due to a combination of lower wind resources, lower availability, and higher operating and maintenance costs.
“Repowering of aging energy infrastructure is becoming an important option for the energy transition to net-zero emission,” Morningstar said, “and rating agencies need to have a prudent view on the useful life and future capital expenditures profile of these assets.”
Another area where risks need be assessed is in digital infrastructure – particularly data centers – which drew big investor interest in 2024, a trend expected to continue in 2025 with the growth in demand for artificial intelligence and cloud computing.
In 2024, there was an increase in the non-renewal or churn rate of leases. Most of these churned leases were replaced by other tenants. While the increase in churn rate was not seen as an immediate risk, market conditions will be key in 2025.
“The credit quality of data center and telecom tower financings is dependent on re-leasing risk, or the stickiness of leases and likelihood of tenant counterparties continuing their terms at the regular renewal points built into data center leases,” Morningstar said.
New and emerging technologies with limiting operating records, such as battery storage twinned with renewable energy generation or electric-vehicle assets using project finance, also come with some “risks and uncertainties.”
In 2024, solar power outpaced wind development spurred by a sharp drop in solar panel prices. The trend is projected to continue with solar power meeting half of global demand growth in 2025.
“In the U.S., however, developers may have to take a pause toward building solar projects in the first half of 2025 as policy uncertainty looms large in the near term,” Morningstar said.
Anticipated import tariffs on solar panels under the Trump administration and the fate of Inflation Reduction Act (IRA) tax incentives are among the uncertainties developers are facing.
Still, Morningstar said, “We believe the long-term growth prospect remains bright as the U.S. builds up its own domestic capacity to produce cheap solar panels.”
Morningstar said it expects two key components of the IRA will have “a lasting impact” on the tax equity market: allowing federal tax credits to be used for any net-zero greenhouse gas emission projects and allowing the transfer of tax credits.
The tax equity market grew in 2024, and Morningstar said that while there may be marked changes under the Trump administration, it does not expect them to affect the availability of renewable energy tax credits.
“We expect renewable energy tax credits will remain in place under the incoming administration because of the large hurdle of repealing the law and the significant benefits Republican congressional districts have seen as a result of IRA funding,” Morningstar said.
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