Standard credit risks in infrastructure projects
Overview
Whilst the credit risk assessment for renewable energy comes with some unique characteristics, as renewable energy projects are infrastructure projects, many of the standard credit risk assessment criteria for assessing infrastructure projects similarly apply.
The credit risk assessment of an infrastructure project is inherently interdependent, often more so than in corporate credit evaluations, as the various components of the underlying project collectively contribute to the overall creditworthiness. Project sponsors typically seek out long-term funding to ensure that the debt burden matches the cash flow of the project, which is long-term in nature and capital-intensive, requiring lenders to commit for extended periods. Project finance is not the only type of debt available to fund infrastructure projects, but often come with no or limited recourse to project sponsors.
Development and execution risk
In a typical greenfield infrastructure project, a project faces development and execution risk. Therefore, the profile and track record of a project sponsor is important, as poor project execution may cause unbuffered delays, which in turn may lead to lower returns. In a worst-case scenario, a stranded project may lead to minimal recoveries for the creditor that funded the development phase, especially if a new project sponsor is not found.
Defined operational and economic lifespan
Infrastructure projects are typically time-bound, unlike a corporate issuer, which is expected to be an ongoing entity. This means there is a limited time for capital source providers to generate their returns, and debt will have to be profiled appropriately in line with such cash flow patterns. In an infrastructure project, an underlying asset has a useful life before it needs to be retired. In the case of solar energy systems, these typically have a useful life of 25-30 years.
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Infrastructure projects may not be fully dependent on market supply-demand dynamics, but are governed by underlying contracts instead, where the contractual terms and conditions will determine the economics of the project, including how long the asset is allowed to generate an income to capital providers (including for debt servicing).
For example, KIT owns a 51% stake in Keppel Merlimau Cogen (KMC), a conventional power plant located on Jurong Island where a capacity tolling agreement has been entered into with Keppel Electric, an electricity retailer owned by Keppel, with an original 15-year term that was extended by another 10 years. Under the agreement, Keppel Electric would pay fees in return for KMC availing electricity generation capacity.
Separately, despite the Singapore electricity market being generally a merchant market where electricity-generating companies are subject to the vagaries of supply and demand, SCI has entered into power purchase agreements with heavy users of electricity, such as data centre operator Equinix, where SCI would supply renewable energy to Equinix’s Singapore operations.
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Cash flow stability is a vital consideration
In infrastructure projects that are solely funded by project financing, where creditors have no legal right to pursue sponsor’s other assets and income or in other words, non-recourse, the debt capacity of that single project would be determined by the quantum and strength of underlying cash flows, whether contractual or otherwise. Infrastructure projects with a stream of cash flow that is more stable and from low-risk sources would allow the project to have a higher debt capacity. The ability to borrow more would thus allow a sponsor to generate higher returns.
Even in cases where an infrastructure project operates without a contractual agreement with a predetermined buyer, such as when the projects generate income due to their near-monopoly status, the stability of the legal, regulatory, and policy framework will play a crucial role in determining the credit strength of the cash flows generated by the project.
Unique credit risks in renewable energy
Resource risk
Unlike conventional energy projects, renewable power projects face some unique hurdles. One of the main differentiating factors is resource risk. As long as feedstock such as oil, natural gas or coal is available, conventional power plants can provide electricity when needed or can be turned off easily when not required. Not all types of renewable energy suffer from the same levels of intermittency.
However, electricity generated from solar and wind is particularly susceptible to the weather. Solar and wind combined account for 47% of renewable energy generation globally in 2024, based on our tabulation using data from the International Energy Agency (IEA), and are fast growing. Actual cash flow generation may fall short of projections if the initial resource forecasts used to raise funding were overly optimistic and if weather patterns shift unexpectedly, leading to lower electricity production than anticipated.
According to the Intergovernmental Panel on Climate Change (IPCC), scientists have observed changes in the climate in every region across the whole climate system. With an uncertain trajectory over climate change and its impact on the weather, this adds a layer of uncertainty to the cash flow projections. While projections could be made more conservative by assuming lower resource availability or parametric insurance procured for the project, this may mean lower returns.
Another complexity to project execution and therefore credit risk assessment for renewable power projects is that the resource supply may be located in far-flung and challenging topographies versus where the demand is required. For example, subsea cables are required for offshore wind.
Curtailment risk
A credit risk in renewable power projects is the risk of curtailment, where the grid does not absorb the electricity generated, even when there are available resources to generate electricity, resulting in a temporary loss of income. This can happen when demand is lower than supply and the power plant is directed to reduce or stop electricity delivery. There are also certain unique circumstances to renewable power that lead to curtailment.
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According to the US National Renewable Energy Laboratory (NREL), a variety of technical challenges must be overcome to ensure the reliability and stability of the grid when integrating renewable energy into the grid. For example, not all renewable energy projects use standard synchronous generators, unlike conventional power plants. Conventional power plants generate electricity at a constant frequency that is synchronised with the grid, which helps with keeping the grid stable. In contrast, grid synchronisation issues are more common with solar and win,d and this may increase curtailment risk to prioritise grid stability.
Separately, due to their intermittent nature, renewable energy plants may face surges in electricity production and contribute to grid congestion where electricity generated is unable to be transmitted to where it is needed. When congestion happens, renewable energy plants may face curtailment risk. Overall, curtailment risk tends to happen in places where grid investment and technological upgrades have not kept up with the growth of renewable energy capacity in the system.
Policy and regulatory risks: Elevated in renewable energy projects
In our view, the impact of policy risk on credit assessment is greatest when an infrastructure project is not economically feasible on its own and where the political environment is hostile. For instance, the only port in a stable, open economy that earns revenue from third parties by providing a crucial entry and exit point for goods is likely to be less vulnerable to policy changes, in contrast to an infrastructure project that is solely reliant on government subsidies at a time when budgets are constrained.
The energy sector has long been a recipient of government subsidies and the renewable energy sector has also been subsidised, especially in early years of development when the cost was not yet competitive against fossil fuels. The form of government subsidies to the renewable power sector includes feed-in-tariffs (FiT), tax credits, grants, and loan programmes. FiT is a mechanism where a buyer pays an electricity rate that is generally higher than the market rate to the renewable energy power generator to encourage new projects, especially when the technology is new. On the surface, FiT is a credit positive as it removes market risk associated with a renewable power project.
However, given that FiT can result in market distortion, this mechanism is fraught with policy uncertainty. For example, in May 2025, Reuters reported that a group of investors in Vietnam’s renewable power sector sent a letter to the authorities warning of investments at risk due to retroactive changes to subsidised rates and that projects are facing the risk of defaults.
An emerging contender?
Looking ahead, nuclear, which still invites scepticism, if not outright anathema, is being studied as an option in Singapore. If this could be deployed safely and overcome public mistrust, it could pose a challenge to the demand for renewable energy. While the operation of solar and wind does not release greenhouse gas emissions, their production involves critical minerals, which may shift public perception toward concerns over the full life cycle of renewable energy.
In May 2025, the US President signed executive orders to accelerate advanced nuclear technologies after a long period where nuclear was de-emphasised in the US, while Singapore has entered into a Comprehensive Strategic Partnership with France that will expand their cooperation in areas including nuclear energy.
Singdollar issuers for now are still corporate issuers rather than project finance issuers
In Singapore, despite having a debt capital market that is maturing, we have yet to see an infrastructure project being financed through a project-specific bond. So far, the Significant Infrastructure Government Loan Act (Singa) bonds that are used to fund infrastructure in Singapore are effectively priced as sovereign bonds.
In the case of Singapore issuers active in the renewable energy space, credit issuances are issued at the holding company level. As such, we focus on taking a corporate credit approach in assessing the credit risk of these issuers. The credit strength of such issuers is heavily influenced by their diversification across multiple projects and geographies.
We note that publicly available details on each project are also currently lacking, and more details are welcome. From a credit perspective, we view it positively that issuers that are transitioning, such as SCI, plan to use the stable and predictable cash flow from their other segments to fund the growth of their green transition over time. This approach is preferable to a one-time, major transformational corporate action or a plan that relies predominantly on debt financing.
Ezien Hoo, Andrew Wong, Wong Hong Wei and Chin Meng Tee are credit research analysts with OCBC’s Global Markets Research & Strategy team
