Lenders underwriting renewable energy projects with revenue linked to CBAM-relevant electricity exports are being urged to evaluate how operational issues, regulatory eligibility and delayed recoveries could affect debt repayment. The risk assessment focuses on how multiple shortfalls may interact, including lower generation, replacement electricity needs, incomplete documentation and the potential loss of preferential treatment. Stress testing is presented as a way to connect each risk to cash available for debt service, including carbon-price effects and liquidity timing.
Financial models are expected to trace consequences through cash-flow outcomes rather than rely on a single downside case. The approach includes testing different carbon price assumptions, the timing of liquidity requirements and the extent to which contractual counterparties can recover losses. These variables are described as factors that can amplify the impact of an eligibility gap on project cash flow.
CBAM-related revenue exposure in four downside cases
Financing models should incorporate at least four downside scenarios affecting CBAM-linked revenue. The cases include expected generation paired with expected eligibility, reduced generation combined with increased replacement power, partial failure of supporting evidence, and complete fallback to the applicable CBAM default-values route. The scenarios are intended to reflect the difference between electricity produced and eligibility for installation-specific actual emissions values.
Under the current framework described, imported electricity generally uses the default-values route unless all relevant conditions are met. The listed conditions include a qualifying physical power purchase agreement (PPA), the applicable network condition, and a generating installation below a threshold of 550 g CO2/kWh from fossil-fuel-origin emissions. Additional requirements include firm nominations matched with production over periods of no more than one hour and independent verification supported by at least monthly interim evidence.
Liquidity pressure when recovery takes time
Counterparty analysis is expected to separate responsibilities across the electricity offtaker, any intermediary and the guarantor. Each party’s ability to meet obligations should be assessed independently, including the time required to collect contractual compensation. The timing element is highlighted because debt obligations may fall due before compensation is received.
The presence of an indemnity is described as not removing immediate funding needs where statutory CBAM-related liabilities or other contractual costs must be paid before recovery arrives. Even when a valid claim exists, a liquidity shortfall can occur while the claim is resolved. Insurance policies and guarantees are described as additional protection but not substitutes for operating controls.
Cash-flow exposure can persist despite contractual recovery rights due to factors such as policy exclusions, waiting periods and counterparty creditworthiness. The risk assessment therefore treats operational controls as distinct from financial backstops. This framing links eligibility and evidence failures to potential funding gaps during dispute or recovery timelines.
PPA premium risk for steel and aluminium buyers
For renewable PPAs serving steel and aluminium producers, lenders are advised to assess whether buyer economics support the premium specified in contracts. The premium risk is tied to whether it reflects an overstated assessment of current CBAM benefits that could be renegotiated. By contrast, premiums supported by electricity hedging requirements, customer expectations or other commercial considerations are described as potentially less exposed to renegotiation.
This assessment is presented as distinct from the four core downside scenarios while still addressing durability of contracted revenue. It is described as particularly relevant where buyer willingness to pay depends on an assumed reduction in its CBAM costs rather than on independently established commercial value. The focus remains on how contract economics may respond if CBAM-related assumptions do not hold.
Illustrative DSCR impact from fallback costs
An illustrative financing example shows how quickly additional costs can reduce debt-service coverage under stress conditions tied to eligibility or fallback treatment. A project producing EUR 4 million in cash flow before debt service against EUR 3 million in debt service results in a debt service coverage ratio (DSCR) of 1.33. The example then introduces an additional EUR 1 million fallback cost.
With the added cost, cash flow available before debt service falls to EUR 3 million while debt service remains unchanged at EUR 3 million. Under those assumptions, DSCR declines from 1.33 to 1.00. The figures are stated as illustrative, but they are used to demonstrate how loss of eligibility-related costs can remove financing headroom.
The stress-testing approach described emphasizes identifying the path from initial evidence failure through to DSCR deterioration rather than adding a generic compliance reserve. This method aims to model how specific failures translate into cash-flow outcomes relevant for repayment capacity.
EU electricity reform proposal not treated as enacted law
The European Commission’s proposal COM(2025) 989 is described as set to materially change electricity treatment under CBAM if adopted, including methodology for electricity default values and parts of conditions governing actual emissions values. It would also broaden physical PPAs to include intermediaries and modify congestion and nomination framework elements. However, it is characterized as remaining under interinstitutional negotiation rather than enacted legislation for current-law pricing assumptions.
The Council adopted its negotiating position on 12 June 2026 and the European Parliament adopted its position on 15 September 2026. Separate Commission materials include definitive-period sector guidance published on 14 August 2026 covering electricity, iron and steel, and aluminium, alongside updated general CBAM questions and answers published on 15 October 2026. These documents are described as supporting understanding of implementation but not replacing binding regulation and implementing acts.
For lenders sizing debt, cash flow is described as needing alignment with what remains available under a selected downside scenario rather than relying on unproven upside tied to regulatory eligibility or supporting evidence. Revenue dependent on such factors should be treated as optional upside rather than essential capacity for debt service under stress assumptions.