How renewable energy companies can unlock project financing

Unexpectedly high-severity losses – driven by climate volatility – are problematic for insurance markets, which have increased technical deductibles and imposed sub-limits in response. Although sophisticated models can increasingly do more with less, renewable occupancy remains a challenge. Overlaying climate volatility is limiting data reliability, with direct and immediate impacts on pricing, capacity and terms for insurance in exposed geographies. It’s increasingly expensive, but a sound insurance program remains pivotal to satisfy lenders.

“Particular problems arise in territories with high natural catastrophe (nat cat) exposures (e.g. windstorm impacting solar projects in the Caribbean and central America). The insurable exposure may be the largest risk the project is exposed to and the insurance market may not be able to offer nat cat limits that will cover the modeled losses plus the 10-25% buffer lenders will expect to be included. This is driving projects to consider non-traditional solutions.” Gavin Newton, Executive Director, Lenders’ Insurance Advisory Practice, WTW

Downtime from technology and supply chain breakdowns – lenders are demanding clarity on downtime and revenue disruption. High business interruption waiting periods can create cashflow issues for projects, which disrupt the project’s ability to service its debt repayment obligations. Insurers are considering the 12-month replacement period times as unrealistic, and countering by charging a rate that reflects 100% of the 12-month loss of revenue being eroded in the first 6-8 months.^[1]

Renewables companies need to get strategic about managing their risks around project resilience from the outset.

Uninsured losses through poorly managed risk retention financial structures and inappropriate sub-limits or structures, can quickly turn a well-performing asset into a distressed special purpose vehicle. Some companies have found their contingent funds insufficient to support multi-million-dollar retentions for nat cat losses. In distressing the non-recourse nature of these projects, lenders have exercised their step-in rights – not at all what their original investment committee envisaged.

Some renewable energy insurance structures are more considered. Blended solutions can achieve acceptable risk transfer at the most economic cost, now more than ever. And establishing a self-insured retention strategy can also enable businesses to remain agile in utilizing balance sheet strength to support growth initiatives and insulate from cashflow and insurance pricing volatility.

When considering technology risk, warranties are often the first response to an insurance claim or loss event.

“When looking across the portfolio of assets, understanding which assets are in or out of warranty needs to be considered as part of the insurance and risk management strategy. Insurers are increasing costs for out-of-warranty assets, with some facing a 25% premium hike. In some cases, it may be commercially reasonable to purchase or agree longer warranty periods to bring down the cost of insurance. Striking the right balance can be a prime opportunity.” Oliver Warren, Account Director, Global Renewable Energy, WTW

These measures must be articulated clearly to lenders but can be presented as a sound and reasonable contingency plan to protect operations and revenue. 

In tackling the availability and affordability of insurance, there’s no one-size-fits-all panel that will write everything at the cheapest cost, so engaging with markets is essential.

For companies with a heavy weighting in areas which have sustained heavy losses or exposures such as North America, balancing local and global markets can be the best way to secure cost and capacity that’s aligned to the company’s risk strategy.

Alternative risk transfer solutions such as parametrics are a stronger proposition than they have ever been before.

For operations spanning large geographies with different projects and exposures – particularly climate and, by extension, supply chain – parametrics can be a valuable solution. In areas with historically low exposures to specific weather perils, parametric premiums will be lower compared to the demands from traditional insurers where premiums and deductibles are on the rise. Parametrics go further than protecting the asset value from property damage, they are pure financial instruments aligned to agreed metrics and triggers; their response is increasingly being used to protect assets and any disruptions in revenue under pre-agreed financial responses.

Stronger parametric providers are having their solutions accepted directly by lenders as acceptable security or being positioned as security to primary insurers. Figuring out whether a project or asset can be insured for its entire lifespan is difficult to model, but parametrics can provide stability for 5-7 years in some cases.

Lenders are looking more favorably on projects with strong risk management and sound contingency plans, alongside insurance coverage, for disruption to protect revenue flow.^[2]

Lenders remain concerned over the length of time it takes to establish root cause analysis (RCA) after a loss event. Only when RCA is determined, can there be clarity over whether the manufacturer warranty or insurance cover will respond. The lack of transparency between manufacturers and insurers during this process needs to be addressed, and brokers have a key role in advocating on behalf of their client.

Brokers are taking action to import clauses. By bringing longstop policy conditions to the table, brokers are able to establish clarity on who will be responsible for paying out in the event that either RCA or acceptance under warranty can’t be achieved within a reasonable timeframe, helping to avoid delays in reinstating an asset and associated loss of revenue.

Other strategies – such as asset sharing agreements with priority calling on assets such as transformers – mean that replacements can be available, faster. Although it’s challenging to secure reduced rates with insurers upfront, there are encouraging movements in this direction to enable companies to curate investment in spares to offset the disruption. 

Creating longstop policy conditions and spares or sharing agreements all help to give lenders confidence that the revenue flow of their investments is protected. In turn, lower debt servicing coverage ratios may be achieved for eligible renewable projects. 

Blended finance allows projects to raise funding at substantially lower rates, However, blended/concessional financing is made available mostly through multilaterals (MFIs) and therefore gives certain lenders a competitive advantage. If available, it is likely that blended/concessional finance is able to take higher commercial risk and this could result in less stringent insurance requirements or even reduced coverage, particularly in countries where certain coverages have become difficult to buy (such as natural perils).

The alternative would be parametric insurance products which have a large scope where traditional insurance capacity is not available, or financially not viable for the project. However, significant work needs to be done to ensure that

• Finance documentation allows the use of these products
• The market is clear on the triggers and payment conditions
• All parties are aware of what the products cover and whether they are financial products or insurance products