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Managing the perils of the green transition with credit and political risk insurance

By Michael Creighton | May 10, 2024

In this article we explore how credit and political risk insurance (CPRI) can help mitigate the risks of the green transition.
Credit and Political Risk
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The impact of climate change is clear.

In recent months alone, unprecedented flooding has hit California, the Spanish government has declared a state of emergency over drought in the region of Catalonia and El Niño conditions are boosting existing global warming, highlighting the need to act swiftly to combat climate change.

While the risks of failing to advance green technology to replace fossil fuels are apparent, the transition itself is not without risks, especially from a financial, economic, and political risk perspective.

In certain cases, these risks may even be heightened. For instance, entry barriers into the renewable energy sector are significantly lower than they are in the coal, oil and gas sectors.

Whereas financial stability is ingrained into fossil fuel projects, having been built up over decades, the same is not true for the renewable energy sector, says Michael Creighton, WTW’s head of trade credit and trade finance for Great Britain. “To develop an oil or gas project, there are really high barriers to entry,” he says. “It costs billions of dollars, and only the largest and very few could actually develop such projects.”

“In contrast, in the renewable energy sector, anybody can do it. People can build their own solar panels on their houses and feed the electricity into the grid. We couldn’t do that in the oil sector – the issue is that so many entrants can come into the sector, and some may not have the deep financial strength as those that went into the old technologies,” Creighton explains.

“From a credit perspective, there’s an elevated risk because of the vast number of entrants into the sector.”

Another potential risk is how rapidly renewable energy technology changes, which is something more usually associated with the electronics sector. The cost and efficiency of solar panels, for example, can shift very quickly, rendering recently developed projects expensive and inefficient.

“There’s continual research and development around solar panels, but these projects are still being funded the same way as the big oil and gas projects, sometimes with 18 to 20-year funding packages. But in two years, the technology might be obsolete and maybe comparable financing costs associated with new projects will come down significantly,” Creighton says.

“The latest OECD consensus rules pushes up the renewable energy funding to even longer tenors,” he adds.

The Berne Union Business Confidence Index for Q1 2023 reflects this, with public providers “anticipating a large increase in demand for longer-tenor cover” and an overall uptick in requests for green products. At the time, some private insurers were looking ahead to “strong demand for structured credit and political risk covers”.

Three recent examples from around the world confirm the existence of very real credit and political risks within the renewable energy sector, all of which can be alleviated by targeted insurance.

Chile, as a country, is very committed to energy transformation, setting ambitious goals of converting 70% of its energy consumption to renewables by 2030 and pledging to be carbon neutral by 2050. However, many of the companies active in Chile’s renewable energy sector are experiencing financial challenges.

A lag in the development of transmission lines compared to the increase in generation, together with low remuneration triggered by storage issues and an oversupply of electricity in low demand periods, is causing financial difficulties for many businesses.

A number of companies have since filed for bankruptcy, including a subsidiary of Spanish firm Solarpack.

In 2019 the 640MW Yunin wind farm, offshore of Taiwan, reached financial close. The project financing involved a significant number of banks and export credit agencies and foresaw 18 years of repayments, with expected project completion slated for 2021.

Yet significant time and cost overruns during construction have necessitated a comprehensive restructuring of its €2.9bn financial debt and recapitalisation. Without this intervention, the project was highly likely to collapse.

On August 15, 2023, the Gabon government announced a “debt-for-nature” swap. The transaction switched US$500mn of debt to a “blue bond” with a lower interest rate and longer maturity, and was expected to generate US$163mn for marine conservation projects over the next 15 years.

But on August 30 – within two weeks of this landmark transaction – a coup resulted in the Gabon army ousting the recently re-elected President Ali Bongo, creating significant uncertainty regarding the country’s future.

“This highlights the inherent uncertainty: there are no guarantees. Just because these projects are nature-positive, it doesn’t mean that credit and political risks don’t exist,” Creighton adds.

All three of these examples were praised for their environmental positives, but within a relatively short period of time significant questions have been raised regarding their viability – a stark reminder of the financial, economic and political risks of doing business.

“A wise strategy is to make sure you put in place sufficient cover to manage the risks, so that if something does go wrong, you’ve got insurance that kicks in,” Creighton says.

The credit and political risk industry has a range of products available. Trade credit insurance provides suppliers with cover against non-payment on their open account trade receivables. Political risk insurance is available to investors looking to protect their foreign investments against a named list of political risk perils and comprehensive non-payment insurance, which can include complex project finance structures with a long tenor, is available to lenders.

As the world gears up for another year of extreme weather events and the green transition forges ahead, it’s clear that businesses will need to be well prepared for all eventualities.

This article was originally published in GTR (Global Trade Review) and has been republished on our website with their permission.

Author

Head of GB Trade Credit and Trade Finance, Financial Solutions

Contact

Alex Bursak
Multinational Trade Credit Leader APAC, Financial Solutions
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