The clean energy transition isn’t new, but what falls within the scope for insurance, is.
The cost of capital remains one of the major barriers to investment in clean energy projects and infrastructure. Against a backdrop of severe macroeconomic volatility, return on investment (ROI) is in the driving seat for lending decisions. If the world’s capital becomes reluctant to support new risks, the predicted scaling and hybridization of the net zero journey will stall.
“The renewable energy insurance market is ever changing, with new technologies and scales of production emerging.”
Julian Richardson | Chief Underwriting Officer, Green Solutions, Munich Re
The insurance market has a pivotal role to play in supporting this technological revolution to electrify our world with clean energy. According to Julian Richardson, Chief Underwriting Officer, Green Solutions, Munich Re, “The renewable energy insurance market is ever changing, with new technologies and scales of production emerging. Underwriters can share in that risk by providing warranty products: performance warranties and long-term guarantees.” By providing a financial safety net, financiers will have security to invest capital, and natural resources companies will be able to drive clean energy projects forward at pace.
While some renewable energy technologies are fully commercialized and capable of demonstrating robust and reliable performance data, innovative technologies need more specialist assessment. Newer technologies entering the market do not always have the data required to prove that they can operate at the trouble-free levels needed to encourage wide deployment of debt. Many renewable energy projects seeking to harness the performance and efficiencies of evolving technologies are not readily bankable through the raising of debt and shared risk capital due to early technology non-performance risk.
Natural resources companies need to get clean energy projects off the ground, and lenders need to be sure that the ROI is commercially supportable. Meanwhile, insurers may not consider it their role to commercially fund the early research and development risks associated with projects that use new or reconfigured technologies.
“Performance insurance works alongside traditional lines like property and casualty by covering the technology risk. Performance insurance acts as a backstop against newer and innovative technologies not reaching the expected production levels as they go through their commercial scale-up.” Vicky Roberts-Mills, Global Head of Energy Transition, AXA XL.
With the protection of performance insurance, project developers, owners and operators can safeguard against some of the risk of technology non-performance materially threatening operators’ ability to service their debt obligations. Performance products are complex and bespoke products, requiring a high level of engineering assessment and collaboration with insurers during the construction and testing of new technologies and facilities. Manufacturer warranties have a role to play in ensuring equipment output and efficiency is delivered as specified, but when technology underperforms, or a component fails its warranty, the whole system’s performance insurance policy can be triggered. Performance insurance covers non-performance risk as a whole, cutting through the complexity of multiple technologies operating under different warranties and delivering confidence and clarity that debt servicing obligations remain protected.
It's good news for everyone. Backed by performance insurance, lenders and equity holders’ financial returns are more secure, enhancing the DSCR (debt service coverage ratio). This certainty is boosting lenders’ appetite, enabling clean energy projects to secure financing for newer and more innovative technologies at a lower cost of borrowing. With this backing, natural resources companies can scale up and grow revenues based on successful performance of the technology with greater confidence. Meanwhile, banks and other equity partners are able to boost their environmental, social and governance (ESG) performance by building clean energy projects into their portfolios.
“By aligning the project owner(s) and lender(s) before the project gets off the ground, performance insurance can secure ROI for the lender, enabling project owners to unlock project financing and reduce the cost of capital.” Steven Munday, Global Renewable Energy Leader, Willis Natural Resources.
For banks and other financiers, despite global volatility, the capital is there. But finding the right energy transition project with so much emerging technology, is a hurdle with ROI in the driving seat. Performance insurance fills the gap by supplementing the credit and market risk with clarity on technology performance.
Backed by highly rated insurance capacity and an increasing underwriting appetite, what’s considered to be a bankable project is changing. Since insurance capacity is enabling project financiers to transfer some of the technology's non-performance risks and securitize long-term manufacturer warranty obligations, more renewable energy deals are becoming bankable. The global opportunity for evolved growth in renewable and clean energy projects is accelerating.
“Performance insurance is a mindset shift. It’s a safety net, but it’s a way to create value upfront. It could end up becoming one of the most important solutions available to clean energy projects.” Vicky Roberts-Mills, Global Head of Energy Transition, AXA XL.
Performance insurance is gaining ground. But as performance insurance emerges as an innovative solution to secure more affordable financing, risk managers will need to work closely with their brokers to make sure the full scope of the benefits to the business are unlocked.
“[Performance insurance] could end up becoming one of the most important solutions available to clean energy projects.”
Vicky Roberts-Mills | Global Head of Energy Transition, AXA XL
The lifecycle of each renewable project will vary, but the core landmarks remain consistent. During the construction and operational phases of a project, property damage, business interruption and liabilities are traditionally covered by corresponding insurance towers. But as agile solutions, such as parametric insurance, supplement insurance portfolios by filling protection gaps and safeguarding revenue flow, brokers and risk managers will need to consider how performance insurance can supplement the full suite of insurance solutions.
“It’s part of a mosaic, and any risk manager needs to think about that whole mosaic and how it fits together. How technology risk management interacts with the traditional products and alternative solutions, depends wholly on fully understanding your own risk profile.” Julian Richardson, Chief Underwriting Officer, Green Solutions, Munich Re.
At the very beginning of the project lifecycle, performance insurance can be an additional tool for some projects to get off the ground. By providing financial protection to debt financing undertakings, the level of security can be rolled to align with the operational life of a project and future refinancing obligations.
From making projects bankable in the first place, to driving down the cost of capital, to protecting debt servicing obligations and keeping projects afloat, performance insurance will be a key tool in the renewable energy risk management toolkit.
Vicky Roberts-Mills, Global Head of Energy Transition, AXA XL
Julian Richardson, Chief Underwriting Officer, Green Solutions, Munich Re
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WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
