Hydro has long been the dominant source of power generation in Latin America. In recent history, the attention for development of new capacity has shifted to solar/wind projects and smaller hydro projects. The plans for further growth in these areas are vast.
Brazil, Mexico, Uruguay, Argentina and Costa Rica have been instrumental in leading this growth, backed by Colombia and Peru. Governments have been and will be organizing renewable tenders in various countries.
In respect of the Latin American insurance market, which is concentrated in Miami and with also underwriting centrums in other Latin American countries (mainly Brazil and Colombia), there is a distinct appetite for renewables. However, market conditions are hardening with a delay effect to global markets, as is the case for the Power market in general. In particular, insurers are imposing restrictions related to testing and commissioning and machinery breakdown because of concerns regarding certain types of wind turbine technology. There are also more stringent technical requirements emerging for dams related to hydro power plants before insurers can deploy their full capacity.
In respect of minimum capacity, some important players require a minimum project value of US$250m, which means that for smaller stand-alone projects local capacity will often have to be sought to complete the placement.
Insurance is always a key component for project finance and indeed project risk transfer management overall and so will continue to be instrumental in the further development of this sector. Especially during these hardening market conditions, an early involvement of an insurance advisor/broker will help dovetail all the project contracts and risk transfer/insurance requirements, with the latter to be placed into construction and operational insurance programs. This issue is equally valid all over the world but requires specific attention in Latin America, due to insurers often still using restrictive wording templates.
It has been proven on many previous financed renewables projects globally that a well drafted contract providing the optimum risk allocation amongst the contracting parties, coupled with manuscript broad form insurance policies and accurate construction and operational insurance budgets. This combination provides the most robust risk management and insurance procurement strategy, which further contributes significantly to the competitiveness of the overall project bid.
Preparation of underwriting information, together with the insurance advisor´s engineering team, will support the discussions with the markets about risks in that respect.
So there are certainly challenges ahead but with the right attitude, adequate insurance protection can be obtained to ensure the support of the growth of the renewables industry in Latin America.
Marc Vermeiren is Latin America Power & Renewables Regional Industry Leader at Willis Towers Watson, Lima.