As a society we find ourselves at the doorstep of the 21st century’s third decade. And from this precipice, we see before us a set of conditions that have never occurred in such a combination and at such epic proportions, especially for the renewable/alternative energy industry. So what is it that we see before us?
While this article does not discuss the traditional utilization of insurance capacity, the reader is asked to accept the premise that the vital traditional roles of insurance capacity is not being questioned; instead, it focuses on novel and alternative applications of some of that insurance capacity. As the remainder of the article refers to insurance capacity as a capital source, it will henceforth refer to it as capital.
Energy investments are by nature capital intensive and typically deliver relatively low rates of return. This paradox presents significant financial challenges when considering investing in un-bankable technologies and/or into assets involving financial counterparties that do not possess a published investment-grade credit rating.
But what if these bankability concerns could be satisfied with insurance capital? What if we started treating insurance capital like any other component of a project’s capital stack and not just as a balance sheet protection tool? While the applicability of these concepts permeates all aspects of this industry, this article will focus solely on the Commercial and Industrial (C&I) solar marketplace.
Globally there are many thousands of commercial entities, commonly referred to as Hosts, seeking to avail themselves of the vast financial benefits that are offered by renewable energy assets. Numerous studies have also found that a large majority of these entities have grave concerns regarding climate change and an innate desire to operate their businesses in an environmentally responsible manner. Regretfully for most potential Hosts, these aspirations can sometimes be eviscerated as quickly as they are formed; when these entities start searching for project financing, they can often be told that they are just not good enough.
The financial markets have been relentlessly brutal in their unwillingness to fund C&I solar projects cost-effectively for Hosts without a published investment-grade credit rating. To further exacerbate this situation, this ostracized market segment is one of the few remaining underserved segments in which developers, especially solar developers, may look to receive unlevered double-digit returns.
To clearly restate the problem: this disconnect within the traditional Renewable Energy capital markets prevents most commercial operations with very strong financial ratios from reaping the benefits of renewable energy utilization while simultaneously minimizing investment returns available to the renewable energy sector. The result: a classic “Lose–Lose”!
As one of its founding principles, Newtonian physics states that every action must have an equal and opposite reaction. Metaphorically, this principle may also be applied to the world of finance: accordingly, the systemic capital market disconnect and its imposition of such overwhelmingly negative financial consequences discussed above affords an opportunity of equal and opposite magnitude of financial gains for those with the drive, creativity and intestinal fortitude to develop scalable investment-grade solutions.
By the end of Q1 2020 a financial and operational platform is planned to be introduced into the US marketplace that looks to create instant bankability for the currently disqualified but financially strong C&I Hosts. As is often the case when solving such systemic problems, there are no silver bullets. The platform will involve a well-orchestrated combination of existing products and services, re-purposed capabilities/resources and newly created financial tools. The platform is being designed to insert itself in the early development stages of a potential C&I project. The automated platform will proactively manage the accumulation of new projects into asset pools which meet a pre-determined risk profile, as opposed to a traditional post-Limited Notice to Proceed (LNTP) deal featuring specific credit underwriting methodology.
Some of this platform’s key elements are:
Binary outcomes rarely exist; this vast pool of potential C&I Hosts presents a range of outcomes. With this bankability platform the financial markets see investment-grade opportunities; without it, the markets can often simply state that they are just not good enough. This bankability platform is designed to transform the C&I industry into an investment opportunity that may best be characterized as follows:
There is a school of thought that would describe the renewable energy industry as a finance, legal, and technology sector that happens to do great things with electricity instead of lumping it into a legacy energy category. While this article is not endorsing one thought process over the other, the solutions discussed above are only possible when one chooses to view the industry from the broader perspective. By viewing insurance as a capital source that specializes in long-term data-driven decision making, one can craft solutions that fill the voids created by traditionally-defined capital providers - thereby redefining bankability.
Danny Seagraves is a risk management and risk finance specialist working for Willis Towers Watson in Charlotte, North Carolina.
1 https://www.nationalgeographic.com/science/2019/11/earth-tipping-point/ 2 https://www.forbes.com/sites/dominicdudley/2018/01/13/renewable-energy-cost-effective-fossil-fuels-2020/#7cf549b54ff2