Navigating Financial Exposures in Renewable Energy Projects

Balancing Risk Management and Insurance

Renewable energy projects span a diverse array of categories such as onshore wind energy, solar energy, hydrogen (long-term storage and transport), hydropower and bioenergy (biomass, biogas and waste-to-energy plants). Getting these kinds of projects off the ground requires comprehensive and demonstrable risk management strategies that where possible de-risk the challenges such projects face throughout the life cycle of the project. This is foundational for organisations when securing capital investment for the renewable energy project.

“By adopting a single pre-agreed insurance policy, renewable energy project developers gain a better means to navigate financial exposures associated with potential coverage gaps throughout the various stages of the renewable energy project lifecycle. This approach, applicable to projects of any size, utilises a portfolio approach to underwriting, enabling effective coverage even for smaller projects that might otherwise be challenging to place cost-effectively in the global insurance market,” explains Santesh Pillay from Aon South Africa’s Renewable Energy & Construction team.

The need for workable renewable energy projects in South Africa

South Africa remains one of the top countries on the African continent implementing ambitious renewable energy development policies as one of its sustainable development goals[1].

• The Department of Mineral Resources and Energy (DMRE) launched Bid Window (BW) 7 of the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) have awarded 8 Solar PV Project totalling 1,760MW of new renewable energy builds[2].
• The total potential large-scale renewable energy, energy storage and component manufacturing market size are estimated at R468 billion by 2030[3].

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Specialised risk and insurance broking guidance becomes imperative for renewable energy contractors and developers in the face of the sheer magnitude and urgency of these projects. It introduces substantial and intricate risks that encompass financial demands, contractual liabilities and the necessary debt financing models. Insurance constitutes a significant cost component for renewable projects.

“Fluctuations in premium costs can impact the profitability of developments and the debt cover ratios crucial for supporting financial arrangements. Therefore, insurance and risk advisors must possess knowledge and understanding of the project to craft the most efficient insurance program,” says Santesh.  

“The availability of project finance can be tied to the insurance solutions available to organisations. Banks may demand high levels of insurance coverage, making it a potential deal-breaker if the business cannot secure adequate risk transfer capacity. It is pertinent to deal with a brokerage and risk advisors who can draw from global experience and actively support finance requirements in collaboration with clients and mandated leads working with banks and legal advisors,” explains Santesh.

Securing funding for a renewable energy project

Effectively leveraging the insurance markets – globally and locally - is paramount in securing funding for projects. The process starts with formulating the most bankable approach, increasingly participating in striking a balance between lender requirements and market-provided commercial insurance solutions with developers and lenders.

Having a risk partner adept at utilising both local and global markets is essential for developing appropriate risk transfer solutions alongside core insurances that are contractually required.

From the initial stages of shipments, construction, testing and commissioning, through to ushering in an operational energy project and the ongoing maintenance thereof, requires seamless insurance coverage to ensure a project’s success. It is important to consider every aspect, from planning and early works to marine cargo transits, construction all-risks, delay in start-up, operating property damage, business interruption and all third-party liability exposures.

“Renewable energy insurance products cover traditional key lines such as property, engineering, marine and liability in conjunction with additional specialised insurance solutions, including credit insurance, political and terrorism, weather risks, Errors & Omissions and Directors & Officers (D&O) cover,” Santesh concludes.

[1] https://www.afdb.org/en/news-and-events/press-releases/renewable-energy-offers-africas-best-opportunity-achieve-sustainable-development-goals-experts-say-63909#:~:text=Still%2C%20Nigeria%2C%20Ghana%2C%20Ethiopia,create%20jobs%20and%20stimulate%20industrialisation.

[2] https://greencape.co.za/wp-content/uploads/2024/04/Large-scale-RE-MIR-2024-digital.pdf

[3] https://greencape.co.za/wp-content/uploads/2024/04/Large-scale-RE-MIR-2024-digital.pdf

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