Securing Financing for Renewable Energy Projects

Risk Management and Insurance are foundational to securing capital investment

 Renewable energy projects span a diverse array of solutions such as onshore wind energy, solar energy (photovoltaic, concentrated, and thermal installations), hydrogen (long-term storage and transport), hydropower and bioenergy (biomass, biogas, and waste-to-energy plants). However, getting such projects off the ground requires comprehensive and demonstrable risk management strategies from the outset that de-risk the mountain of challenges such projects face throughout every life-cycle stage – and which is foundational to securing capital investment for the project build.  

“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 Jacques De Villiers, head of Aon South Africa’s commercial division.

The need for workable renewable energy projects in South Africa

The spotlight on South Africa's renewable energy sector has never been more intense, as the economy grapples with the severe impact of load shedding and Eskom’s struggling supply challenges which will not be resolved in the short-term. A recent online survey conducted by BrandMapp[1] found that:

• 44% of employers have seen a decrease in productivity due to load shedding.
• 33% of entrepreneurs have lost some business/billing due to load shedding.
• 27% of employers are concerned about the safety and security of staff during load shedding, while 21% of businesses have seen an increase in theft due to load shedding.
• 9% of respondents to the BrandMapp survey have lost their jobs due to load shedding.

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, and is also foundational in terms of where capital investment flows.

“Consequently, fluctuations in premium costs can profoundly impact the profitability of developments and the debt cover ratios crucial for supporting financial arrangements. Therefore, insurance and risk advisors must possess extensive knowledge and understanding of the financial nuances in the project's cash-flow model to craft the most efficient insurance program,” says Jacques.  

“The availability of project finance is closely tied to the insurance solutions at hand. Banks, being risk-averse, demand high levels of insurance, making it a potential deal-breaker if brokers cannot secure adequate risk transfer capacity combined with seamless local solutions. It is pertinent to deal with brokerage and risk advisors who can draw from extensive global experience and actively support finance agreement negotiations in collaboration with clients and mandated leads working with banks and legal advisors,” explains Jacques.

Read Article: Financing SA’s Renewable Energy Projects Starts with Appropriate Risk Management and Insurance Solutions

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 negotiations with developers and lenders to strike a balance between lender requirements and market-provided commercial insurance solutions.

Aon finds that they are progressively more involved in traditional pre-construction risk advice, liaising with a multi-disciplinary team of lenders, contractors, legal counsel and insurance advisors during contract negotiations. Jacques adds that proactive involvement in negotiations from the outset helps align insurance with the risks and indemnity clauses arising from contracts, preventing costly pitfalls. 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 the traditional key lines such as property, engineering, marine and liability while additional specialised insurance solutions, including credit insurance, political and terrorism, weather risks, Errors & Omissions and Directors & Officers (D&O) cover can also be made available,” concludes Jacques.

[1] BrandMapp online survey p18 & p22: https://whyfive.co.za/wp-content/uploads/2023/03/The-BrandMapp_SilverstoneCIS-SA-Blackout-Report-2023.pdf

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