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Renewing the approach to financing renewable energy projects

Marsh’s newest thought leadership piece looks at 5 actions that all project finance stakeholders can take now.

12/02/2022 · 5 minute read

As more organizations embed climate change and sustainability efforts into their business strategies, the demand for renewable energy will continue to increase. Actions such as the recent federal Inflation Reduction Act, which provides financial incentives in terms of tax credits, is expected to accelerate the demand for and inflow of capital to finance assets, particularly in the independent power sector.

A substantive headwind to the efficient, effective, and otherwise accelerating deployment of capital into new projects involves the requirements for insurance coverage purchased by project sponsors to cover their risks and those of their lenders. The challenge often stems from the way project sponsors identify and analyze risks related to their own projects and present them to their lenders. These methods often result in insurance requirements that do not consistently reflect the risks that might be reasonably insured or retained.

As the demand for renewable energy increases, project sponsors and their lenders should explore options that enhance their risk management processes. Investments in risk management — in particular the ways in which risk identification and risk analysis are performed and communicated with stakeholders — may improve their financial partners’ confidence that risk is managed effectively. This can help reduce the cost and the time required to get to financial close, as well as a project’s cost of risk over its lifecycle.

Actionable solutions for project stakeholders:

  • Identify credible risk identification and risk analysis techniques as inputs to insurance program design, making them the gold standard for submissions.
  • Employ a certified risk management professional within your organization.
  • Reflect on potential agent or broker conflicts of interest and incentives on each project’s — or portfolio of projects’ — risk management strategy.
  • Consider the importance of the insurance sufficiency assessment associated with financing strategies that are presented to lenders and investors and the unique role of the lender’s insurance consultant.
  • Perform annual sensitivity analyses.

The path toward more sustainable project financing

As renewable energy development in the US continues to gather momentum, project financing is expected to remain front and center. The many requirements for insurance coverage can pose a significant barrier to the efficient development and financing of these projects.

The way forward depends on creating a roadmap that allows for education, open dialogue, and willingness to change, allowing all stakeholders in renewable energy project financing to close deals more efficiently and with the right amount of insurance being purchased on a per-risk, merit basis.

Renewing the approach to financing renewable energy projects whitepaper

Learn why it is critical for project sponsors and developers to partner with experienced risk modeling professionals who can help them improve the credibility of outputs and instill confidence in lenders.

Download PDF

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