The latest on Energetic and renewable energy trends.

GreenBiz and the Clean Energy Buyers Association (CEBA) convened climate action leaders in San Jose for VERGE22 and CEBA Connect last week.

Everyone from clean energy developers, to buyers, financiers, and advisors were aligned on one thing; the market is ill-prepared to meet the insatiable demand for clean energy and other footprint-reducing solutions prompted by unprecedented SBTi, net zero, or other ESG commitments. Keep reading for our key takeaways.

Corporate demand for clean energy is insatiable

Renewables procurement was top-of-mind for many of those in the audience. Thanks to programs like RE100, hundreds of businesses have committed to relying on 100% renewable energy. Procurement challenges are an unintended result as clean energy development fails to keep pace with rapidly growing demand. Businesses are competing to procure renewable energy, especially via virtual power purchase agreements (VPPAs). The winning bidders are primarily large investment-grade corporates. A huge swathe of the market remains unserved.

The renewables market has shifted from a buyer’s market to a seller’s market

Demand has outpaced supply. Developers are racing to satiate demand, while navigating ongoing supply-chain challenges, rising interest rates, lengthy interconnection and permitting queues, and more. The majority of buyers are toiling with how to successfully procure renewable energy as most of the market is unrated or sub-investment grade, including those procuring energy through third-party platforms, on behalf of franchises, or via subsidiaries.

Credit presents a significant barrier to scaling clean energy procurement

According to the Clean Energy Buyers Association, “only 23 percent of the most mature U.S.-listed companies have sufficient credit ratings to support the development of large-scale offsite clean energy projects.” Lauren Tatsuno from 3Degrees, Harry Singh of Goldman Sachs, and Brooke Malik of Apex Clean Energy spoke to four common, but imperfect solutions; leveraging existing banking relationships, credit sleeves, posting high amounts of credit, and PPA terms flexibility. Developers, buyers, financiers, and advisors emphasized the limited success they have had with these approaches, the persistence of credit barriers, and the need for more solutions.

Scope 3 is the next frontier

Those lucky enough to be able to tackle their scope 1 and 2 emissions are now increasing their focus on scope 3 emissions. Approximately 80-90% of overall emissions stem from supply chains. These emissions fall outside of the direct control of procuring entities, yet they fall within the scope of influence. Supplier engagement, education, and enablement are key. Only a fraction of companies are actively engaging with their supplier base today in an effort to decrease emissions. Entities like OneTrust provide footprint calculating tools and are working with procurers and suppliers to make reporting easier. Companies like Meta have developed support programs for their suppliers. These programs are critical for ESG success as approximately 98% of Meta’s emissions stem from scope 3 from their many suppliers providing building materials, technology for data centers, professional services, and more. Suppliers most often begin with renewable energy procurement, employee training, and energy efficiency programs. Unfortunately, credit barriers resurface here, too, as an estimated 70%+ of suppliers for major corporations are sub-investment grade or unrated. Panelists acknowledged that financing is a key barrier for suppliers. Without targeted financing and credit support, a minority of suppliers will be able to address even their scope 1 and 2 emissions.

Carbon credit investments are ramping

As the mitigation hierarchy teaches us – those in a position to eliminate and reduce emissions should do so, and then consider the role carbon offsets can play in mitigating their remaining footprint. Corporates, startups, NGOs, scientists, multilateral public and private institutions are endeavoring to bring clarity, guidance, and liquidity to carbon markets. Innovators, registries, and verifiers are focusing on how to deliver high-quality nature-based and engineered carbon credits. Early adopters are already purchasing credits or making commitments. Most prospective buyers are keeping an eye on carbon market movements, while first improving the efficiency of their operations, electrifying where they can, and procuring clean electricity to the maximum extent possible.

Collaboration is critical

The structural market challenges present in clean energy and efficiency markets cannot be solved unilaterally. We were pleasantly overwhelmed by requests for support and collaboration. Buyers need credit support. Developers need more affordable financing. Financiers need more projects to invest in. Advisors need tools in their kits to support buyers when they run into procurement barriers. Our team at Energetic Insurance solves alongside developers and financiers every day. We are increasingly interested in hearing directly from buyers and supporting their procurement needs.

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Have questions on how Energetic Insurance can reduce credit barriers, support cost-effective renewable energy procurement, and help support the greening of supply chains and reduction of scope 3 emissions? Contact us here.   

This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.   

“We have stringent risk monitoring protocols in place. The protocols require us to track site performance and evaluate risks, ensure compliance with customer communications and claims reporting, and report to reinsurers on our bordereau. We must have a robust, trackable system of record. That system has to be flexible enough to add these puzzle pieces. In addition to that, we allow our workforce to be remote and would never contemplate a system that requires people to be on-site to use it. We’ve been happy that our Novidea deployment is cloud-based from day one, and we couldn’t imagine it any other way.”

Energetic Insurance partner, Novidea, featured our work in a case study this month. An excerpt is below and you can download the full case study below to learn more.

"A trailblazer in trade credit risk for solar, Energetic brings to the industry decades of experience in the energy sector, in conjunction with robust data analytics, modeling, and software. Energetic offers a new form of trade credit insurance customized for the renewable energy industry. It’s a 10-year, non-cancellable policy. However, taking on this risk across an entire energy project adds layers of complexity to insurance policy administration.

“Unlike other MGUs with one-year policies and renewals, when we book a policy with a developer or a bank, it’s often a 10-year tenor. That makes it challenging to monitor and track insurance policies. On top of that, the nature of our risk product means we must deal with dynamic limit of liability schedules that change over time. To operate, Energetic had to find a flexible system of record that can change as a function of those schedules,” McAulay says.

Energetic sought to minimize time spent on policy administration as they scaled their business. Energetic required a future-forward agency management platform that could serve as a system of record for all insurance policy-related information. This system included quotes, rating actions, issuances, renewals, compliant customer communications, bordereau reports for reinsurers, and more. Most importantly, the technology had to be able to grow with the company. When McAulay and his team started investigating traditional insurance policy management systems, they quickly learned that an energy insurance industry- specific system of record didn’t exist. Energetic had two choices: they could build something from scratch or find a flexible vendor partner with the ability to customize a solution for their needs.

“We looked at many different systems,” McAulay recalls. “Most insurance agency management vendors only offered policy administration systems for existing insurance products. They didn’t have a solution that fit our policy terms and limit schedules. In terms of functionality, they offered many things that we didn’t need and not enough of what we required.” That’s when Energetic discovered Novidea.

Energetic Insurance has partnered with Novidea to streamline its policy administration. By adopting Novidea’s cloud-based agency management system (AMS), Energetic has built a scalable, compliant system of record for managing its credit insurance policies, including the flagship EneRate Credit Cover.

This partnership allows Energetic to automate processes like policy monitoring, renewals, and reporting, enabling the company to focus on growth. Since deploying Novidea’s solution, Energetic has expanded its product line and raised $7 million in a Series A round.

Read more about this collaboration here.

Energetic Insurance has been recognized as one of the top 5 risk management solutions for energy companies in a recent report by StartUs Insights. Their innovative approach to solar project financing, through the EneRate Credit Cover, helps mitigate credit risks for unrated and below-investment-grade counterparties, streamlining financing for renewable energy projects.

Alongside Energetic Insurance, the report highlights solutions in energy trading, portfolio management, and remote asset maintenance, showcasing how technology is transforming risk management in the energy sector.

Read the full report and discover more about the leading energy startups here.

Energetic Insurance was recently highlighted as a critical component in supporting renewable energy strategies, particularly by addressing credit risk in long-term agreements such as power purchase agreements (PPAs) and community solar projects. As discussed during a recent panel featuring industry leaders, creditworthiness remains a major barrier to securing financing for renewable energy developments. Energetic Insurance provides essential credit support, enabling companies with below-investment-grade ratings to access affordable financing, reduce costs, and facilitate the adoption of clean energy solutions. This innovative insurance solution is poised to accelerate the transition to renewable energy by removing financial hurdles for both corporate and community-driven projects.

For more insights, read the full article here.

The Securities and Exchange Commission (SEC) recently proposed a new rule that could require companies to provide more detailed reporting of their climate impacts and emissions, should it be adopted.

Regardless of the outcome of the proposed rule, climate-related events are already impacting businesses and portfolios. Businesses and financiers should be planning and preparing to minimize their climate-related risk exposure, and to preserve their asset values.

SEC and Disclosure Rules

The information companies are required to disclose to the SEC pertains to matters that materially affect a business and its financial health. The SEC is now joining the chorus of asset managers who have pushed for public companies to disclose climate-associated risks as they understand that the material impacts of climate change affect corporate financial health and must be accounted for.

The proposed rule focuses on Scope 3 emissions; emissions which stem from assets not owned or controlled by the reporting organization, but that are indirectly impacted by company activities. Until now, only Scope 1 and 2 emissions (coming from direct operations and electricity consumption) were taken into account by the SEC.

The newly proposed SEC rule would require companies to engage in disclosures on three fronts: material risks, greenhouse gas (GHG) emissions, and transition plans.

Material Risks

If enacted, the SEC rule will require companies to disclose any risk stemming from climate-related hazards. A given company would have to describe in detail its governance of climate-related risks and relevant risk management processes.

It would also have to focus on the identified and potential impacts of climate-related risks on its business model, strategy, and outlook – as well as on its financial statements. Filers should not only disclose impacts, but also their processes to manage the risks.

GHG Disclosures

The proposed SEC rule goes beyond the bounds of the guidelines for Scope 1 and 2 emissions, and now includes Scope 3 emissions. As such, a registrant with a set GHG emissions target, or whose disclosures are material, would now be required to disclose GHG emissions from upstream and downstream activities in its value chain.

Until now, Scope 3 emissions were not taken into account – this would significantly change the way financiers and companies think about the intersection of investments, climate impacts, corporate risks, and enterprise value. Beyond this, Scope 1 and Scope 2 emissions would have to be separately disclosed on a disaggregated and aggregated basis. All disclosures would be required on a gross basis and relative to emissions’ intensity.

Transition Plans

Under this framework, companies would have to disclose any existing targets around low-carbon strategies. The SEC would then require specific information on how the company’s plan will achieve the set targets.

Application    

Should the rule be adopted by December 2022, major companies would have to disclose most of this information as of fiscal year 2023, and smaller companies as of fiscal year 2024. If not done so already, companies should establish clear, temporally bound plans for emissions reductions, and must prioritize high fidelity data collection. Policies and procedures should be in place to gather data required for reporting, and to fulfill assurances related to emissions reporting.

The SEC would provide time for planning and reporting of Scope 3 emissions by allowing an additional year beyond the aforementioned deadlines. As such, investors and firms can initially focus on mitigating and reporting Scope 1 and 2 emissions, which should provide a more secure foundation on which to develop detailed understandings of scope 3 emissions from within and beyond their supply chains.

Scope 3 emissions reporting and reduction still represent a challenge for most companies. While the SEC protocol provides specific guidance on how to measure them, accessing the information required for accurate reporting represents a significant challenge. Quantifying Scope 3 emissions is particularly difficult and requires comprehensive consideration of all sourcing, product usage, and end-of-life disposal activities. Quantification hinges on robust data collection and accounting, which is ideally done in a collaborative manner, enabling data sharing across supply chains to enhance accuracy and to avoid double-counting.

Public Reception

As the conversation around climate change heats up within the public debate, investors, and more generally big financial firms, have been supportive of measures to reduce climate risk and stranded assets. This SEC rule will serve as a guidebook for investors seeking to quantify and assess financial risks posed by climate change, and direct their funds to the most resilient enterprises.

The proposed rule has been met with some criticism, with certain groups fighting back, arguing that the commission lacks the authority to issue this type of guidance, and threatening to remove their investments from banks supporting the rule. Despite this push back, most investors seem to favor the new rule – it is both the right thing to do for the environment and society, and it would provide another tool for financiers and corporates as they strive to make sound investment decisions.

How to Prepare

Although the final SEC decision won't be revealed until November – during midterm elections – asset managers and corporate executives should assume some new requirements will unfold, and pre-emptively prepare for the impacts the requirements might have on disclosure plans.

Whether or not the rule is enacted, requirements like these are inevitable, as are new regulations and changing consumer preferences. It is only a matter of time before climate risks are incorporated into 10-Ks and/or other corporate filings. As a result, investors, board members, and shareholders are changing the way they think about corporate financial health. Sound corporate governance and risk management is key.

Emissions reduction targets must be coupled with tangible and achievable roadmaps, and plans must be implemented. Decision-makers should prioritize investments in energy efficiency, renewable energy procurement, and other similarly de-risked climate-friendly solutions. Doing so can have the added benefit of minimizing operating costs – consider the value of locking in long-term competitive electricity prices and decreasing consumption needs – while contributing to the activity's requisite for Scope 1, 2, and 3 emissions reporting and reduction. As emissions reduction activities ensue, companies should ensure ongoing data collection, analysis, and address risks as they arise.

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References:

• https://www.wsj.com/articles/the-sec-climate-rule-wont-hold-up-in-court-west-virginia-epa-agency-congress-11657659630
• https://cleantechnica.com/2022/07/14/republican-attorneys-general-fight-sec-over-corporate-climate-disclosures/
• https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/understanding-the-secs-proposed-climate-risk-disclosure-rule
• https://www2.deloitte.com/us/en/pages/audit/articles/sec-climate-disclosure-guidance.html
• https://www.sec.gov/news/press-release/2022-46