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In renewable energy project finance, managing credit risk is critical for both project developers and lenders. Two key tools in the risk management toolkit are credit enhancement and risk sharing. These mechanisms, though often complementary, serve distinct purposes and can be used strategically to improve outcomes. In this post, we’ll explore the different use cases for tools like EneRate Credit Cover (a credit enhancement) versus non-payment insurance (a risk-sharing tool).

What is Credit Enhancement?

Credit enhancement strengthens the creditworthiness of a project to mitigate risk and improve financing terms. There are two types of credit enhancement:

1. Structural – These are features built into the transaction itself to reduce the risk of default. For example, lenders often require specific Debt Service Coverage Ratios (DSCRs) or establish Debt Service Reserve Accounts to ensure funds are available to cover debt payments in the event of distress.

1. Contractual – These are separate agreements or contractual provisions designed to mitigate certain risks. One example is termination penalties or liquidated damages built into a contract. Our EneRate Credit Cover is a form of contractual credit enhancement, where a policy insures amounts due from an offtaker under a Power Purchase Agreement (PPA), effectively enhancing the credit quality of the offtaker.

In either case, credit enhancement aims to address situations where the underlying credit of the project or one of its participants is insufficient to meet an investor’s (lender, tax equity, or other) standards. For example, a PPA for a combined heat and power system might require the offtaker to “take or pay." If the offtaker chooses not to take power from the system or fails to provide the fuel required to generate power, it still must pay a certain amount. This contractual risk enhancement mitigates concerns over system usage. EneRate typically enhances counterparty credit risk. If a project’s offtaker has a sub-investment grade rating, a credit enhancement solution could include a credit insurance policy that insures payment obligations, allowing the project to secure more favorable financing.

What is Risk Sharing?

Risk sharing is a mechanism where a financial institution distributes a portion of its exposure to another party, such as an insurer, to enable larger or riskier transactions.

Motivations for using risk-sharing tools include:

• Increasing capacity – Allowing a lender to bid for a larger portion of a project finance transaction (and win greater client wallet share).
• Managing concentration risk – Reducing exposure to specific sponsors or geographies, often referred to as “tall tree” risk.
• Optimizing regulatory capital – Reducing risk-weighted assets or meeting regulatory capital requirements through eligible guarantees under frameworks like Basel III.

An example of risk sharing is non-payment insurance, where a lender involved in a large renewable energy project insures the credit risk, reducing the bank’s overall exposure to the sponsor or geography. This enables the bank to manage internal concentrations while still meeting client needs.

Credit Enhancement vs. Risk Sharing: Key Differences

While both mechanisms help manage risk, their purposes differ. Credit enhancement improves the transaction itself, often addressing concerns that might prevent an investor from participating. Risk sharing, on the other hand, enables an investor to expand—such as increasing lending capacity—despite external constraints like lending caps or geographic exposure limits.

EneRate Credit Cover (credit enhancement) improves the credit profile of a project, often leading to better financing terms. Non-payment insurance (risk sharing) allows lenders to distribute risk, enabling them to participate in larger transactions without exceeding internal or regulatory limits.

Interestingly, credit enhancement can achieve some of the same outcomes as risk sharing by improving a project’s overall risk profile. However, risk sharing is not typically used to enhance credit quality but rather to distribute and manage risk exposure across a portfolio.

Conclusion: Which Tool to Use?

 When determining which tool to apply, consider your primary goal:

• Are you seeking to improve the overall credit of the project to meet lender requirements? If so, credit enhancement is likely the appropriate solution.
• Are you looking to distribute risk to enable larger participation or manage regulatory requirements? In this case, risk sharing may be more suitable.

Ultimately, both credit enhancement and risk sharing are powerful tools that can complement one another in renewable energy project finance, helping stakeholders optimize risk management while meeting their financial goals.

For more in-depth discussions on credit enhancement, check out our previous blog posts here. You can also explore risk-sharing strategies in project finance in this article by Clifford Chance.

Energetic Capital is proud to announce a new investment from Greensoil PropTech Ventures, a ClimateTech investor focused on decarbonizing the built environment. This latest funding, alongside support from existing investors including SE Ventures, MS&AD Ventures, Congruent Ventures, and MUUS Climate Partners, will enable Energetic Capital to expand its financing solutions for distributed energy resources across underserved areas.

Having already expanded beyond solar into energy efficiency, microgrids, and other clean energy technologies, this investment will help Energetic Capital continue to deliver capital to traditionally overlooked real estate assets and low-income communities.

For full details on this exciting development, read the full press release here.

We're excited to share that Jeff McAulay has joined the "Insider's Guide to Energy" podcast as a co-host! With his extensive experience in the clean energy sector and passion for innovation, Jeff brings fresh insights to the show’s deep-dive conversations on the future of energy.

Tune in to hear Jeff and the team explore the latest trends, challenges, and opportunities shaping the energy landscape. Whether you're in the industry or just passionate about the energy transition, this podcast is a must-listen!

Check out more episodes here: Insider's Guide to Energy.

Last week, I was able to attend several Climate Week events in NYC 2024. This annual convening of thought leaders is crucial in driving top-down influence in the fight against climate change across every industry. Insurance has always been a priority of ours at climate week, but this year it was impossible to ignore the growing emphasis on insurance across all attendees, from venture investing to broader finance.

Historically, insurance discourse at climate events has revolved around resiliency and adaptation. Given that insurers have shouldered much of the financial burden from the physical damage caused by climate change , it's understandable that the industry has focused on mitigating and avoiding losses. Insurance has often been viewed as a tool to manage risk, especially as natural disasters increase in frequency and severity. However, this year, the conversation took a proactive turn.

The tone of 2024's discussions signaled a shift toward a more forward-looking role for insurers in preventing climate change itself. The industry’s growing engagement with “de-risking” clean energy and energy transition projects reflects a deeper involvement beyond traditional risk management. This shift not only introduces new players to the nuances of insurable risks but also demonstrates the powerful influence that Climate Week can have in aligning industries with climate action goals.

But the top-down influence observed during Climate Week NYC must be followed by meaningful action on the ground. As individuals within the industry, especially those involved in transactions, we have a responsibility to carry this momentum forward. Here are a few reflections on how insurance can continue to evolve as a force for change in the fight against climate change:

Engage Early

Every project or company must face a complex landscape of risk management. Engaging with insurers early in the process allows for crucial resiliency and adaptation considerations to be integrated into planning. This not only lowers insurance costs but also helps avoid costly last-minute surprises.

Early engagement can identify specialized products designed to transfer or reallocate risks that a project might not want to retain. By incorporating these solutions from the beginning, project stakeholders can model both the costs and benefits, ensuring more accurate planning and execution.

Quantify the Value of Insurance

Insurance is often perceived as an unavoidable expense, rather than a tool to create value. Shifting this perception requires a clear focus on the value an insurance policy provides. What measurable benefits does it bring to a project? Which key performance indicators (KPIs) does it optimize? These are key questions to answer.

At the same time, project owners and investors need to adopt an outcome-oriented approach. By isolating the tangible benefits of an insurance policy—whether it's protecting revenue streams or mitigating unforeseen costs—they can better balance the value it provides with its cost. The focus should be on achieving problem-solution fit, where insurance plays a critical role in enabling the success of a project.

Be Specific

Insurance can be broad and flexible, but to be actionable, it is crucial to be specific about the risks that need to be covered. This is especially important for emerging risks linked to the energy transition.

Taking a detailed approach to understanding the steps that could give rise to a loss, the potential economic impact, and the benefits of mitigating that risk ensures that the insurance solution is tailored and effective. For example, by mapping out the risk scenarios in a renewable energy project—such as operational downtime due to extreme weather—stakeholders can design an insurance solution that directly addresses these challenges, providing both financial protection and operational stability.

The impact of climate change was laid bare in 2023. It was the hottest year on record and the ten warmest years in the last 174 have all occurred in the last decade. Climate investment is attempting to rise to the occasion – investors poured $1.8 trillion into the energy transition globally, a 17% increase from the prior year. Still, the impact of climate change is clear, and capital deployment needs to accelerate in order to meet any of the stated energy transition goals at any level. Large, flat rooftops across America’s commercial and industrial (C&I) segment present a promising solution.

Installing solar panels on industrial rooftops provides an opportunity to bring meaningful chunk of clean energy generation online. Rooftop solar currently produces 1.5% of US electricity consumption, up tenfold from 2012; although this is a significant increase, there remains a large opportunity for growth. Environment America reports that widespread installation of solar on residential, commercial, and industrial properties could result in rooftop solar generating up to 45% of all electricity currently used in the United States. If all qualifying REIT real estate assets added panels on their rooftops, the amount of energy generated would make up 25% of commercial consumption. Large, flat warehouses roofs could produce enough electricity to serve their own consumption, leaving 80.14TWh available to the grid. Industries such as furniture, textiles, metal, apparel, and printing could generate enough electricity through rooftop solar to power their operations.  

Most industrial rooftops are flat and uncovered, creating ideal conditions for installation. Developers are not required to acquire land or work through burdensome siting and permitting requirements. Prioritizing onsite generation also mitigates significant interconnection delays that plague renewable deployment across the US. On top of it all, rooftop solar installation creates meaningful value for customers. Leasing rooftops to project developers creates an opportunity for landlords to increase net operating income (NOI). At the same time, onsite generation from rooftop arrays have the potential to reduce the cost of electricity. Commercial customers could see a 9% reduction in electricity costs relative to purchasing utility electricity in 2025 by installing rooftop solar. When coupled with battery storage, there are additional opportunities to generate income and reduce costs by participating in virtual power plants or providing ancillary services.

When considering the challenge ahead to combat climate change, the empty, flat rooftops in America’s commercial segment are a valuable resource. Unlocking this resource will be a massive uplift in the energy transition.

In the race to combat climate change, the energy transition has become an essential pillar. However, as we transition to greener energy solutions, there’s a critical piece of the puzzle that often gets overlooked—insurance. Innovative insurance solutions are key to reducing risks, encouraging investment, and driving decarbonization at the pace needed to meet global targets.

The Role of (Re)Insurance in Commercializing Energy Transition Technology: Opportunities in New York State (“the Report”), written by Cara Eckholm and Brandon Luebbehusen, offers a comprehensive look into the role of the re/insurance industry in the energy transition, showcasing the untapped potential for creating new insurance products that mitigate emerging risks. The Report also demonstrates why companies like Energetic Capital, which focuses on addressing credit risks and unlocking capital for clean energy projects, are vital to the energy transition.