The latest on Energetic and renewable energy trends.

Lobbies around New York City proudly display signage declaring that the retrofitted infrastructure installed improves the building’s sustainability. Qualifying buildings that are not in compliance with Local Law 97 are going to be subject to fines starting next year. As the deadline for penalties approaches, there are many ways to ensure a portfolio follows New York City’s policies.

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New York City consumes more than 50 terawatts of energy annually and emits ~55 million tons of carbon dioxide yearly, with buildings accounting for two-thirds of the total. In 2019, the city government took steps to reduce this impact and passed the Climate Mobilization Act and Local Law 97, intending to reduce emissions from buildings by 40% by 2030.  

The regulation requires any building (including residential, commercial, and institutional) over 25,000 square feet to meet specific standards for efficiency and emissions. Failure to meet specific thresholds will result in fines as early as 2024 – to the tune of $268 per metric ton over the limit. The Real Estate Board of New York estimates this could lead to $200 million in fines across 3,000 buildings. Complying with the new regulation seems straightforward – invest in efficiency! Implementing these solutions is not always straightforward.

Building owners and property managers should consider the following when assessing energy efficiency:

• Conduct an energy audit: An energy audit can help identify areas where facilities are wasting energy and determine cost-effective ways to improve efficiency. Audits can help identify specific steps to reduce a building’s energy consumption.
• Make energy-efficient upgrades: Upgrading energy-efficient lighting and appliances, sealing air leaks, and adding insulation can all help reduce energy consumption.
• Incorporate renewable energy: Consider incorporating renewable energy sources into a building power mix. Enrolling in renewable energy programs can help reduce a building’s carbon footprint. When installing panels is unrealistic, enrolling in “community solar” programs that mix renewable energy into a power supply is possible.
• Use the city's benchmarking tool: New York City’s benchmarking tool, introduced as Local Law 84, allows property owners to track and compare a building’s energy and water usage over time across a portfolio of properties. The tool is Energy Star’s Portfolio Manager and can help identify areas where efficiency can be improved.
• Partner with an energy service company (ESCO): An ESCO can help assess energy needs, identify cost-effective solutions, and implement upgrades to improve a building’s energy efficiency. In addition to providing expertise and technical support, an ESCO may also be able to help you secure financing for energy-efficient upgrades.

Financing Energy-Efficient Upgrades

Financing energy-efficient upgrades can be challenging for building owners due to the high upfront costs and the perceived risk of these projects by banks and other lenders. Building owners may need more financial resources to pay for these upgrades out of pocket and may need to secure financing to implement them. However, some banks may be hesitant to lend to buildings for projects like this, particularly if the building has a history of financial problems or the upgrades are considered too risky. Buildings held in LLCs may also face challenges when obtaining financing, as banks may hesitate to lend to an LLC without a parent credit guarantee.  

However, several financing options are available to help building owners finance these projects. These options include rebates, tax credits, and financing programs.

Rebates and Tax Credits

The New York State Energy Research and Development Authority (NYSERDA) offers a variety of rebates and tax credits to help building owners finance energy-efficient upgrades. These rebates and tax credits can offset the upfront costs of energy-efficient upgrades and make them more affordable for building owners. For example, the Commercial New Construction program presents incentives for buildings designed to be energy-efficient from the outset, while the Existing Buildings program offers incentives for energy-efficient upgrades to existing buildings.

Financing Programs

Building owners can also take advantage of financing programs to help finance energy-efficient upgrades. Partnering with an energy service company (ESCO) can help fund energy-efficient upgrades. Banks have started to be more aggressive in supporting third-party financing structures for energy service companies. This assistance enables property owners to finance projects off-balance sheets through ESAs or MSAs. Bundling many properties together and structuring credit enhancements enables property owners to bundle multiple sites into a portfolio to achieve economic pricing. Grant funding is also available to support these projects. NYSERDA offers up to $5 million in grants through the Commercial & Industrial Carbon Challenge program to help building owners pay for energy-efficient upgrades.  

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

Have questions on how Energetic Insurance can help you implement a programmatic partnership to deploy energy efficiency and renewables across commercial real estate sites? Reach out below.

We’ve all seen it – retail sites and commercial buildings that proudly display LEED certifications or other clean energy and efficiency achievements. What is easy to miss is how many commercial real estate (CRE) sites do not make property-related ESG claims.

The uncomfortable industry secret is that the majority of properties are ripe for energy efficiency upgrades, can decrease their energy consumption, and can procure the electricity they do consume from renewable energy sources, but they don’t - because of contracting hurdles and credit and financing barriers.

Burdensome financing requirements have inhibited green investments across the CRE sector. Creative structuring and innovative financial and insurance products can help alleviate investment barriers.  

The problem with ESG implementation, interest alignment, and credit in CRE

Property owners, building managers, and tenants have more incentives to implement energy efficiency and clean energy procurement strategies than ever before. Property owners, LPs, and REIT investors are demanding ESG action – they want goals to be developed, solutions to be found and implemented, and metrics that demonstrate impact. The same applies to many building managers and tenants.  

Regulatory requirements are further driving the demand for CRE ESG solutions. New standards are being placed on buildings and corporations – both structures and occupants need to be more efficient and reduce consumption and climate impact. The US Securities and Exchange Commission (SEC) is slated to require companies to disclose climate change risks. In California, all new builds are required to meet certain energy efficiency (EE) standards. And the list goes on.

Unfortunately, landlords and tenants often have differing incentives, which causes difficulties in building-by-building implementation. Consider the hospitality industry – often the property owner is not the site property manager, nor the hotel operator. A hotel chain that is working to achieve ESG goals can run into implementation barriers if they go to implement energy efficiency retrofits or on-site solar installation. They need property owner agreement and alignment, and the property owner will also want to share the benefit of any impact claims or financial rewards.

Structural challenges further compound the issue. Commercial and industrial (C&I) properties are typically held in bankruptcy remote LLCs, or subsidiaries that do not carry parent guarantees. This structure is non-problematic for real estate financing purposes, but creates a blocker for non-recourse project finance.

It is a perfect storm of demand and misalignment, ripe for a solution that brings together all stakeholders, and aligns interests across landlords, tenants, investors, project developers, and financiers.  

We view coordination and standardization as the key to expanding the C&I ESG market.  

The challenge of heterogeneity in C&I energy transactions

The residential market benefits from a level of homogeneity that enables contracts of adhesion or a price-taker environment. Unlike the residential market, the C&I market has more variability and is rife with price-setters and negotiators.

Standardization has been a problem with C&I energy transactions due to the inherent heterogeneity of properties, owners, tenants, locations, energy markets, and desired terms. Though a standard Solar Energy Industries Association (SEIA) form exists, contracts in the C&I sector have historically been negotiated on a project-specific basis.

Business owners are accustomed to negotiating individual contracts, whether it be employment, capex, or opex agreements. Although these negotiations can be critical for property owners and offtakers, contract negotiations can present a blocker for project developers. Developers, financiers, and customers each have their own preferences, challenging alignment across stakeholders.

C&I efficiency or clean energy deals are typically not large enough to warrant the cost and effort associated with individual contract negotiations. Site-specific contracts are simply not efficient.

Structures and why they matter

The non-recourse nature of project finance presents a structural challenge. Bankruptcy remote LLC structures work well for secured lending, like mortgage lending, because they allow for properties to be taken over cleanly in bankruptcy. Unlike secured lending, project finance for energy projects is non-recourse.

Property owners or real estate investment trusts (REITs) are not often willing to front and offer their credit (rating) and/or may be unable to provide more significant upfront cash, making it challenging for them to overcome this hurdle.

We’ve collaborated with project developers and financiers to overcome this hurdle. We underwrite the credit worthiness of LLCs and tenants and take a comprehensive view of the project and site attributes. Further, we recommend programmatic structuring, which affords contracting efficiencies and enables multi-site development.

How standardization can enable C&I energy transactions

Bulk structuring, or programmatic structuring as we call it, lends efficiency and facilitates economies of scale. Programmatic structuring refers to multistakeholder structuring events that apply to multiple sites.  

Consider a real estate investment trust (REIT) that wants to deploy efficiency solutions and enable clean energy procurement across their property holdings. Asset manager(s), developer(s), and financier(s) are brought into a single negotiation event. They align on a contract that has applicability to multiple sites at once. This means one set of lawyers, negotiating one or two contract sets for all buildings. Property owners can work with tenants, help them understand the ESG and cost benefits, demonstrate landlord alignment, and encourage tenant involvement and agreement.

This coordinated process allows for solutions to be implemented across hundreds of buildings at once under a single program with standardized contracts, and value propositions. This process facilitates replicability, helps developers overcome high customer acquisition (CAC) costs, and minimizes the costs of contracting associated with individual site-by-site contracts.

Our solution

At Energetic Insurance, we unlock economies of scale by working alongside building or property owners with a vested interest in helping their tenants and themselves achieve ESG goals, and with developers and financiers eager to support project development.

We enable all stakeholders to overcome the ubiquitous CRE structural and credit barriers.  

When it comes to energy project development, there is no aim to take over buildings or properties in the case of default. Rather, the security interest lies in the solar assets, wind assets, or energy equipment. In other words, financiers lending into equipment deals are not entitled to take over properties. Requirements pertain to the equipment and its maintenance throughout an event of default. As such, we underwrite projects through a different kind of valuation – rather than focusing on underlying property value, we assess the probability that someone will remain in and use the building. This is an entirely different approach that a mortgage lender assessment of an LLC.

We see credit risk through a different lens; we look past the problematic structures and quantify the real probability, frequency, and expected severity of losses on an actual properties. We underwrite the credit worthiness of the LLC and tenants. We take a comprehensive view of the properties, ownership, and occupancy. We understand that as long as tenants occupy the building they will pay for electricity, especially if the clean energy offered is cheaper than fossil fuel-derived alternatives.

Have questions on how Energetic Insurance can help you implement a programmatic partnership to deploy energy efficiency and/or renewables across commercial real estate sites? 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.  

All eyes remain on the Inflation Reduction Act (IRA)

As expected, the entire industry is still awaiting guidance on IRA implementation details. Most developers are budgeting a 30% investment tax credit (ITC) for all 2023 projects due to the IRA. Developers can surpass this by harnessing adders, but anything above that 30% is considered the proverbial cherry on top.

There is limited guidance on the approval process and required documentation for said adders. Consider project development on brownfields – certain paperwork, due diligence, surveys and more will be needed for successful implementation and credit receipt. Lenders and tax investors see promise in projects like these, but don't want to model projects presuming a higher ITC rate until they understand the process and are confident in their ability to deliver the requisite documentation.

Generally, the industry is viewing the IRA transferability provision as a last-case scenario for developers, suggesting that the first priority should always be to utilize tax equity as is done today.

Headwinds are top of mind

Module availability, permitting, and interconnection remain the most significant causes of project delays. The majority of developers and financiers we have spoken to recently have stated that much of their 2022 pipeline has been pushed into 2023 given market constraints.

Although some developers are pleased with the current sellers market, corporate buyers are struggling with renewable energy procurement, and developers see credit challenges manifesting, with a wave looming ahead. Commercial utility scale virtual power purchase agreements (VPPAs) are in high demand by large corporates. Demand significantly outweighs supply. Large investment-grade offtakers are competing for the limited real, near-term projects. VPPA developers, financiers, and investment bankers are already running into hurdles when these commercial offtakers procure via subsidiaries or energy holding companies. In these instances, the subsidiary entities are often unrated, inhibiting credit committee approval and prompting a need for alternative solutions like credit insurance.

The macroeconomic environment is exacerbating credit challenges

Concerns around a recession remain top of mind for financers. We’ve heard directly from bank contacts that credit committees are getting more stringent on counterparty credit quality.

Developers are interested in getting ahead of credit concerns and are seeking project underwriting support. Leading developers are seeking advanced project insights on market dynamics, loss mitigants and offtaker risk profiles.

New technologies require financing support

Stand-alone storage continues to be a hot topic among developers. Financiers are finding it difficult to finance stand-alone storage projects today due to lack of cash flow predictability as you would normally see in contracted, generating assets (e.g. solar). The stand-alone storage deals that are getting done are predominately on-balance sheet (equity) financing.

For the deals in the market that are contracted, the counterparties to these long-term tolling agreements tend to be trading firms with thinly capitalized balance sheets. We’ve heard from reputable industry advisors and investment bankers that although this approach satisfies lender requests for a contracted revenue agreement (as opposed to selling merchant or via energy arbitrage agreements), counterparty credit is a major concern.  

Community Solar

Community solar has been a hot commodity in recent years. Some sponsors and financiers are expressing concerns regarding long-term market saturation for community solar in certain regions, others remain bullish. Sponsors are harnessing EneRate Credit Cover ® as an "Anchor Maker" facilitator. This allows a sponsor to use their investment-grade offtakers more efficiently (e.g. not overly concentrating IG into one portfolio to meet financing requirements) by enabling sub-investment grade offtakers to be their anchor offtake through coverage from the EneRate Credit Cover.

Siezing opportunity early in 2023

A new year brings refreshed budgets and renewed corporate goals and commitments. These goals are increasingly oriented towards ESG, climate disclosures, and renewable energy procurement commitments. Developers and financiers are ready to dive into 2023.

As 2023 progresses, the risks of recession, budget cuts, and corporate credit downgrades increases.

Those likely to lead and win in 2023 plan to be the early birds – sprinting to capture deals and fill pipelines in the first quarter of the year.

Have questions on how Energetic Insurance can enable competitive financing, successful project bids, reduce credit barriers, support cost-effective renewable energy development and procurement, and help support the greening of supply chains and reduction of scope 3 emissions? Reach out.

Credit experts from across the globe gathered for the International Association of Credit Portfolio Managers (“IACPM”) 2022 Fall Conference in Washington, DC. The three-day conference was a resounding success, with many professionals connecting for the first time since the onset of COVID.

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Some of the more salient themes at this year’s conference included the need for reliable and standardized climate impact metrics, maintenance of and threats to portfolio integrity, and the value and growing popularity of credit insurance as a risk mitigation and capital relief tool.  

Climate Impact and Measurement

The impact of climate change remains a key opportunity and risk for many credit portfolios. This includes both the physical and transition risks of climate change.  

Transition risk (such as policy, technology, and consumer preferences, among others) remains a key focus in credit portfolio management. However, the industry has continued to struggle with the inability to appropriately measure transition risk. This is due primarily to limited and reliable ESG data (banks often ask clients directly for this information), definition and measurement of appropriate metrics, and lack of standardized disclosure standards. There remains a significant and ongoing need for more and better data in the public domain to supplement client-provided information. While the rules are still being written, the challenge remains in modeling and stress testing these risks over both near- and long-term horizons.  

Physical risk (such as wildfire, severe storms, and floods) resulting from climate change is another concern among credit portfolio managers. Physical risk has the potential to impact such areas as real estate property values and net operating income (due to uninsured damage, business interruption, and higher insurance costs). Additionally, physical and transition risk are not necessarily mutually exclusive from one another.

Differences exist in how banks and credit managers have chosen to measure and manage climate risk in their portfolios. However, institutions such as the International Sustainability Standards Board (“ISSB”) continue to work on a comprehensive global baseline of sustainability-related disclosure standards that will provide market participants with information about companies’ sustainability-related risks and opportunities. Deliberations for various proposals remain ongoing. While banks have continued to ramp-up their toolkits to identify and measure climate risks, harmonization of climate disclosures would fill a significant industry need.      

Portfolio Integrity

Banks currently have strong capital levels and liquidity. However, given the current economic environment, institutions have continued to increase reserves. Economic factors that continue to be most impactful include inflation and weakness in the consumer sector. Although current credit quality is generally good, retail credits are beginning to show signs of stress. Additionally, the period of ultra-low interest rates has kept “zombie” companies afloat. Rising interest rates, labor costs, and general inflation could result in a higher number of bankruptcies among these organizations. However, bank risk profiles remain healthy and institutions have generally been better at credit risk management over a 10-15 year horizon.          

Credit Insurance

Risks in the current economic environment have resulted in higher demand for credit insurance as a tool for risk mitigation. According to IACPM’s Risk Sharing and Market Developments panel, credit insurance remains an extremely reliable and effective product. Claim payment history for insurance providers has also been historically strong. Continuing education and due diligence among banks has resulted in higher product comfort. One of the largest global trade and project finance banks noted that they have been using credit insurance for the past 15-years. It has been one of its most widely used products for risk mitigation and also been an important lever to help the bank win more business. While use of credit insurance among banks for capital relief remains a primary motivator, alternative uses, such as credit concentration management, larger ticket sizes, are gaining popularity.    

In the Peripherals: Geopolitics, Regulatory Developments, and Synthetic Securitization      

Additional themes and topics credit professionals are monitoring include geopolitics, regulatory viewpoints, emerging threats on credit portfolios, and synthetic securitization, among others.  

Special thanks to the IACPM for organizing a forum of rich and timely content, distinguished speakers and panels, and the opportunity for industry professionals to discuss practitioner-based viewpoints.  

Interested in Energetic Insurance’s credit insurance products?

Project developers are no strangers to the infrastructural bottlenecks and regulatory gridlock that constrain the deployment of new renewable energy projects.

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Delays are causing electricity costs to rise and are limiting economic development and job creation expected from the Inflation Reduction Act (IRA). Efforts to address these structural issues have thus far failed in congress.1 The current state of affairs has business leaders, policy experts, and academics raising the alarm: the current approach to permitting and interconnection is broken, presenting barriers to the energy transition, and threatening the progress of corporate decarbonization commitments.2

The source of the bottlenecks

Delivering electricity is a complicated is a business that takes time, investment, and more time. Several factors can delay clean energy project development, but two intersecting factors are top of mind for all stakeholders in the industry; permitting & interconnection queues.  

Permitting has two layers: siting and transmission.

After a developer has identified a site that makes sense for solar and has negotiated the relevant arrangement with a landowner (no small feat!), they must secure the relevant permits to actually build the project. This requires approval at the local and federal level, and can take up to 3 years.3 This is particularly challenging when a project requires federal permits, often requiring sign-off from multiple different agencies.4  

Projects large enough to require new transmission lines are subject to further scrutiny. Transmission lines refer to the short- and long-distance lines that convey electricity from the site of generation to the site(s) of consumption. Projects can be further delayed if additional electric transmission lines and/or permits are needed.  

Overall, between siting, permitting, and construction, new transmission projects can take a decade to complete.5

The Progressive Policy Institute highlighted the discrepancy between electrical transmission line permitting times and fossil fuel pipelines, with electric transmission infrastructure permitting taking an average of 4.3 years, which is 8-months longer than the average fossil fuels pipeline permitting process.6 These numbers exclude the many projects ultimately abandoned and not constructed due to overly burdensome costs and delays which may prompt negotiations to fall apart and options on land to expire.

Projects that check all the relevant regulatory boxes still face hurdles. Lengthy interconnection queues, which can reach 5+ years for utility-scale projects, have been an Achilles heel of the market. Interconnection queues refer to the waiting line in which projects are assessed to determine if the electric grid can handle the additional power load the projects add to the system. It now takes about twice as much time to build a typical solar project than it did in 2005 – from 2 years to 4 years.7  

Compounding the issue, much of the existing grid is not designed to handle the varying sources of power that developers are looking to bring on line, putting renewables at a disadvantage. Those concerned that gridlock will inhibit achievement of 2030 clean energy targets are in for a frustratingly pleasant surprise - according to Lawrence Berkeley National Laboratory (LBNL), 70% of the renewable and nuclear capacity needed to meet these goals are currently in the 750GW queue.

With time-intensive processes at the backbone of electricity system, it is critical to plan ahead and build out the infrastructure needed to support generation and distribution.

As the Inflation Reduction Act (IRA) catalyzes increased clean energy investment, project development bottlenecks are well-poised to be exacerbated unless the pace and magnitude of grid infrastructure investment ramps.

With the energy transition afoot, a wave of developments expected following the passage of the IRA, and year-over-year growth in capacity in interconnection queues, it's critical to encourage more proactive transmission efforts, and to seek troubleshooting mechanisms. The domestic approach to transmission planning must shift from reactive to proactive.8

But what about today and right now? Can the bottlenecks be avoided?

There is a glimmer of hope. Permitting for renewable energy generation projects is comparatively short relative to transmission or pipelines, on average taking 2.7 years. Structural challenges are fodder for innovation and sea-change. Developers have the opportunity to focus on a road somewhat easier to travel, which serendipitously can enhance grid resilience and energy security.

Distributed generation (DG) offers an alternative approach: mitigate (or avoid altogether) interconnection and permitting delays by generating power where it is being consumed. By prioritizing smaller distributed generation projects with shorter permitting and interconnection processes, developers may be able to accelerate development and get ahead in the market. Distributed generation also contributes to energy resilience and can insulate energy buyers, whether households or businesses, from disruptions in service or shocks to energy prices. It’s an easy way for consumers to take more control of their energy security – after all, it’s impossible to install an LNG-fired plant on your roof!

So what’s the catch?

Cost is often noted as a primary challenge for distributed generation projects. On a dollar per watt basis, distributed generation projects can be more expensive. This is driven by a lack of basic economies of scale: DG projects tend to be smaller, and supply chain pressures make it difficult to rapidly install systems across disparate sites. One way to mitigate cost pressures is to ensure that a behind-the-meter system is able to export power back to the grid. Alternatively, there are many favorable jurisdictions that offer incentives or programs that allow these projects to easily benefit from the investment in DG.  

Where do we go from here? What are the mechanisms to bring the $/w cost of small projects down?

Stakeholders should encourage expanded virtual net metering. Increased virtual net metering can benefit non-proximate energy consumers and production systems by easing the accounting and exchange of clean energy production, and by doing so, improve distributed generation project economics.

Microgrids and other aggregation strategies could be effective approaches, however, if deployed at scale these projects could run into the same permitting and transmission delays as larger projects. We encourage the development community and other stakeholders to keep their eyes and efforts on supporting robust, modernized, and expanded transmission infrastructure to support clean energy deployment, enhance grid reliability, and mitigate power outages.

Have questions on how Energetic Insurance can help increase the bankability of distributed generation projects, contribute to a lower cost of capital, and expand market access?

Contact Us

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

Sources: 1. https://news.bloomberglaw.com/environment-and-energy/common-ground-elusive-as-manchin-permitting-bill-awaits-action

2. https://cleanenergygrid.org/new-report-finds-current-transmission-interconnection-process-unworkable-inefficient-raising-energy-costs-customers-stifling-job-creation/

3. https://www.progressivepolicy.org/publication/americas-clean-energy-transition-requires-permitting-reform-policy-recommendations-for-success/#_ftn3

4. https://www.resources.org/common-resources/reforms-to-federal-permitting-can-speed-solar-energy-deployment/

5. https://yaleclimateconnections.org/2022/10/permitting-americas-next-big-climate-conundrum/

6. https://www.progressivepolicy.org/publication/americas-clean-energy-transition-requires-permitting-reform-policy-recommendations-for-success/

7. https://www.utilitydive.com/news/energy-transition-interconnection-reform-ferc-qcells/628822/

8. https://www.utilitydive.com/news/gridlock-in-transmission-queues-spotlights-need-for-ferc-action-on-planning/603128/

Recommended Reading:

• https://www.energy.gov/sites/default/files/2022-04/Queued%20Up%E2%80%A6But%20in%20Need%20of%20Transmission.pdf  

The virtual power purchase agreement (VPPA) market has changed. Today there is a steep market imbalance; there are “five-to-seven IG offtakers for every one VPPA project.”  

How did we get here?

A significant market shift occurred over the past 12-18 months. Unsurprisingly, this is due to the age-old factors of supply and demand.

Demand for renewable energy has grown exponentially in recent years, especially as corporate ESG commitments proliferate.

This demand will further expand as electrification increases. Further, there has been a broader attention and appetite shift to clean energy sources and assets within the current macro-economic and geopolitical environments. This growing demand for renewable energy has prompted scarcity.

Simultaneously, supply has not kept pace with demand.

The pace and volume of project development have been held back. Regulatory challenges have plagued the market for years. Lengthy permitting processes and interconnection queues have resulted in waiting periods that can exceed 36 months. This means that it takes years for projects to go live. Supply chain challenges are pervasive – from market availability and pandemic-related supply contractions, to limits in panels that meet ethical manufacturing requirements, to onshore panel availability and concerns about meeting new domestic content requirements – equipment procurement hurdles abound. Finally, every corner of the market is affected by inflation and the broader macroeconomic environment. Inflationary costs have been added in all components of the value chain from input costs for silicon, to transportation, to labor costs. Taken as a whole, these supply challenges result in challenging project economics as costs rise across the board.

Simply put, limited supply is compounding the impact of unprecedented demand. Today this environment affords developers the luxury of selecting from a variety of investment-grade offtakers, However, this environment is unlikely to persist. Transactions and offtaker identification will not always be this easy.

Preparing for long-term success

A long-term view and intentional strategy can help. As corporates reach pledge targets and market obstacles ease, supply and demand will return to balance. Sophisticated developers today understand this and are engaging in pipeline planning to remain competitive in the future market.

The offtake market for VPPAs is diversifying as it expands

Demand from unrated and sub-investment grade counterparties is increasing. The ability to address this demand requires intentional planning and structuring. Bankability of long-term energy agreements with unrated or sub-investment grade offtakers will require increased collateral and/or security requirements. Corporate procurement teams and sustainability advisors need to be aware of emerging market solutions, and leading developers are being proactive.  

Experienced developers see credit emerging as a procurement barrier for a large segment of the market

They are already scoping solutions that will allow them to support the sub-IG market segment, viewing it as a significant component of their future development plans. A few strategies leading developers are pursuing are:

• Proactively building long-term relationships with clients with substantial energy needs who are not viewed as top-tier offtakers in today's environment. Many of these current and prospective clients will increase demand for clean energy and efficiency solutions, especially if they have franchise locations and/or subsidiaries that are often unrated or sub-investment grade.
• Assessing project structures that can ease the transaction process when the need to move downstream arises, for example; parent guarantees, multi-offtaker load subscription to decrease cashflow dependence on any single obligor, increased buyer credit supports, stronger security rights, offtaker reserves
• Assessing external risk mitigant products like credit sleeves and credit insurance products

Overall, developers are planning ahead to increase confidence in offtake from traditionally unbankable counterparties so that they will be well equipped to meet the needs of a notoriously underserved market.

The clean energy ecosystem will benefit from increased project development. Developers need all the help they can get from market participants to ensure viable project economics and offtake. We’re calling on all participants – developers, suppliers, financiers, advisors, and buyers – to collaborate and solve alongside eachother to increase the competitiveness of projects. Are you already contributing to this effort? Tell us how!

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Have questions on how Energetic Insurance can help increase the bankability of projects, contribute to a lower cost of capital, and expand market access? 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.