What product should “pretty much every developer out there … be looking for?” Insurance.
“If you are developing a solar project, among the hardest nuts to crack is finding bankable offtakers and actually ensuring that the promised revenue in the project will … be there as predicted.”- Nico Johnson, SunCast Podcast.
Our Co-Founders, James Bowen and Jeff McAulay sat down with Nico Johnson at RE+ in Boston and discussed how Energetic Insurance helps solar projects become bankable. Listen to the SunCast Podcast episode here.
Insurance products can be hard to understand, and onerous to purchase. Layer insurance on an esoteric space like renewable and distributed energy and it can seem even more complex. Fortunately – Energetic Insurance makes insurance products that are comprehensible and desirable.
The Commercial and Industrial (C&I) clean energy market is booming. Fortune 500 companies are hungry for renewable procurement. Developers are in intense competition for the most attractive, investment-grade (IG), easily bankable projects.
Unfortunately, a huge swathe of the C&I market falls outside of this IG niche.
Approximately 90% of the C&I market either lacks formal credit ratings (unrated entities) or are deemed below investment grade (BIG). These offtakers are hard to bank.
Developers struggle to get the numbers to work. The pool of finance willing to fund these projects is small.
Jim and Jeff experienced this first-hand as developers. They were frustrated when reputable businesses that make money struggled to procure renewable energy. If these C&I offtakers don’t have Moody's, S&P, Fitch, or other ratings, they were deemed “unbankable.” This is the case for manifold businesses that reliably pay their electric bills and cannot operate without electricity, seeing it as an essential payment.
Cue the insurance community. Insurance companies can be thought of as large financial institutions. They have sizeable balance sheets and bear risk.
The critical factor is quantifying that risk. In this case, it is the risk that a C&I offtaker defaults on their electricity payments.
Jeff’s time as an engineer at an applied R&D lab was all about testing, validating, and de-risking technologies. His time at EnerNOC illuminated that once distributed energy technologies like solar and energy efficiency solutions are de-risked, a new de-risking need arises, and is all about financing. The 90% of the C&I market that is BIG and unrated must be de-risked to enable financing.
“Do we think that 90% of the C&I market shouldn't have access to solar? Of course not!” This is not just a US phenomenon. This is a global issue, for solar, storage, HVAC, and more. “This counterparty risk is so pervasive in all of the long term infrastructure as a service agreements for all of the essential distributed resources ... There is no bigger opportunity, there is no bigger need, and most of it crashing up against counterparty credit wall.” – Jeff McAulay, Energetic Insurance
Now cue Energetic.
We’ve quantified the probability of default of electricity payments.
That probability is different and inherently lower than other risks. Our actuarial pricing and underwriting software quantify this probability, allowing insurers to know how much premium to collect in order to absorb potential future claims.
This de-risking enables the use of our EneRate Credit Cover policies. In turn, this unlocks financing as financiers are willing to lend when they can see enhanced predictability of payment.
Developers can harness our policies to reach more of the market and to support reductions in customer acquisition costs (CAC).
Instead of competing for the limited 10% of the C&I market that is IG, they can now reach 50-60% of the market. And for those wondering – no, we don’t expect to ever unlock 100% of the market. Real credit risks exist which developers and banks should be wary of.
Real estate asset owners, including Real Estate Investment Trusts (REITs) are also catching on to the value of our policies.
Many real estate entities are publicly traded and highly IG. However, based on the structure of the real estate industry, properties are owned via separate, individual, LLCs, which perform poorly relative to standard bank credit evaluations. These LLCs do not carry a parental guarantee – if they default, rated public parent entities do not have to pay LLC debts. Tenancy terms can further exacerbating this issue. Banks may be reluctant to finance a 20-year power purchase agreement (PPA) if tenancy terms are shorter. As such, if property owners seek financing to go solar, or install energy efficiency equipment, they are often declined.
The first policy we issued solved exactly this problem. A developer was struggling to get a loan approved to finance a project at a large outlet mall in California, despite the mall being owned by two brand name publicly rated owners. With our policy covering payment default risk on the PPA, backed by a AA- rated insurer, a bank became more confident in the predictability of cashflows. The unbankable 900kw project became bankable.
Insurance has shifted from a nice-to-have to a want-to-have.
Developers and banks have realized that our policies help enable the essential elements of their businesses. Our policies may be the difference between getting financed or not, of deploying capital or not, of getting a project acquired or not, of successfully developing a portfolio or not.
We welcome project of all sizes and have expanded beyond C&I as we develop a strong, diverse insurance book of business.
We seek small, medium, and large projects from different industries and geographies. We encourage very small projects (eg 25 kW) to be grouped in portfolios.
We began in C&I, viewing it as the largest untapped segment for solar. We’ve listened to customer demand and have expanded into VPPAs, energy efficiency, building electrification, solar + storage, and into international geographies. We continually collaborate with leaders in these spaces. The US Department of Energy (DOE) and the New York State Energy Research Development Authority (NYSERDA) are leaning in on energy efficiency. Collaboration across private sector, public sector, municipalities, and developers will be critical to unlocking large-scale opportunities.
There are other pioneers in the renewables-oriented insurance space.
kWh Analytics and ReSurety demonstrated the feasibility of renewable energy insurance startups. They play critical roles in covering the supply-side. PPA cashflows ultimately boil down to dollars per kilowatt hour. kWh Analytics ensures those kilowatt hours show up. We make sure the dollars show up from the offtaker. Conventional property and casualty (P&C) and liability insurance cover the rest of traditional project risks.
Interested in learning more about how to unlock financing for unrated organizations? Listen to another SunCast podcast featuring Energetic Insurance, Jordan Blanchard, and Live Oak Bank here.
Have questions on how our policies can help unlock revenue streams, protect against downside risk, credit risk, and make unrated or BIG offtakers bankable? Reach out.
Thanks to Nico Johnson for having us on the SunCast Podcast. Looking forward to future collaborations – always glad to talk tax equity and the changing landscape!
This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.