Financing SA’s Renewable Energy Projects Starts with Appropriate Risk Management and Insurance Solutions
Jacques de Villiers, General Manager for Aon SA’s Inland Region
The focus on the renewable energy sector has never been higher, with South Africa besieged with overcoming the crippling impact of load shedding on households, businesses and the economy. Given the financial hurdles of many renewable energy projects and the soaring demand in South Africa, contractors and developers in the field require specialist risk and insurance broking advice to ensure that the renewable energy sector is able to step up to the plate and meet its many complex challenges.
“The National Power Utility’s inability to meet countrywide supply and demand has been declared a national state of disaster on 9 February 2023 by the Presidency, making it imperative for renewable energy projects that can bring capacity to the grid, in the shortest time, be fast-tracked,” says Jacques de Villiers, General Manager for Aon South Africa’s Inland Region.
At the same time, the sheer scale and urgency of these projects bring significant and complex risks into play that span across financial requirements, right through to contractual liabilities and the debt financing models required.
Insurance is a notable line item in the costs for renewable projects. Accordingly the impact of premium cost fluctuations can be significant to the profitability of developments and debt cover ratios required to support finance arrangements. It is important that an insurance and risk advisor has a deep understanding of the financial sensitivities in the cash-flow model of the project in order to design the most efficient insurance programme. Aon has extensive global experience in supporting finance agreement negotiations, working closely with clients and the mandated leads arranging bank and legal advisors.
“The reality is that the availability of project finance depends heavily on the insurance solutions available. Banks are risk averse, requiring high levels of insurance and this can be the deal breaker in the event that a broker cannot find adequate risk transfer capacity combined with seamless local solutions,” Jacques explains.
“Effective use of insurance is an essential part of securing funding for projects. Aon works with clients to provide the most appropriate bankable approach and are increasingly being involved in the negotiations with the developer and lenders as there is always scope for negotiation in balancing what lenders require and what the market will provide commercially,” he adds.
“One of the most crucial areas that Aon is finding itself increasingly involved in is the traditional pre-construction risk advice which includes liaising with lenders and contractors, including lawyers and insurance advisers, to enable effective contract negotiation. As the developer, it is essential to have a risk partner that is involved in the contract negotiations to avoid potential pitfalls that can be very costly if risk and insurance issues are not considered early enough during contract negotiations. By being involved in the negotiations, we are able to marry the insurances to the risk and indemnity clauses that flow from the contracts,” Jacques explains.
It is also essential to have a risk partner that is able to utilise both local and global markets to develop appropriate risk transfer solutions where necessary, along with the core contractually required insurances.
“The success of the project relies heavily on having a risk partner that fully understands the consultancy and market placement advice to be used within the bank feasibility study which happens long before the project even gets off the ground. In this regard, Aon’s experience in respect of renewable energy projects is extensive right from the start of shipments, the construction period, through to testing commission and operation/maintenance,” says Jacques.
Seamless cover is a key requirement of any renewable energy project, right from the planning and early works stages and between marine cargo transits, construction All Risks, delay in start-up, operating property damage and business interruption, as well as all third-party liability exposures.
Renewable energy insurance products cover the main lines of insurance such as property, engineering, marine and liability while additional special types of insurance can be made available such as credit insurance, political and weather risks, Errors & Omissions, and Directors & Officers cover.
Aon South Africa is able to cater for the insurance and risk management requirements of renewable energy projects in onshore wind energy, solar energy (photovoltaic, concentrated and thermal installations) and bio energy (biomass, biogas and waste to energy plants).
“By having a single pre-agreed policy, the developer is better equipped to navigate financial exposures associated with the possibility of gaps in cover between each of the stages of the renewable energy project lifecycle. The process can be applied to projects of any size by taking advantage of the portfolio approach to underwriting. In this way even smaller projects that would otherwise be difficult to place cost effectively in the global insurance market can be effectively covered,” Jacques concludes.