New technologies are being integrated into the built environment at an unprecedented pace. Within the energy sector, the adoption of new technologies into its built environment portfolios is urgently needed. The global economy is accelerating its journey to ween itself off of fossil fuel energy sources and replace them with sources that bring little to no carbon emissions: renewables. The game is simple – transition fossil fuel energy sources to renewable energy sources as quickly as possible and at a cost that minimizes the impact on the global economy.
One of the biggest hurdles impacting the pace of this transition to renewable energy is the reluctance of the world’s capital to take risks on new technologies. Within the renewables sector, there are many categories of energy-creating asset types, and each one has technologies that have limited to no data proof that the technology can generate (or hold) energy at the levels required to make project financing viable. In other words, and using terms utilized by the technology underwriting community, they have low technology readiness levels (TRL). Unfortunately, many renewable energy projects are not bankable due to technology risk, or worse, perceived technology risk.
Below are renewable energy categories that need to accelerate their global capacity to comprehensively replace fossil fuel capacity within the global economy:
- Wind
- Solar
- Hydro
- Biomass
- Geothermal
- Tidal
- Hydrogen
In addition to these renewable energy-creation categories, there are several types of energy storage technologies that are required to effectively and comprehensively transition from old-world energy to new-world energy.
So how do we help capital get comfortable with the risks associated with these new sources of energy and these associated energy storage technologies? The insurance industry is beginning to play a leading role in removing and reducing the technology risk to project financiers through the use of an emerging insurance category: technology performance insurance (or technology performance guarantees). Pockets of actuarial, engineering project finance and underwriting expertise are beginning to form worldwide that can assess the viability of new and/or emerging technology within the renewables economy. Further, these pockets of expertise are being empowered with insurance capacity to allow the project finance sector to transfer these risks, making more renewable energy deals bankable and accelerating the global capacity of renewable energy. This emerging class of technology risk insurance could end up becoming one of the most important products ever created by the insurance sector.
From a high level, these technology risk insurance underwriters are developing methodologies that help new technologies develop a framework for piloting the use of their technologies — and then organizing and compiling the pilot data in a way that allows insurance capital to get comfortable around the technology risk. Once the insurance capital is comfortable, the technology performance insurance, or guarantee, can be issued to provide the project finance capital sufficient security to fund the project. Or, it can be issued to fund the project at commercially viable terms, such as providing improved interest rates that make the project financially viable. These pockets of tech risk insurance underwriting not only provide an insurance guarantee that allows the project financing to be secured, they also provide a valuable consultative service to project stakeholders bringing new technologies to market; they are making certain that those stakeholders take the right steps to ensure their technology actually works. The underwriting methodology they use is the actual sentence with valuable information housed within its frameworks, and the performance guarantee is the period at the end of the sentence.
To obtain a technology performance guarantee for your project, specialized underwriters will initially require the following documentation for assessment:
- Financial Model: A detailed financial model for your project, including all necessary financial metrics (pricing of feedstock, cost of debt, price of outputs, etc.).
- Technology Performance Data: Any data that is available on technology performance, often in the form of data from a pilot project, or series of pilot projects, that have successfully incorporated the new technology.
- Engineering Reports: All engineering reports related to the project or associated projects, so the underwriter’s expert engineers can validate their viability.
From this initial package of underwriting information, often delivered via access to a project data room, the underwriter will be able to assess the project and determine if they are willing to extend technology performance guarantee capacity. If they are willing, a draft terms sheet will be provided for project stakeholders. Stakeholders will then review and validate if the estimated policy pricing and terms, and knock-on improvement in finance terms, will make the pursuit of the technology performance guarantee worthwhile. If project stakeholders see the value in moving forward with the underwriters, a formal engagement is established and a deeper diligence process begins, usually taking one to three months to complete. This leads to a more formal and accurate set of estimated policy terms and conditions with insurance capacity fully supporting outlined terms. In other words, the policy is ready to be bound and delivered to the appropriate stakeholders, thus making the deal happen.
This emerging class of “deal catalysing” insurance is proving to be highly valuable, and there is no reason that methodologies being applied by these specialized underwriters cannot be used on new technologies (or integrations of technologies) beyond the renewables asset class sector — like complex transit systems. If you have a project where technology risk is not allowing the necessary project finance capacity to come to the table with viable terms, then consider bringing that deal to this emerging sector within the global insurance marketplace. The combination of professional skillsets being brought together with innovative underwriting methodologies could end up being the most impactful insurance product ever created by the insurance industry, given the urgent societal and economic need to accelerate the use of novel technologies .
For more information, please contact:
David Bowcott
Managing Director
NFP Construction & Infrastructure
100 King Street | Suite 5140 | Toronto, Ontario M5X 1E1
P: 416 566 5973 | david.bowcott@nfp.com
Rob Scherer
Senior Vice President Complex Risk Solutions Group
700 – 2nd Street | Unit 2250 | Calgary, AB T2P2W1
M: 403 971 8884 | robert.scherer@nfp.ca