Webinar: Warranties, guarantees and insurance
Presenters: Michael Bullock, Renewable Risk Advisers
Rémi Gruet, Ocean Energy Europe
Ocean energy technologies are still at an early stage of development. Lacking significant data from operation in real sea conditions, ocean energy projects carry significant risks, pushing up to the cost of capital. Warranties, guaranties and insurances can alleviate these risks and facilitate access to capital. However, such products, common in other more mature industries, are not always accessible to ocean energy project developers.
The webinar analysed the current situation and solutions for mainstreaming warranties, guaranties and insurance in ocean energy.
- A public insurance fund, at European or national level, will allow a small amount of risk bearing capital to leverage significantly more project finance and commercial debt.
The fund could cover several “financing gaps” that ocean energy developers, currently, cannot fill, such as loss of revenue or cost overruns.
- Risk bearing equity is scarce in Europe. Ocean energy developers focus their attention on project finance, requiring non-recourse financing.
This situation is different from when the first offshore wind farms were deployed. The latter were largely financed by utilities’ balance sheets.
- To take technology risks, commercial insurers will require devices to have been operational for at least 8,000 hours. Any upgrade to a device, upgraded or new component, will require it to run for 8,000 hours too.
- The insurance fund could also address finance for decommissioning. Eliminating the need for developers to put up cash collateral upfront.
In the absence of upfront cash collateral, decommissioning funds are built-up during a project’s operational lifetime through energy sale revenues. Where a project underperforms, less revenue is generated which impacts the project developer’s ability to accumulate the necessary decommissioning money. Loss of revenue insurance could address this.
- A public insurance fund can help projects that do not have sufficient revenue support in the form of a PPA or feed-in tariff.
- An insurance fund reverses the public spending logic compared to revenue support. Developers would draw on the insurance fund when the project is underperforming. As technology improves and performs better, less money is drawn from the public fund. This is the opposite logic to classic revenue support where the better a technology performs, the more public money it draws.
- Such a fund would not only be beneficial to the ocean energy sector. Its scope could be broadened to all renewable energy technologies such as floating offshore wind or deep geothermal.