DEEP DIVE
Key Finding #3
Global economic conditions have made securing finance for renewable energy projects more expensive and challenging
Amidst shifting global economic conditions in recent years that were marked by rising interest rates and inflation, the renewable energy sector has faced considerable challenges due to its financing structures. When interest rates were lower, project financing was more accessible and cost-effective. However, today’s higher interest rates have made securing financing for renewable energy projects more challenging and expensive.
These challenges reflect the broader concerns highlighted in the survey data, where high capital investments required for projects (35%) and global economic conditions (33%) emerge as two of the most common barriers hindering energy producers and industrial energy buyers from increasing investment in renewable energy technology.
It’s worth noting that relatively high upfront investment costs for renewable energy technologies can ultimately be offset by lower operating and fuel expenditures over time.
In addition to global economic conditions, financing challenges are often exacerbated for cutting edge and nascent technologies, as they require more capital (40% of energy producers cited this as a challenge) and lack the proven technological ROI that investors often want to see (33% of energy producers cited this as a challenge).
Engaging investors earlier in planning discussions could help create a more thorough understanding of energy transition technologies and their associated risks, as well as the built-in safeguards to address them.
In the qualitative interviews, customers highlighted the resilience mechanisms integrated into their technologies and stressed that considering these mechanisms is crucial for obtaining fair policy rates and alleviating investors’ concerns about risks related to energy transition projects. Early collaboration and discussions between investors, insurers, and energy producers can help build the trust and confidence needed for more successful project financing outcomes.
Global economic conditions and project-specific financing challenges also impact insurance coverage
Financial challenges not only hinder future project investments, but they also have a measurable impact on energy producers’ decision-making on insurance options. Unsurprisingly, 93% of energy producers consider the level of insurance mandated by lenders or investors to be a crucial factor when selecting an insurance provider, highlighting the influence of investor demands on the insurance process for energy transition projects. Providers of non-recourse debt finance have very limited ability to influence a project’s design or approach to risk management and therefore have the strictest requirements for the breadth and depth of insurance cover required by project sponsors, which may in turn affect the project’s operating costs.
Energy producers face additional hurdles when it comes to meeting investor requirements for technology performance guarantees (reported by 26% of respondents) and extensive coverage limits mandated by financial institutions (reported by 22% of respondents), underscoring a disconnect for many between the coverage levels insurers are willing to provide and the coverage levels desired by investors.
Removing siloed perspectives can remove financing constraints
Almost all energy producers (94%) agree there is a need for more collaboration and information sharing between project developers, insurance companies, brokers, investors, and financiers, preferably in the early stages of a project, to ensure risk profiles are aligned before technology is deployed.
However, despite the clear benefits of early collaboration, only 12% of energy producers believe that the optimal time for insurers to get involved in energy transition projects is during project financing discussions with investors and banks, suggesting there may be untapped potential for insurers to demonstrate how they can take a more proactive role in these early stages of projects.
By engaging in these conversations early, insurers can draw upon their extensive historical performance data to provide valuable insights into risk assessment and mitigation strategies that can help set up projects for long-term success. This proactive approach can further bridge the gap between investor expectations and insurance coverage, ultimately facilitating the flow of capital into energy transition projects.
