New insurance products are coming onto the market to provide coverage for the renewable energy sectors. Such products may find favour with investors, but do manufacturers and developers risk getting tangled in high premiums?

By Rikki Stancich in Paris

In February this year, Energi Holdings announced the formation of its alternative energy solutions division, with the aim of providing energy product warranty assumption and alternative risk solutions.

WindEnergyUpdate’s Rikki Stancich talks to Energi Holding’s director of alternative energy solutions, Angela Ferrante, to find out how such products can de-risk renewable energy projects in the eyes of investors and whether such products are likely to become obligatory in future.

WindEnergyUpdate: How do insurance products like Energi's de-risk large-scale project financing?

Angela Ferrante: There is growing demand for extended warranty and product recall insurance from within both the solar and wind sectors. The solar sector players are generally looking for a 20-year warranty and wind sector is looking at five-year warranties on wind turbine components.

From the investor perspective, such insurance products parcel out the risk in the project. This is mainly due to the fact that companies operating in the alternative energy space do not have a long balance sheet, a long track record, or an operating history.

This is significant for strategic partners and investors, who otherwise might not have the confidence to make those large investments.

WindEnergyUpdate: To what extent do such products improve the bankability of
large-scale offshore wind projects?

Angela Ferrante: Different investors might have a different take, depending on the technical risk. Where there is specific technology required for bigger projects, such products could certainly reduce the risk.

It definitely would improve the bankability of the project, but as yet it is not clear to what degree, given that we haven’t yet seen very many successful deals.

WindEnergyUpdate: What kind of market value does the renewable energy sector represent for insurers – is it a growing market and are such products likely to become a standard requirement for securing project funding?

Angela Ferrante: Last year the extended warranty market worldwide was valued at around US$23-25bn. Of that, US$155bn was spent on alternative energy and clean tech, worldwide.

We are very much at the early stages. Energi has been looking at this market since early last year. Several deals evolved over the course of the year to set the standard for how deals are shaped.

As more insurers enter the game and as more companies take out insurance, the products will gain market share given that they could be seen to confer a competitive edge on products or projects.

WindEnergyUpdate: How established are these kind of products to date?

Angela Ferrante: Well-established insurance companies have been doing extended warranties and product recall insurance for years. But now, insurers are having to structure deals for new products with very new companies that have little or no track record, which means the insurance companies have very little data to work with.

This is why we tend to favour existing technologies that have alternative applications.

In this way, we are able to gather data from past applications about what the component failure rates are, product life spans and so on.

The company might be new, the technology might be new, but the components have a history. In this way, we can provide a policy that is affordable.

WindEnergyUpdate: Can components suppliers and developers expect to pay considerably high premiums in the early years?

Angela Ferrante: Insurance companies do a good job of insuring themselves against risk by demanding a minimum premium. Insurers need to structure the deal to reflect risk (the deal is always structured from the bottom up).

For a riskier company, you would charge a minimum premium up-front and then a percentage based on unit sales.

Is it cost prohibitive? Not really, when you consider that the manufacturer can provide warranty to its customers without having to tie up capital to cover that warranty reserve.

It is far more attractive for the manufacturer to pay the premium and to effectively free up the extra capital for investment in other things, such as growing the business. 

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Rikki Stancich: rstancich@gmail.com