One of the main reasons private equity (PE) firms have held back on investing in renewable projects is the perception that it’s difficult to predict how investments will perform. Renewables are volatile. Energy produced from them can vary from year to year, even day to day, and investors are concerned about how that variability could impact cash flow. They’re worried about the underperformance of their investments.
Two key factors could hinder performance in renewable energy. Weather can have a significant impact on how much energy plants are able to produce, given renewables rely on the availability of wind, water, light and heat. So can the new technologies renewables are using to harness and convert these sources into energy.
Risks associated with technology can take many shapes. Will the technologies perform as designed? Will they withstand operating conditions? And what could impact their expected operating life? These are risks insurers are hoping to help mitigate.
Assessing weather and technology-related risks
Owners and developers of renewable energy assets will provide prospective investors with in-depth studies that contain performance data (historic, from lab tests and field studies), third-party engineering reports and detailed financial models that include extensive scenario analysis as it relates to weather and technology performance. Private equity investors are growing their sophistication in evaluating such data and judging the feasibility of projects.
Recent transactions, such as the Global Infrastructure Partners and China sovereign wealth fund’s acquisition of a portfolio of Asian wind and solar energy projects from Singapore-based Equis Pte Ltd for $3.7bn, confirm there’s growing in-house expertise and comfort in evaluating performance-related risks and making decisions to invest. And recent data from Preqin Infrastructure Online shows an uptick in renewable energy investments over the last three years.
But even with sophisticated ways to evaluate projected performance, there may be certain risks investors would rather not assume. In the 2016 Power Market Review, the Alternative Risk Transfer team at Willis Towers Watson outlined how parametric solutions could be used to limit the potential volatility in power output due to weather and could help make cash flows more predictable, mitigating one of investors’ chief concerns.
Still, potential technology underperformance remains a major concern for investors and a key short-term road block to more PE investment. To address these concerns, a couple of large insurers have developed solutions to help mitigate technology-related risks and facilitate financing of renewable energy projects.
How can insurers help reduce technology-related risks?
Insurers that consider technology performance risk in the renewable energy space can leverage their internal expertise to contribute to the due diligence process and work with underwriters, risk management consultants and engineers who specialize in renewable energy technologies to understand, quantify and underwrite technology risk. They can be a crucial link among investors, owners and developers of new renewable energy technology and can act as partners to help facilitate investment, while absorbing risks due to technology-related underperformance.
Willis Towers Watson is excited to work with insurers as they move to fill this gap and remedy an inefficiency preventing increased investment in renewable energy assets. We strongly believe that this move can encourage more private equity capital to enter the renewable energy space. Private equity firms looking to acquire renewable assets, those who already own renewable assets and those looking to divest can all benefit. We look forward to helping our partners structure these alternative risk transfer deals in the months and years ahead.