Reducing the risk in renewable energy infrastructure investment
The world has already made remarkable progress toward a carbon-free energy landscape, but around US$4.5 trillion needs to be invested in renewable energy annually to reach net-zero emissions by 2050, according to the International Energy Agency.
That sounds like a tall order. Yet an FM survey of 250 executives from the banking and investment sectors reveals that the appetite to invest in renewable energy infrastructure is strong:
- 76% of lenders and 70% of investors plan to increase their financial commitment to the sector over the next three years.
While motivation to invest is strong, such is the scale of the transition that there isn’t enough finance available to satisfy the demand of developers.
- 64% of lenders and 58% of investors say demand for finance outstrips supply.
This matches the experience of Pamela Griffing, staff senior vice president and chief tax officer at FM, who is responsible for identifying renewable energy infrastructure projects for FM’s investment.
“There has been a lot more appetite for finance than capacity since the US Inflation Reduction Act was passed in 2022, and even with more players coming to the market, there is still an imbalance between supply and demand,” she says.
That allows investors to be discerning. When assessing potential projects, FM’s focus is on resilience.
“We dig really deep into the details,” says Griffing. “We look at where the asset is being located, for example, whether it is in a flood zone or if there’s lots of hail—and at the systems and technology they’re using. We are looking for something that is well constructed, designed by experienced developers and we want to know who the insurance company is.
“We need to be very comfortable on all these points if we are going to invest,” she adds.
Resilience has a significant influence over investment
Griffing is not alone in these demands. The financiers that FM surveyed reveal that resilience has a significant influence on their willingness to engage and the terms they will offer:
- 72% say resilience has a moderate or significant impact on the deal terms they offer.
- 69% say it affects their valuation of a project.
- 66% say it influences the likelihood they will invest.
Griffing says to achieve true resilience in their projects, developers need to start considering risk—during both construction and operational phases—as early as possible, ideally during the design phase and with the support of a risk engineer.
“It’s all about de-risking a project,” she says. “Choose the location carefully and think about the technology being used, because even if it has been used previously, it may not perform as expected in a new environment.
“Testing equipment and understanding how it performs in real life is vital,” she adds. “We have an arm at FM that tests and approves technology to be used in particular builds and locations.
“I want to see a developer thinking about that whole package—the location, the equipment used and the experience of the people building and managing the project.”
Partnering with experience to mitigate risk
Financiers expect the resilience of renewable energy infrastructures to be verified by third parties and supported by insurance, the survey shows, through the lifecycle of the asset.
For example, 53% of financiers expect their project partners to work with independent risk advisors during construction and 46% expect construction insurance. During operations, 48% want independent risk engineers involved and 50% expect the infrastructure to be well insured, too.
“Insurance is such an important part of finance—the last thing you want is a less experienced insurer involved. When we’re investing, we’re looking for an insurer that has engineering expertise, understands the renewables sector and doesn’t resist paying claims,” says Griffing.
While FM and other financiers turn to risk experts to secure ever more granular detail on their investments, they also increasingly favor partnerships with experienced developers as a way to mitigate risk.
“If, as a developer, you lack the necessary experience to attract capital, partner with people who do have experience because insurance is not a replacement for good due diligence,” advises Griffing.
“That partner could be another developer or OEM, but somebody has to provide the experience as without it, few will provide their capital.”
Removing the risk from renewables investment
- Financiers can use the demand for their capital as leverage to encourage developers to engage more with risk mitigation and to push for the inclusion of the risk experts they want involved in a project.
- Developers can attract finance by engaging with risk experts and insurers at the design stage of their projects to create, and evidence, the resiliency of their project compared to peers.
- Greater collaboration between all parties—developers, financiers and insurers—and sharing of their experiences of risk, will make individual projects, as well as the wider renewable energy sector, more resilient to risk in all its forms.