The following are three types of renewable energy insurance and credit guarantees that make projects bankable and that can help your business be more successful.
If you would like to learn more about how you can use these renewable energy insurance strategies to help improve your business, schedule an appointment with me today.
Renewable Energy Insurance & Credit Guarantees That Can Help Your Business Succeed
The following are three types of renewable energy insurance and credit guarantees that you can use to make your projects bankable and help your business grow and succeed:1
- Tax Credit Insurance: An insurance policy that improves tax credit quality, protects you and absorbs any losses related to an adverse tax ruling related to a renewable energy tax credit transaction (such as the direct transfer of tax credits).
- Surety Bond: A three party contract that enhances your company’s balance sheet, enabling your business to win larger projects. What it does is back up your balance sheet with that of an A-rated insurance company and ensure your company’s performance according to the terms of a contract.
- Offtake/Trade Credit Insurance: An insurance policy that protects your business from B2B counterparty risk. The carrier underwrites your B2B customers’ creditworthiness and absorbs certain losses under certain events of non-payment.
As described below, and in the video above, each of these tools transfers risk in ways that can be utilized and leveraged by you to help your business succeed.
Tax Credit Insurance
Tax credit insurance2 is an insurance policy you can buy that transfers the risk of a potential adverse tax ruling away from you (and your investors) to an insurance company.
This enables you to be more confident about a tax position you are taking in a tax credit transfer transaction and also improves the quality of the tax position in the eyes of a buyer.
What Tax Credit Insurance Does
Let’s say you are engaged in a direct transfer of tax credits or a partnership flip structure related to a renewable energy project. If the IRS disagrees with the value of the credits, the step up in basis you are using or other intended tax position related to the transaction, the tax credit insurance policy it will step in to cover defense costs, penalties and financial penalties, such as incremental tax due on the insurance proceeds (aka a gross-up).
Tax credit insurance also improves the quality of your tax credits for sale in the eyes of the market.
As such, you can be more confident about the strength of your project when selling your credits in the market… Both you and your investors will have greater peace of mind.
Tax credit insurance may be purchased on its own, for a single project or a portfolio of transactions, and (optionally) along with representations and warranties insurance, to broaden the coverage of the latter.
In addition to renewable energy insurance, tax insurance may be used to reduce risk in day to day corporate operations as well as business transactions and M&A including, but not limited to:
- Risk management in tax treatment of routine corporate business operations
- Historical tax treatment by a target entity in an M&A transaction
- Insuring the qualified basis on a solar investment tax credit (ITC) transaction, or direct transfer of credits
- Wind production tax credit (PTC) characterization
- REIT characterization
- Partnership characterization
- Capital gains treatment vs. ordinary income
- Foreign tax credits
- Opportunity zone tax compliance
- Capitalization vs. deduction of expenses
Tax credit insurance is one type of renewable energy insurance developers and tax equity investors can use as a risk management tool to protect tax treatment of commercial and industrial solar, wind and energy storage (BESS) projects.
Surety Bond
A surety bond is a three party contract in which a surety lends you the strength of its balance sheet to back your promise of performance (as the “principal“), for the benefit of your client (the “obligee“).
There are many types of renewable energy industry focused surety bonds, including, but not limited to:
- Community Solar Subscription Bonds
- EPC/Payment and Performance Bonds
- IPP Bonds
- PPA Bonds
- Decommissioning Bonds
Instead of having to pledge collateral (such as a letter of credit) and guarantee the payment and performance by your company for a large project, with a surety bond a surety “lends” you their balance sheet and vouches for your performance for the term of the project.
How a Surety Bond Works
Imagine a solar engineering, procurement and construction (EPC) bids on a large rooftop solar job for a municipality that requires a surety bond.
To win the bid, the principal works with a broker to find a top surety company to back its financial performance for the benefit of the obligee:
- Principal: The EPC that buys the bond. The EPC is underwritten based on the “three C’s” of surety underwriting: Character, Capacity and Capital.
- Surety Company: Provides financial assurance that the principal will perform according to the terms of the contract.
- Obligee: The municipality requiring the bond. The obligee is the beneficiary of the bond and the surety steps in in the event the principal fails to perform.
If the principal fails to complete the project, pay its suppliers, partners and sub-contractors, deliver the project on time, etc. the surety may step in for the benefit of the obligee. The surety will then seek 100% indemnity from the principal according to the terms of the general indemnity agreement.
Certain bonds can save your company money over other collateral alternatives, such as a letter of credit (LoC).
A surety broker should have strong relationships with surety companies, this can make all the difference in helping you close more deals and making your business more competitive and capital efficient.
Trade Credit aka Offtaker Insurance
In a business to business relationship, you want to sell a lot of goods or services, you don’t necessarily want to act like a lender.
Unfortunately, if your customer is getting 30, 60 or 90 day terms, or is overseas or is not credit rated, you are taking on the incremental counterparty risks of a lender.
Trade credit insurance (also known as offtaker insurance in the renewable energy insurance industry) covers your receivables, whether those receivables are physical products, services or kilowatt or megawatt hours in a power purchase agreement (PPA).
Trade credit or offtaker insurance can protect developers, lenders, investors or tax equity against the risk of payment default by a non-credit rated buyer.
How Trade Credit Insurance Works
Trade credit insurance reduces your counterparty risk by having a top insurance company underwrite your specific B2B credit relationship(s).
In doing so, the trade credit insurer underwrites both you and your customers. You may choose to protect your entire B2B exposure, certain key accounts or one specific buyer.
The trade credit insurer will evaluate the buyer’s financials, payment history, industry and country-level (geopolitical) risk.
Trade credit insurance does not replace good credit management or collections processes. However, it can protect against customer insolvency, default or political risk.
Offtaker insurance is useful for renewable energy projects with certain non-credit rated municipalities, non-profits, businesses, religious organizations, churches, etc.
Renewable Energy Insurance FAQ
What unique risks do renewable energy projects face that standard insurance might not cover?
Renewable energy projects, such as wind farms, solar installations, and hydroelectric systems, come with their own set of exposures that typical insurance policies may not cover, including tax and credit risk.
To address these risks, customized insurance policies are crafted specifically for renewable energy ventures. These policies help ensure financial security and operational continuity.
By recognizing these distinct vulnerabilities, project owners can choose coverage that fits their needs and keeps their renewable energy efforts on track.
What’s the difference between parametric and traditional insurance for renewable energy projects?
Parametric insurance works differently from traditional insurance by offering payouts based on predefined triggers, such as specific weather conditions or energy production levels. Unlike traditional insurance, it doesn’t require proof of physical damage or loss to process a claim.
Take this example: if a wind farm experiences wind speeds below the agreed threshold for a certain period, a parametric policy could automatically issue a payout. This method allows for quicker claim settlements and is particularly useful for risks that are difficult to measure using conventional methods.
In contrast, traditional insurance focuses on covering tangible losses. For instance, it might pay for damage to solar panels or wind turbines caused by storms or accidents. Both types of insurance are essential for safeguarding renewable energy investments, but the choice between them often depends on the nature of the risks being addressed.
Why is environmental liability insurance important for renewable energy projects?
Environmental liability insurance plays a key role in renewable energy projects by offering protection against the financial and legal challenges tied to environmental damage or pollution. Such risks might stem from issues like soil contamination, water pollution, or leaks of hazardous materials during construction, operation, or even decommissioning phases.
With this insurance in place, your project is better shielded from expensive claims and cleanup efforts. It allows you to stay focused on driving renewable energy initiatives forward while ensuring compliance with strict environmental regulations.
Footnotes
- According to the Surety and Fidelity Association of America, a surety bond is a form of credit, not a transfer of risk in the same way an insurance policy is. A surety bond is merely shifting the credit risk away from the obligee to the surety which will enforce the credit terms with you, the principal.
- Also known as “tax insurance”, “tax equity insurance” or “tax opinion insurance”, etc.
Header image by Samuel Faber from Pixabay".
