Posted by W. Bruce Murray, Jr., AssuredPartners
Across the United States, the Inflation Reduction Act has enabled growth in solar, wind, battery energy storage systems (BESS), renewable natural gas (RNG), biofuel, and hydrogen, which includes the fuel cell industry. Large cities are discovering anaerobic digestion to address municipal waste issues and using the methane off-take and hydrogen for greater profitability.
Whether your company is a utility or developer building a portfolio of “green” assets such as hydro power, wind, solar, and BESS, assets are being combined for efficiency. Nuclear energy could be on a rebound with “pink hydrogen” off-take. Clean coal and the generation of “blue hydrogen” could make West Virginia a hub of prosperity in time. Old ammonia plants have value again due to their ability to produce green ammonia and inexpensively distribute “green hydrogen.”
Tax Incentives are the investment driver in many cases, along with carbon credits. With new clarity from the IRS, we are beginning to see and feel the impacts of the Inflation Reduction Act. Canada is on the verge of enacting their green energy tax incentive program (similar to our Inflation Reduction Act), and this has created positive energy among Canadian Infrastructure Funds that invest both in the U.S. and Canada.
As insurance brokers, we de-risk projects, meaning we contain and transfer risk exposures to enable project debt and equity financing. Simply put, significant alternative energy projects require a different level of risk management, insurance, and surety bonding.
Here are a few examples:
Performance Warranty Guarantees help mitigate design and engineering risks associated with new and more novel Alternative Energy technologies. Essentially this is “shortfall” coverage; the policy covers quantity and quality projections of a project’s off-take. In the past, these performance guarantees were tied to a project debt service for up to 15 years. Recently, AssuredPartners collaborated with clients to bring the performance guarantee to the equity level, aligning the performance-based coverage for project debt and principal equity partners. We routinely include governmental incentive coverage (e.g., RINS, LCFS, ITC, PTC) in the insured value stream, and the performance-based technology insurance claim ‘trigger’ is reduced output. For tax credit coverage to apply, it must be tied directly to project technical performance.
Tax Liability Insurance works to provide certainty around credit eligibility and is also a risk mitigation tool. Coverage design is flexible, and it can be a customized solution.
- Tax insurance can provide effective protection against the loss of investment tax credits or production tax credits due to a successful challenge by a taxing authority.
- The protection can be purchased for the investment tax credit. This helps offset the exposure of a taxable agency denying or challenging the credits as part of the investment.
- The protection also applies to production tax credits. Protecting claimed credits from a taxable entity challenging the credits. In both instances, the policy can cover the loss of the tax attributes, defense, and penalties.
New IRS regulations define and clarify the transferability of credits:
- IRS issued proposed and temporary regulations on June 14, 2023, in two areas that are anticipated to increase opportunities for developers to monetize renewable energy projects:
- Direct pay (Sec. 6417): allows tax-exempt investors to receive credits directly.
- Transferability (Sec. 6418): allows ITCs and PTCs to be sold to unrelated taxpayers for cash.
- Certain requirements apply for transfer credits, including the transferor registering the credits and transfer elections being filed with the IRS.
- All or a portion of the credits may be transferred, including bonus “adder” credits.
- Applies to sale and leaseback transactions.
- Tax insurance is likely to increase because material risks are borne by the buyers of credits (i.e., recapture risk, audit, risk that excessive credits are claimed).
Although Sellers/Developers might provide indemnities, many buyers of credits are likely to prefer A or higher-rated insurance in lieu of seller credit risk.
Surety Bonding. We recently bonded a Power Purchase Agreement (PPA) that enabled our insured to free up cash (LOC Security) at a major bank. Traditional bonding can be used annually to support long-term service agreements that support consistent operational performance over time, such as monitoring and continual maintenance and repair. Bonds can be used to hedge against production shortfalls and secure contracts with counterparties. Bonded renewable energy obligations include EPC Contracts, Interconnections Agreements, Power Purchase Agreements, and Decommissioning Bonds.
Full Property Casualty Insurance capability, including Builders’ Risk, OCIP or CCIP during the construction phase, Environmental Site Specific and Contract Specific Liability, and Professional E&O Liabilities (including Technology E&O and Manufacturers Design E&O). P&C Insurance coverage is specifically designed to cover all aspects of the project’s life cycle: pre-construction and finance requirements, during the construction phase through ‘hot testing,’ and then ongoing operations upon completion and passage of title.
Regulatory Risk via London Specialty Markets. This ‘cutting edge’ insurance coverage can support investment into Clean Energy, climate finance, and environmental commodity markets. It can provide pricing support (‘floor’ pricing scenarios) for financial modeling. Here are a few examples:
- Environmental Integrity Risk: Carbon offsets are only of any value if they have high environmental integrity. Parhelion underwrites the risks related to the environmental integrity of carbon credit assets. This allows offset purchasers to buy with confidence, knowing that should the environmental integrity of a purchased offset be compromised – by fraud, errors, or invalidation, for example – they are protected by insurance.
- Delivery Risk: Carbon offset projects deliver over an extended period, and throughout this crediting period, the projects are exposed to multiple risks that have the potential to result in the non-delivery of offsets and underperformance of projects. Insurance can be structured to transfer delivery risk at the project or portfolio level.
- Political and Policy Risk: Compliance and voluntary carbon markets are created and regulated by governments and are part of a wider national and international policy framework.
Many of these policies are still under formation and subject to change by policymakers, businesses, and society. Contact AssuredPartners Energy for more information and insight.
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