Navigating risky waters

Credit: Dreamstime
Credit: Dreamstime


With the renewable energy industry moving out of traditional growth areas and into emerging markets, pioneering developers are looking to take advantage of investment opportunities. However, in order to exploit the potential of these new, unfamiliar markets, a combination of additional market-specific risks will need to be tackled, writes Jatin Sharma of GCube


The draw for renewable energy developers and financiers in the world’s most promising new markets is clear. While traditional growth markets in Europe and North America continue to feel the effects of a global recession, and government support for new construction falters – particularly for onshore wind developments – ambitious firms are hoping to make a long-term investment by carving out a share of the market in new growth areas.

However, in doing so they open themselves up to additional, less familiar risks. Many of the most promising emerging markets, with the most plentiful wind and solar resources, can bring about one headache after another for developers and investors looking to plant their flag and build out a portfolio of sites.

These risks can be logistical: European manufacturers looking to export parts, labour and machinery to South America, Africa and the Middle East, for example, will need to account for a lack of supporting infrastructure close to project sites, which can be many kilometres from major ports and transport links.

They can also be related directly to the construction and operational phases of a project. The quality of local labour is not always consistent, while, in the African market in particular, theft of project-critical materials such as copper cable and oil can contribute to significant startup delays and project downtime.

Yet it could be argued that, provided developers do their homework and timely and appropriate mitigation measures are taken, generic logistical and operational risks of this type need not lead to any project setback. In fact, from an insurance perspective, we would expect these to be accounted for through sensible planning and project design, and they form a standard part of GCube’s Business Interruption coverage for both developed and developing markets.

It is when factors outside the control of developers and operators come into play that projects become vulnerable. Recent developments in Crimea – where 100 MW of operational wind farms and a substantial pipeline of projects are currently at a standstill – have served to raise awareness across the industry that external political risks should be a real concern for industry players in politically and financially unstable territories.

They have also confirmed a clear need for a political risk insurance (PRI) offering to safeguard investment in these markets.

The launch of GCube’s PRI coverage earlier this year, however, was not a knee-jerk response to a sudden flood of enquiries, but a considered and strategic move based on a steady increase in demand for PRI since around 2005.

While recent events in Mexico and Eastern Europe have raised the profile of this kind of risk, over the past ten years or so, unexpected events in the Middle East and North Africa, expropriations in Latin America and contract renegotiations in the mining sector have played out against a backdrop of ongoing economic and political uncertainty following the global financial crisis.

Capital constraints and increasing regulation for foreign investment have limited financing options, while there is a growing need to satisfy project financiers and lenders.

Specifically, with the rise in project finance being utilized to fund renewable energy initiatives in riskier markets, companies and lenders, particularly banks, have required more safeguards for their overseas investments, in the form of subsidiaries and joint ventures.

These business interests are exposed to a range of potential losses arising from actions taken by the host government. In particular, GCube has seen increased demand for coverage against risks of confiscation, expropriation, nationalization and deprivation (CEND) of assets.

Credit: Dreamstime
Credit: Dreamstime

Acts of CEND such as those seen in the Latin American mining industry, where the Bolivian and Venezuelan governments have seized control of numerous assets previously owned by foreign investors – see the fate of Canadian miner South American Silver in central Bolivia – can be hugely damaging for overseas investments.

For a project operator, they can result in partial or total loss of assets and a complete cessation of activities in the host nation, since the host government may not offer compensation and the investment has passed out of their ownership. Such scenarios have already started to occur in the renewable energy sector, and it’s clear that project developers are becoming increasingly aware of the risks involved in entering potentially unstable foreign markets.

Given ongoing investment in North Africa and the Middle East, where high-profile unrest has impacted severely on otherwise promising markets such as Egypt, political violence cover has also become something of a prerequisite for developers looking to exploit this potential and attract the necessary investment to do so.

Physical damage to investments arising from civil war and domestic unrest in the host country is more likely to result in partial loss; however, should a subsequent change in regime lead to a total breakdown such as we have seen in Libya and Syria, the door is opened to a whole range of more severe risks such as forced abandonment and forced divestiture. In these eventualities, a comprehensive PRI package is the only means of financial protection following the unforeseen loss of an asset.

Political protests can leave energy infrastructure projects vulnerable
Political protests can leave energy infrastructure projects vulnerable
Credit: asiapacificglobal

Nonetheless, rather than constituting a one-size-fits-all solution to host government intervention, each package must be carefully tailored based on the stability of the host nation, the foreign enterprise experience of the firm in question, the nationalities involved, the size of any given project and the importance of the asset to the host economy. Despite a strong Asian market for political risk insurance, reflecting the large growth in infrastructure projects there, it remains a specialist offering in the renewable energy space.

While GCube’s PRI launch signifies the arrival of the first private policy of this type for the renewable energy market – and the role of PRI for renewables is only set to increase as some of the largest planned projects to date in Latin America, Africa, and Asia seek to reach financial close – it is a sign of the times that such a policy is now required to keep investors on board in testing political climates around the globe.

Jatin Sharma is Business Development Leader at GCube.

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