New Hope for Project Finance
Unique Products Mitigate Risk

By Michael A. Cook
September 1999

The Author is Partner and Managing Director at TradeWind Insurance Brokers and Principle of ACEnergy Services, Ltd. Mike has over twenty years experience insuring energy risks and has been involved in the Development of specialty risk mitigation products for the Energy Industry for 5 years, he can be reached at 1-626-914-2903 or at

The World stage is currently set for Independent Power Producers and new energy efficiency, renewables and cogeneration to provide ever increasing percentages of power demand in the new millenium. It has also become clear the majority of new project finance must come from the private sector.

It would appear, that at least for the near future, merchant plants will continue to take a back seat to the long term single customer power take off arrangements that dominate the independent power producers (IPP) today. Having said that, it is also apparent that deregulation of the various world power markets will continue and various Renewable Portfolio Standards (RPS) schemes will become law of the land. Merchant plants able to capitalize on the sale of Renewable Certificates and Kyoto style Carbon Emissions Credits to a global market will eventually come into vogue.

Some experimentation in "hybrid" financing models involving various techniques such as bond issues, public stock offerings, export credits and balance sheet funding sometimes in concert with non-recourse or limited recourse project finance have begun. However, the expectation is that pure non-recourse project finance to dominate new renewable project capitalization in the foreseeable future. There is a tremendous need for new sources of non-recourse capital which will grow exponentially in the next 20 years. The limiting factors in the attraction of capital resources are the uncertainties existent in new energy technologies and the ability to maintain stable markets for the debt service term. As a rule, private sector commercial lenders are AVERSE TO RISK. These factors usually lead to extensive time and money spent on due diligence efforts as project developers attempt to demonstrate their ability to alleviate risk to a variety of lenders hired financial advisors who's activities, while necessary, are not always expeditious.

The various risks that concern lenders can be categorized as follows:

Traditional methods of mitigating these risks usually involve proving the reliability of EPC contracts, O&M contracts, PPA's, sovereign guarantees, resource studies, equipment performance data and setting sufficent sinking funds to cover "expected" problems. This process is always time consuming, expensive and at the end of the day, just one detail can foul the entire process and send the project sponsors packing.

Keeping the plates spinning whilst simultaneously keeping the balls in the air can be a daunting task. However, there is new hope from an old source for quality projects that happen to have a few rough edges. New (and some not so new) specialized risk mitigation products can be found to level the risks and alleviate the lenders fears. The Insurance Industry can now offer a number of unique products that, when used judiciously, can help project developers/sponsors in the risk allocation and mitigation process and expedite the signing of loan documents. Some of these unique products include:

In conclusion, proper risk allocation and mitigation is the key to securing project financing. By identifying and pre disposing of financial risk concerns, project managers can expedite the financing process. This in turn reduces the time and money spent on resolving the conflicts which characterize the financial advisor process of commercial and investment banks.


Copyright © 1999, ECO Services International