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:

• Construction: will the project be on time, on budget, is the contractor capable of delivering what he's agreed to and does he have sufficient assets in the event he does not, will some act of God, force majeure or other physical loss impede or otherwise upset the project.
• Operations: will the project be properly maintained, is the O&M contractor qualified and experienced, will the project perform efficiently and at predicted capacity levels, will there be labour difficulties, unplanned outages, physical losses and income losses caused by acts of God
• Equipment: is the chosen equipment suitable for the situation, will it be delivered on time, will replacement parts be readily available, is there a technology risk, what is the stability of the manufacturer and do they have sufficent assets in case of a fleet wide failure.
• Economic: will there be unexpected costs, problems with currency conversion, repatriation of funds, tax changes, policy changes, will sinking funds and government agreements be sufficient or reliable.
• Power Off-Take: will the project have the ability to sell power at sufficient rates to assure debt service and project health. Is the credit rating of the Power Purchase Agreement sufficient, what is the ability of the Government to back PPA's, what is the value of the country's Sovereign Guarantee.
• Political: a number of political or cross boarder risks may need to be addressed such as private ownership, power sales, taxes, fuel use, emissions, currency, contract repudiation, expropriation, nationalization, insurrection.
• Fuel Supply Resource Reliability: depending on the technology being used, different fuel reliability issues arise such as long term supply contracts or agreements, the fluctuation in fuel prices, reliability of resource studies, weather risk such as a lack of sufficent wind speeds or hours of sunshine for wind and solar projects.

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:

• Liquidated Damages: an old product but special to the process as it provides indemnity should a contractor fail to perform and so impacts the income potential of the project.
• Technology Risk: a new form of an old idea of providing warranty coverage to new technology. These products are highly individualized and negotiated on a specific need and financial capability basis.
• Debt Service and Credit Enhancement: these are highly specialized contracts designed to transfer the risk from the lender to the insurance company balance sheet effectively giving the project triple "A" credit.
• Weather Risk: insurance and weather derivatives that provide a risk leveling resource guarantee for any measurable force of nature.
• Political Risk: all manner of political or cross boarder risk can be provided for with the most prevalent coverage being Contract Repudiation.
• Commodity Hedges: like the commodity market itself, these products serve to level the risks while placing a cap on positive gains. The product allows for a pre set long term contract, backed by triple "A" paper. The advantage over a self managed commodity fund is it takes the uncertainties out of the equation. The various products in this class include: Fuel prices, currency exchange rates, market risk, transmission risk, counterparty risk, generation risk and any risk that comes from dependency on the future price or cost of an item.

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.

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