Many banks are wary to finance renewable energy projects, and that hesitation can stall or even stop new projects. Insurers have stepped in to help mitigate the risks and establish the appropriate underwriting processes.
Massachusetts based Energi Insurance Services has published a handbook to guide banks though the many risks involved with renewables (and naturally how insurance products can help). The findings outline potential risk exposures in an attempt to help banks identify conditions when loans may not be repaid.
The guide covers energy efficiency projects and renewable sources including cogeneration, fuel cells, hydropower, solar power, and wind power. Of those, Energi found that wind energy projects could be the most be more prone to failure over the long run, but that new technology is lessening that risk, said CEO Brian McCarthy.
"Wind performance is an issue on a longer-term basis especially with the experience other countries have had," he explained. For example, wind projects in Germany have experienced delays and can have major fluctuations, affecting the reliability of the power grid.
While there had been many successes, tales of failed solar and wind engagements add to banks' uncertainty. "It is still more expensive to produce solar and wind byproduct than through natural gas or traditional coal plants that we see in the U.S.," McCarthy said, adding that those fossil fuel sources have associated costs.
"Uncertainties exist for alternative energy and energy efficiency around the performance of technologies and the security of future energy savings or production, leading to a conservative lending environment Further education is necessary to overcome the barriers that prevent wide-scale lending and project development," the guide concluded.
"The market has shown that for these technologies and industries to reach scale, banks require enhanced underwriting practices where future project performance can be analyzed. In order to fully capitalize on industry opportunities, lenders must develop standardized underwriting guidelines that incorporate the projected future energy savings or production. To do this they must understand risk exposures that may affect project economics."