As the world searches for better ways to power the planet, renewable energy has become a topic of note for virtually every industry. While the emergence of such resources as energy sources is exciting and for sure part of the future, it isn’t without risks. In fact, in some cases, renewable energy projects can be even more risky than traditional projects using proven, existing methods.
According to the Department of Energy, renewable energy is any resource that provides energy in a natural capacity, which is thought to be better for the environment long term. Sunlight/solar, wind, geothermal, marine, and biomass resources can all be converted from a naturally occurring source into energy. The growth of renewable energy projects is exciting, and with that growth is the responsibility to learn how to navigate the risks along with identifying the many rewards these projects also offer.
Risks and Challenges in Renewable Energy Projects
As with any new industry or growing industry at the very least, renewable energy and the projects within this sector are still in the early stages. As a result, there are specific challenges related to renewable energy that don’t often go along with other projects. This is a risk faced by investors and lenders as well as the professionals actually completing the projects. These challenges can be associated with a wide range of issues, including technology, the regulatory environment that encompasses such projects, and the project location. Therefore, while the rewards of creating a fully functioning renewable energy source can be immense, the risks can also be somewhat overwhelming when considering them throughout the large scope of the project.
Thankfully, there are ways to mitigate the risks and protect the investments made in the projects, creating a measure of safety for those who invest in such endeavors. Of course, each type of project will have varying risks associated with that particular type of resource. They can range from opposition from other energy sources like fossil fuels to questions about rare earth elements and even tariffs. Therefore, it’s important to evaluate each project on its own in terms of mitigating risks overall during the project and afterward. However, the primary way to mitigate such risks is through exploring and purchasing the right insurance policies.
Role of Insurance in Renewable Energy Projects
With the insurgency of renewable energy and the demand for more ways to create energy outside of traditional methods, more and more companies are climbing on board and attempting to get involved in this industry. Thankfully, the insurance field has also evolved to meet this growing demand. In many cases, insurance policies present a way for lenders or sponsors of renewable energy to invest in such projects and protect themselves against the risks. Insurance policies are also making it easier for construction companies to take on the task of working in this innovative field. The following are some of the most applicable risks, and thankfully how insurance policies can help offset these risks:
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Construction Risks:
This includes risks associated with engineer or design experience, underskilled staff, local conditions not being ideal, changes to the project scope, construction costs, and equipment issues. Policies can be issued that cover all phases of construction and even involve an aspect of protection against delays. -
Regulatory Risks:
This includes risks associated with delays for licensing, permits, approvals, and tax credits. These are not necessarily risks that can be insured against but they can be mitigated when they are contemplated at the beginning of a project. -
Technology Risks:
The technological systems being utilized have to perform for the long term. There is room for error in design flaws and such that can cause this to not work as intended. This can be a problem for both lenders as well as owners and construction companies. -
Operational Risks:
This can include testing and commissioning involving operational concerns after the completion of the project. In the case of a wind farm for example this might include the risk of not getting the desired level of energy output after the project is completed. -
Much, much, more:
There are many more risk factors that should be considered going into such a project. Thankfully, in many cases, insurance policies can offset many of these and allow companies to continue to invest in and complete renewable energy projects.
Key Players in Renewable Energy Project Finance and Insurance
When it comes to renewable energy projects, there has to be a strong collaboration between investors, lenders, and insurers. Each one of these players plays a much-needed role in the process. Without the entire team, a renewable energy project would likely be dead in the water from the start. There are many companies that have made a name for themselves by being involved in renewable energy projects and have quickly become key players on the investment side. They include but are not limited to NextEra Energy, which has invested $20 billion in renewable energy since 2019, Greenbacker Capital, which has invested upwards of $1.460 billion since 2011, and MidAmerican Energy, which has invested over $1,300 million in wind, and solar energy mostly in Iowa, but also in Nebraska, South Dakota, and Iowa.
Challenges and Opportunities for Insurers in Renewable Energy
It can be extremely challenging for insurers to assess the risks and to properly underwrite policies that protect those involved in renewable energy projects. Much of this is simply because we don’t know what we don't know about innovative technology and what the future will hold. However, it’s still vitally important for the world overall and America more specifically to continue to invest and protect those who do so in order to further the renewable energy industry overall. There is also a great deal of room for growth within the insurance market when it comes to the renewable energy arena. Insurance has always had a hand in affecting or influencing corporate behavior overall. In other words, when insurance companies begin getting involved in an industry by making policies for that arena, then the field overall is validated. This is a positive impact that can improve the growth of the industry overall.
Insurance plays a very important role in the furtherance and expansion of renewable energy projects throughout the country and even globally. Investors, lenders, and insurers alike must work together to promote renewable energy projects and continue to grow this innovative, exciting field. At Winter-Dent, we are happy to advise you on renewable energy projects and the policies that could be put in place for these either on the investment side or from that of the construction or owner.
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