Brokers may play a role in South Africa's renewable energy future
Since the fragility of South Africa's power generation capacity was exposed in 2008, there have been calls from many sectors of government and the public for Eskom to diversify its power generation strategy away from its sole reliance on coal generated power. While there were significant investigations into expanding the countries' capacity in nuclear power, the country followed the international trend of turning towards renewable energy to fill this gap.
However, this is far from merely pushing buttons. Significant investments will need to be made in areas such as skills, infrastructure and capital outlay. In order for this programme to be a success, the financial services industry may play an important role.
World-wide focus
The focus on the renewable energy sector has never been higher, with governments around the world setting tough targets for the amount of energy provided by renewable sources. Global demand for renewable energy continued to rise in2012, supplying an estimated 19% of the world's final energy consumption. Given the financial hurdles of many renewable energy projects, and the speed of change in renewable energy technology, in what is still a relatively new industry in South Africa. Contractors and developers in the field require specialist risk and insurance broking advice to ensure that this increasingly competitive industry is able to meet its many complex challenges.
Christa Strydom, Renewable Energy Account Executive at Aon South Africa, points out that the renewable energy sector will continue to grow significantly faster than any predicted national and international economic growth indices. This provides significant opportunities for developers and operators alike.
"South Africa has set a target of generating 3275 MW from renewable energy, according to the Energy Department of South Africa. Demand by governments and individuals for a secure supply of cleaner and cheaper alternatives to fossil fuels is escalating, along with the introduction of tightening emission reduction targets. But renewable energy projects come with significant and complex risks and in most instances, massive financial requirements and contractual liabilities due to the debt financing models in place," she explains.
The need for insurance is clear
Strydom adds that insurance costs can be a notable line item in the costs for renewable projects. Accordingly, the impact of premium cost fluctuations can be significant to the profitability of developments and debt cover ratios required to support finance arrangements. It is important that brokers understand the financial sensitivities in the cash-flow model of the project in order to design the most efficient insurance programme.
"The reality is that the availability of project finance depends heavily on the insurance solutions available. Banks are risk averse, requiring high levels of insurance and this can be the deal breaker in the event that a broker cannot find adequate risk transfer capacity combined with seamless local solutions."
"Effective use of insurance is an essential part of securing funding for projects. Aon works with clients to provide the most appropriate bankable approach, and are increasingly involved in the negotiations with the developer and lenders as there is always scope for negotiation in balancing what lenders require and what the market will provide commercially," she says.
One of the most crucial areas that Aon is finding itself increasingly involved in, is the traditional pre-construction of risk advice which includes liaising with lenders and contractors, including lawyers and insurance brokers, to enable effective contract negotiation. "As the developer, it is essential to have a risk partner that is involved in the contract negotiations to avoid potential pitfalls that can be very costly if risk and insurance issues are not considered early enough during contract negotiations. By being involved in the negotiations, we are able to marry the insurances to the risk and indemnity clauses that flow from the contracts."
Partnering with the right risk provider
It is also essential to have a global risk partner that is able to utilise both local and global markets to develop appropriate risk transfer solutions where necessary, along with the core contractually required insurances.
"From a South African perspective, the success of the project relies heavily on having a risk partner that fully understands the consultancy and market placement advice to be used within the bank feasibility study which happens long before the project even gets off the ground," explains Christa.
Seamless cover is a key requirement of any renewable energy project. This involves all aspects right from the planning and early works stages and between marine cargo transits, construction all risks, delays in start-up, operating property damage and business interruption, as well as all third party liability exposures. Renewable energy insurance products cover the main lines of insurance such as property, engineering, marine and liability while additional special types of insurance can be made available such as credit, political and weather risks, errors & omissions, and directors & officers cover.
Editor's Thoughts:
While this is a growing trend in the country, renewable energy is a niche market which requires significant capital investment. How much room is there in the market to grow with this demand and will it really prove to be profitable to brokers? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
