A Touchstone in Energy Financing: Reduced Yield and Turkish Insurance Market
The effect of climate change is not only an environmental problem today as it directly relates to the resource-based industries. In today’s world, the scientific assessments lead the players of energy to reflect on their project viability. In direct proportion to the growth in financing renewable projects, insurance companies and underwriters are also expected to formulate their risk assessments on resource-oriented allocation models. Since especially the incontestable growth of ancillary instruments in Europe and the Japan the warranties in financing the “energy as the capital and the resource itself” yields new insurance coverage.
Unlike the generic insurance products developed to date, the new era presupposes the climate change rates to involve in collateral assets to be financed that are reflected to difficultly adapted insurance policies based on expended risk evaluation methods.
The National Renewable Energy Laboratory of the U.S. Department of Energy segments the project life cycle of into three segments: project risk identification; mitigation and allocation of the risks and the insurance.
In this article you will have a general perspective about the third segment that is considered as the insurability of the resource effectiveness and applicability of such policies under Turkish law.
It is obvious that the generally accepted and easily adapted coverage for general liability, property, construction and environmental risks and the coverage due to the warranties that are especially provided for components do not satisfy the lenders wishing to secure the pay-backs and the investments. In addition to such coverage new products have been developed by some insurance companies around the world that guarantees the performance of components. However, this resulted with uncertainty before lenders as the suppliers of EPC market vary under many unstandardized criterias.
As same in global energy market, Turkish lenders and insurance companies are also motivated to find out an insurance product to cover the risk arising out of resource effectiveness. Due to the fact that regulations do not impose project owners to make assessment in unlicensed electrical production (less than 1 MW per plant), lack of standardized test data for prototypes and forecasts that directly affect the criteria determination and range of costs, remains as a crucial problem in risk management.
In addition to the lack of standardized historical database infrastructure, the legislative requirements seem not met yet as the Turkish insurance law require Undersecretariat of Treasury to set out the general conditions of each certain policy. In consideration of the unforeseen risks that might be caused by component specifications, site and installation the reduced yield in Turkey can be insured by a uniform product that consists of the clauses of business interruption and reduced yield policies. In this regard it is possible to develop a new product under the general conditions of sole risk with the conceptual approach of all risks coverage.
Such extended coverage insurances for reduced yield mostly cover 90% of the predicted annual energy yield in Europe and Japan and the compensatory payment mostly does not exceed the 50% of the annual yield forecast.
The circumstances included to exclusion clauses are determined in parallel to the phases of the investment starting from site selection to power purchase agreements. These should include location of the site, defects in the plant, grid connections and disconnections, functions and changes of component and modules, representational authorities of the project owners, improper handling by the operator or his representative, unauthorized changes or modifications to the insured objects and the technology by the operator, failure of the feed, interruptions in the grid, security management, unauthorized inspections and maintenance howsoever and shadings by trees. However, tackling the problems in setting the standards and criterias to figure out the exclusions on investment basis shall be determined and assessed by insurance companies and lender with contribution of the project developers, construction companies, operators, EPC contractors of the project. Since historical database does not exist and domestically accepted experts are not institutionalized in assessment and evaluation risk of securitization remains as a challenge for Turkish insurance market players those who needs to find short and mid-term transactional solutions rather than proceeding with the calculation of the predicted annual energy yield as made in Germany.