USA: Struggle between the need to accelerate renewables adoption and the weather risk transfer

Renewables are growing rapidly as a percentage of new electric generation, but are still being assimilated too slowly and still constitute too small of a fraction of total generation, to be able to transition quickly enough to scale into a low carbon economy in time to mitigate climate change.

The issue of providing public support, with subsidies and other reallocation methods, is a politically charged subject. High carbon advocates, for example American Petroleum Institute, argues that support for renewables distorts the market. On the other hand, it has been argued, for example by the IMF, that subsidies for high carbon industries are so pervasive, estimated for 2015 at US$5.3 trillion (6.5% of global GDP) that not only is the market distorted but governments are effectively captured. This dispute will not be resolved in the near term, but the “market” will continue to respond, as has been seen by the dramatic reduction in costs for photovoltaic hardware and batteries.

Structuring the transactions to incentivize the capital markets to reduce financing and other “soft” costs is the pathway that will most likely contribute to accelerating continued development. The market, in broad strokes, consists of three generic groups:

  • 1) project developers or Sponsors that coordinate project finance to underwrite planning, design, procurement, permitting, etc.
  • 2) end users of the generated power (Off takers) which include major utilities, large commercial industrial corporations, municipalities, universities, etc.
  • 3) and asset holders (Portfolio funds), which acquire completed projects to operate, distribute earnings, and are focused on net yield. Risk Mitigation measures targeted at each transactional node may be the best way to accelerate the ascendancy of renewables.

Sponsors have to manage costs to be able to compete as electricity suppliers, to be able to offer a competitive pricing to the Offtakers. Risk mitigation at the project level involves various forms of insurance against an array of more common risks, for example with performance bonds.




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