P50 Risk Solutions

Status: Short-listed
Cycle: 2015-2016
Type of instrument: Insurance
Focus area: Utility-scale renewable energy
Goal: To reduce the cost and increase the amount of long-term debt to the utility-scale renewable energy sector by transferring the risk of revenue uncertainty from banks to insurers, through a blending of commercial and donor capital
Implementing entities: Insurance underwriter
Private finance targets: Commercial finance and domestic banks

A formidable risk in the renewable energy sector is weather variability, especially for wind energy. Weather variability translates to revenue variability, which has a direct effect on the ability of projects to meet their debt obligations. Banks take a conservative approach to this risk, and this limits the availability and cost of capital for renewables.

P50 Risk Solutions is an insurance product that guarantees a minimum level of revenue generation against the payment of an upfront annual insurance premium. If the revenue during the year falls below this level, the insurer makes up for the difference (up to a maximum predetermined cap). The product is designed so that the customer has certainty of achieving a minimum revenue with 90% probability, increasing the level and reducing the volatility in projected revenues.

Banks make their investment decisions on the projected levels of revenues. The increase in levels and reduction in volatility of the projected revenue has the possible impact of:

  • Increasing the project debt-equity ratio
  • Reducing the cost of debt
  • Relaxing banks’ conservative lending practices
  • Introducing new sources of institutional debt and equity capital

This has a net effect of reducing the cost of capital and increasing the availability of new investment sources.

P50 Risk Solutions is structured so that, first, an insurance underwriter prices the insurance using the Wind Resource Assessment of the project as the main source of data. In keeping with IRDA regulatory requirements, a domestic insurer front-ends the insurance with the customer, and signs a reinsurance treaty with the underwriter. All payments flow through the conduit of this fronting agency, which charges a facilitation fee in the process.

The insurance hedges the ideal energy generating potential of the wind farm, defined as the wind speed applied to the power curve of the turbine, excluding any losses. If the hedged level exceeds the annual cumulative potential, the insurer makes an indemnity payoff to make up for the difference. There is a predetermined maximum cap on this indemnity payoff.

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“P50 Risk Managers and Robert Ashdown from Swiss Re Corporate Solutions submitted our concept to the India Innovation Lab for Green Finance because we believe that our innovative risk transfer solution for renewable energy projects will transform the way Indian banks look at resource risk, thereby increasing funding capacity. We see that this concept will have the catalytic effect of mobilizing credit for the Indian energy market and creating a strong demonstration of how to deliver a greater volume of projects and MWs at highly competitive energy tariffs in other growth markets.” said Nigel Purse of P50 Risk Managers and one of the idea proponents of P50 Risk Solutions, in a statement.

For more information about P50 Risk Solutions, please contact Vinit Atal at vinit.atal@cpidelhi.org.