The latest on Energetic and renewable energy trends.

We’re thrilled to share that Energetic Capital is featured in 'The Great Enabler', a new report launched at COP29 by Howden, BCG, and the High-Level Climate Champions. This pivotal whitepaper highlights how insurance solutions are catalyzing the estimated $10 trillion required for the global climate transition.  

Our credit product is spotlighted on page 17, demonstrating how innovative insurance-backed solutions can unlock capital for clean energy projects. The report also provides key insights on the broader role of insurance in powering climate finance, including strategies to accelerate the energy transition (page 37).  

Explore the report to learn how the insurance sector is driving transformative change.  

Read the full report here.  

Governments play a pivotal role in shaping the energy transition. Policy interventions, like tax credits and regulatory incentives, are essential to drive the sector-wide transformations needed for a greener economy. However, with a critical election approaching in the US, concerns about "political risk" have surfaced among businesses and investors. Many worry that a change in administration could bring new or revised policies, potentially undermining investments in renewable energy and related sectors. Given this emerging risk, a key question arises: Can insurers provide solutions to mitigate these concerns?

In this article, I aim to distinguish between "Political Risk" and "Policy Risk" to clarify where the insurance industry can offer protection—and where it cannot.

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What is Political Risk?

Political Risk is a broad term, but in insurance, it refers specifically to products that protect businesses from adverse government actions (or inactions). These can include expropriation (asset seizure), political violence, currency inconvertibility, or breaches of contract by government customers (known as “contract frustration”). Essentially, Political Risk Insurance (PRI) helps manage the financial impact of unexpected, discriminatory government actions on foreign investments. PRI emerged post-World War II, primarily to protect Marshall Plan investments, and has since evolved into a standard product offered by both government-backed and private insurers.

For example, if a foreign government nationalizes a foreign investor’s assets without due compensation, a PRI claim would likely be triggered. Insurers can issue this coverage because recovery paths exist through contracts with dispute resolution language or international commercial treaties, allowing pursuit of compensation for expropriation.

What is Policy Risk?

Policy Risk is the risk businesses face due to changes in public policy. Unlike Political Risk, which arises from government actions like expropriation, Policy Risk stems from regulatory shifts that impact business operations. For example, an electric vehicle (EV) manufacturer that has made long-term investments based on federal tax credits to boost consumer demand for EVs could face significant financial challenges if these credits are rolled back, affecting projections and ROI.

Although both Political and Policy Risk involve government actions, the key distinction lies in the "police powers of the state." Under international law, states have the right to regulate in the public interest. Thus, regulatory changes like tax adjustments or environmental regulations may not be compensable, whereas expropriation is generally compensable under most international agreements.

Can Insurers Cover Policy Risk?

As politics in many developed countries becomes more polarized, investors increasingly ask whether Political Risk Insurance can cover Policy Risk. The answer is typically "no," though, as in much of insurance, it depends. Political Risk Insurance protects against significant government actions like expropriation, where recovery paths exist through arbitration or international dispute resolution treaties—not the regulatory changes that define Policy Risk.

That said, the potential for insurers to address certain aspects of Policy Risk isn’t entirely off the table. The key is understanding the nature of the insured event, its likelihood, and the possibility of legal recovery. If these align, an insurer might underwrite Policy Risk—but likely at a premium reflecting the anticipated loss and recovery profile.

Conclusion

As we move toward a greener economy, the energy transition requires both government support and private investment. However, increasing political uncertainty surrounding environmental policies presents challenges for businesses. While Political Risk Insurance offers protection against severe government actions, Policy Risk—such as the rollback of EV incentives or renewable energy subsidies—often remains outside the scope of traditional insurance solutions. To address this, businesses must be clear and specific in their concerns and work closely with insurers to determine whether their risks are insurable—and at what cost.

For example, an investor concerned that EV infrastructure incentives might be withdrawn could ask an insurer whether the loss of a particular revenue stream would be covered. While the answer might be “no” in most cases, the key lies in a precise understanding of the risk. Only by honing in on specific risks can insurers and businesses collaborate effectively to manage emerging uncertainties in the energy transition.

In renewable energy project finance, managing credit risk is critical for both project developers and lenders. Two key tools in the risk management toolkit are credit enhancement and risk sharing. These mechanisms, though often complementary, serve distinct purposes and can be used strategically to improve outcomes. In this post, we’ll explore the different use cases for tools like EneRate Credit Cover (a credit enhancement) versus non-payment insurance (a risk-sharing tool).

What is Credit Enhancement?

Credit enhancement strengthens the creditworthiness of a project to mitigate risk and improve financing terms. There are two types of credit enhancement:

1. Structural – These are features built into the transaction itself to reduce the risk of default. For example, lenders often require specific Debt Service Coverage Ratios (DSCRs) or establish Debt Service Reserve Accounts to ensure funds are available to cover debt payments in the event of distress.

1. Contractual – These are separate agreements or contractual provisions designed to mitigate certain risks. One example is termination penalties or liquidated damages built into a contract. Our EneRate Credit Cover is a form of contractual credit enhancement, where a policy insures amounts due from an offtaker under a Power Purchase Agreement (PPA), effectively enhancing the credit quality of the offtaker.

In either case, credit enhancement aims to address situations where the underlying credit of the project or one of its participants is insufficient to meet an investor’s (lender, tax equity, or other) standards. For example, a PPA for a combined heat and power system might require the offtaker to “take or pay." If the offtaker chooses not to take power from the system or fails to provide the fuel required to generate power, it still must pay a certain amount. This contractual risk enhancement mitigates concerns over system usage. EneRate typically enhances counterparty credit risk. If a project’s offtaker has a sub-investment grade rating, a credit enhancement solution could include a credit insurance policy that insures payment obligations, allowing the project to secure more favorable financing.

What is Risk Sharing?

Risk sharing is a mechanism where a financial institution distributes a portion of its exposure to another party, such as an insurer, to enable larger or riskier transactions.

Motivations for using risk-sharing tools include:

• Increasing capacity – Allowing a lender to bid for a larger portion of a project finance transaction (and win greater client wallet share).
• Managing concentration risk – Reducing exposure to specific sponsors or geographies, often referred to as “tall tree” risk.
• Optimizing regulatory capital – Reducing risk-weighted assets or meeting regulatory capital requirements through eligible guarantees under frameworks like Basel III.

An example of risk sharing is non-payment insurance, where a lender involved in a large renewable energy project insures the credit risk, reducing the bank’s overall exposure to the sponsor or geography. This enables the bank to manage internal concentrations while still meeting client needs.

Credit Enhancement vs. Risk Sharing: Key Differences

While both mechanisms help manage risk, their purposes differ. Credit enhancement improves the transaction itself, often addressing concerns that might prevent an investor from participating. Risk sharing, on the other hand, enables an investor to expand—such as increasing lending capacity—despite external constraints like lending caps or geographic exposure limits.

EneRate Credit Cover (credit enhancement) improves the credit profile of a project, often leading to better financing terms. Non-payment insurance (risk sharing) allows lenders to distribute risk, enabling them to participate in larger transactions without exceeding internal or regulatory limits.

Interestingly, credit enhancement can achieve some of the same outcomes as risk sharing by improving a project’s overall risk profile. However, risk sharing is not typically used to enhance credit quality but rather to distribute and manage risk exposure across a portfolio.

Conclusion: Which Tool to Use?

 When determining which tool to apply, consider your primary goal:

• Are you seeking to improve the overall credit of the project to meet lender requirements? If so, credit enhancement is likely the appropriate solution.
• Are you looking to distribute risk to enable larger participation or manage regulatory requirements? In this case, risk sharing may be more suitable.

Ultimately, both credit enhancement and risk sharing are powerful tools that can complement one another in renewable energy project finance, helping stakeholders optimize risk management while meeting their financial goals.

For more in-depth discussions on credit enhancement, check out our previous blog posts here. You can also explore risk-sharing strategies in project finance in this article by Clifford Chance.

Energetic Capital is proud to announce a new investment from Greensoil PropTech Ventures, a ClimateTech investor focused on decarbonizing the built environment. This latest funding, alongside support from existing investors including SE Ventures, MS&AD Ventures, Congruent Ventures, and MUUS Climate Partners, will enable Energetic Capital to expand its financing solutions for distributed energy resources across underserved areas.

Having already expanded beyond solar into energy efficiency, microgrids, and other clean energy technologies, this investment will help Energetic Capital continue to deliver capital to traditionally overlooked real estate assets and low-income communities.

For full details on this exciting development, read the full press release here.

We're excited to share that Jeff McAulay has joined the "Insider's Guide to Energy" podcast as a co-host! With his extensive experience in the clean energy sector and passion for innovation, Jeff brings fresh insights to the show’s deep-dive conversations on the future of energy.

Tune in to hear Jeff and the team explore the latest trends, challenges, and opportunities shaping the energy landscape. Whether you're in the industry or just passionate about the energy transition, this podcast is a must-listen!

Check out more episodes here: Insider's Guide to Energy.

Last week, I was able to attend several Climate Week events in NYC 2024. This annual convening of thought leaders is crucial in driving top-down influence in the fight against climate change across every industry. Insurance has always been a priority of ours at climate week, but this year it was impossible to ignore the growing emphasis on insurance across all attendees, from venture investing to broader finance.

Historically, insurance discourse at climate events has revolved around resiliency and adaptation. Given that insurers have shouldered much of the financial burden from the physical damage caused by climate change , it's understandable that the industry has focused on mitigating and avoiding losses. Insurance has often been viewed as a tool to manage risk, especially as natural disasters increase in frequency and severity. However, this year, the conversation took a proactive turn.

The tone of 2024's discussions signaled a shift toward a more forward-looking role for insurers in preventing climate change itself. The industry’s growing engagement with “de-risking” clean energy and energy transition projects reflects a deeper involvement beyond traditional risk management. This shift not only introduces new players to the nuances of insurable risks but also demonstrates the powerful influence that Climate Week can have in aligning industries with climate action goals.

But the top-down influence observed during Climate Week NYC must be followed by meaningful action on the ground. As individuals within the industry, especially those involved in transactions, we have a responsibility to carry this momentum forward. Here are a few reflections on how insurance can continue to evolve as a force for change in the fight against climate change:

Engage Early

Every project or company must face a complex landscape of risk management. Engaging with insurers early in the process allows for crucial resiliency and adaptation considerations to be integrated into planning. This not only lowers insurance costs but also helps avoid costly last-minute surprises.

Early engagement can identify specialized products designed to transfer or reallocate risks that a project might not want to retain. By incorporating these solutions from the beginning, project stakeholders can model both the costs and benefits, ensuring more accurate planning and execution.

Quantify the Value of Insurance

Insurance is often perceived as an unavoidable expense, rather than a tool to create value. Shifting this perception requires a clear focus on the value an insurance policy provides. What measurable benefits does it bring to a project? Which key performance indicators (KPIs) does it optimize? These are key questions to answer.

At the same time, project owners and investors need to adopt an outcome-oriented approach. By isolating the tangible benefits of an insurance policy—whether it's protecting revenue streams or mitigating unforeseen costs—they can better balance the value it provides with its cost. The focus should be on achieving problem-solution fit, where insurance plays a critical role in enabling the success of a project.

Be Specific

Insurance can be broad and flexible, but to be actionable, it is crucial to be specific about the risks that need to be covered. This is especially important for emerging risks linked to the energy transition.

Taking a detailed approach to understanding the steps that could give rise to a loss, the potential economic impact, and the benefits of mitigating that risk ensures that the insurance solution is tailored and effective. For example, by mapping out the risk scenarios in a renewable energy project—such as operational downtime due to extreme weather—stakeholders can design an insurance solution that directly addresses these challenges, providing both financial protection and operational stability.