The latest on Energetic and renewable energy trends.

Conversations about climate change are centered around what tools organizations and individuals have at their disposal to accelerate the transition to green energy. One key question the insurance industry contends with is how to address adaptation and mitigation challenges of climate change.  

The risks of clean energy installation are real, and insurers are particularly exposed. Transitioning to a resilient carbon-neutral economy requires stepping up global financing of climate mitigation and adaptation measures with a more integrated approach. Insurers, as risk managers and investors, play a critical role.  

Insurance providers should be actively providing solutions through risk management strategies and investment into projects in areas that need additional assistance. They are positioned to take on risks that are unique to project developers actively working on mitigating carbon emissions and working to create sustainable energy solutions.  

1. Insurers can take on weather and infrastructure risks exposed to changing climate and are therefore positioned as leading authorities on the costs of business-as-usual approaches.
2. Insurers can take on risks of holding back deployment of renewable and distributed technologies to mitigate carbon emissions and contribute to resilient energy grids. The physical risks of climate change are rising in severity, with widespread effects on people, communities, businesses, and governments globally. Investing in clean energy to mitigate changes in the global climate is necessary. Clean energy’s creditworthiness often struggles to recover from energy shocks in the market. Government funding does not provide all the resources necessary for a developer to rise to meet market demand. Entities conducting risk analyses must actively contribute to the solution.  
3. Insurers can deploy their investment arms to be an essential source of capital for sustainable infrastructure projects. Significant capital is needed for the large-scale deployment of new technological solutions to enable and expedite the decarbonization of key sectors. Capital from tax equity entities, private investors, private and public grants, and financiers are necessary to fuel the next steps in advancing clean energy. Yet new technologies and infrastructure systems come with myriad risks that must be assessed and managed with a full life cycle view to attract large-scale capital.  

Insurers are uniquely positioned to allocate risk capital to proactively combat climate change, as opposed to simply absorbing the risks of the market. Government entities, such as the New York State Energy Research and Development Authority alongside the Department of Energy, are leading the way with resources and funding available for developers and financiers to procure cheaper capital and other resources to supply clean energy to entities that need to comply with public policy.  

Local policies are rising to meet this challenge by assisting all stakeholders in adopting clean energy solutions; 70% of buildings in 2050 have already been built. Environmental retrofits are necessary to further the carbon-neutral economy. Local laws are increasing demand for building retrofits, and financial tools must evolve to provide solutions that work for everyone, including New York City’s Local Law 97.  

But despite targeted government action, financing gaps remain. Financial and credit risks are holding back the clean energy market. Due to the scale of the challenge, blended finance can augment the impact of government subsidies. A combination of policy commitment and private investment is needed to facilitate climate migration, and here is where insurers can easily participate.

All project stakeholders are exposed to risks Insurance provides risk mitigation that can appropriately allocate capital to certain risks and advance all stakeholder goals. Insurers are the long-term investors that clean energy developers and financiers need to meet the long-term policy goals established by international and domestic governing bodies. Private capital is available for regulated, core technologies that can meet goals aimed at addressing climate change. Insurance provides supplemental financial tools to mitigate risks, allow private and public funds to actively respond to community needs, and build a sustainable economy that meets stakeholder needs.  

Scale Microgrids has closed a $225 million energy transition debt facility to fund a wide range of distributed energy projects, including microgrids, solar systems, and battery storage. Backed by KeyBanc Capital Markets and Energetic Insurance, this groundbreaking financing will support cleaner, more resilient energy infrastructure for businesses, schools, and municipalities across the U.S. The deal underscores the growing momentum behind renewable energy solutions and Scale’s leadership in the industry.

Learn more about this exciting development here.

Energetic Insurance attended IMN’s ESG & Decarbonizing Real Estate Conference in early February. The conference focuses on how the energy sector can have a significant positive impact on the environment, diversity and inclusion, social responsibility, and impact investment opportunities. Investors, employees, customers, suppliers, and tenants are all demanding higher standards for ESG strategy. Investors understand that ESG is a driver for long-term value and sustainability, and it has become an important part of the decision-making for capital allocation.

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There is a knowledge gap emerging for property owners who are being asked to report on their carbon footprint for investors and other stakeholders, but really do not know how to do so. Data capture products are emerging from the market to fill this gap. These products help property owners and managers understand their footprint, and provides them with the information they need to invest in resiliency. A process is beginning to form this data capture and reporting structure:  

1. Collect and measure data on building utilities.
2. Analyze data.
3. Assess goals and create a plan.
4. Implement methods to meet goals.

Investors require GRESB (the global entity responsible for creating ESG benchmarks for financial markets) scores and other metrics for their portfolio. These investor requirements force building owners and managers to put emphasis on the first two steps in this process. With robust data, building owners and managers can direct their attention to the third item on the list, but that attention does not extend to the fourth. Property owners have collected data, analyzed and drawn conclusions from the results, then hired consultants to design a plan to improve energy efficiency utilities. But there is little execution.  

Based on the conversations we had at the conference, whether or not a building manager can implement plans is based on individual situations. Some said that the reporting itself suits their needs, and there is no incentive to implement a plan. In some cases, implementation is purely a matter of bandwidth: sustainability teams are often thin (although growing), and individuals have full workloads. Where companies are starting to implement, it seems that financing is case specific. Many cities are introducing rules that require buildings to be more efficient or pay a fine, like New York City’s Local Law 97. Some property owners may opt to pay the fine rather than remediate their emissions footprint. The incentives for installing energy-efficient retrofits are not always aligned with building owners’ priorities. Complying with the law comes down to economics - if the cost of the fine is less than the cost to remediate, then it is hard to argue for further investment in efficiency.

One of IMN’s goals of the conference included discussions of how the energy sector can further diversity and inclusion and talk openly about social responsibility. Stakeholders are trying to understand how the Social aspect of ESG is related to their work. Many property owners and managers are experimenting with ways to make tenant spaces more community-focused in an effort to enhance tenant experience and increase satisfaction in spaces, even if it means lessening rentable square footage or increasing operating costs to do so. Solutions for this part of the equation range from common spaces for collaboration or inter-company events to near real-time transparency of a tenant's environmental impact. Building managers and owners are still collecting data on the outcome of these changes, so real long-term impact of these efforts, but property owners reported a decrease in tenant turnover and an increase in demand for these types of spaces.

Some private property owners take the view that they are "exempt" from growing calls for reporting because they are not subject to new SEC rules or other investor-driven reporting. However, in many cases, the Scope 1 & 2 footprint of these properties account for the Scope 3 emissions of larger entities - so ultimately, they will need to get a handle on their emissions as well.  

Lobbies around New York City proudly display signage declaring that the retrofitted infrastructure installed improves the building’s sustainability. Qualifying buildings that are not in compliance with Local Law 97 are going to be subject to fines starting next year. As the deadline for penalties approaches, there are many ways to ensure a portfolio follows New York City’s policies.

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New York City consumes more than 50 terawatts of energy annually and emits ~55 million tons of carbon dioxide yearly, with buildings accounting for two-thirds of the total. In 2019, the city government took steps to reduce this impact and passed the Climate Mobilization Act and Local Law 97, intending to reduce emissions from buildings by 40% by 2030.  

The regulation requires any building (including residential, commercial, and institutional) over 25,000 square feet to meet specific standards for efficiency and emissions. Failure to meet specific thresholds will result in fines as early as 2024 – to the tune of $268 per metric ton over the limit. The Real Estate Board of New York estimates this could lead to $200 million in fines across 3,000 buildings. Complying with the new regulation seems straightforward – invest in efficiency! Implementing these solutions is not always straightforward.

Building owners and property managers should consider the following when assessing energy efficiency:

• Conduct an energy audit: An energy audit can help identify areas where facilities are wasting energy and determine cost-effective ways to improve efficiency. Audits can help identify specific steps to reduce a building’s energy consumption.
• Make energy-efficient upgrades: Upgrading energy-efficient lighting and appliances, sealing air leaks, and adding insulation can all help reduce energy consumption.
• Incorporate renewable energy: Consider incorporating renewable energy sources into a building power mix. Enrolling in renewable energy programs can help reduce a building’s carbon footprint. When installing panels is unrealistic, enrolling in “community solar” programs that mix renewable energy into a power supply is possible.
• Use the city's benchmarking tool: New York City’s benchmarking tool, introduced as Local Law 84, allows property owners to track and compare a building’s energy and water usage over time across a portfolio of properties. The tool is Energy Star’s Portfolio Manager and can help identify areas where efficiency can be improved.
• Partner with an energy service company (ESCO): An ESCO can help assess energy needs, identify cost-effective solutions, and implement upgrades to improve a building’s energy efficiency. In addition to providing expertise and technical support, an ESCO may also be able to help you secure financing for energy-efficient upgrades.

Financing Energy-Efficient Upgrades

Financing energy-efficient upgrades can be challenging for building owners due to the high upfront costs and the perceived risk of these projects by banks and other lenders. Building owners may need more financial resources to pay for these upgrades out of pocket and may need to secure financing to implement them. However, some banks may be hesitant to lend to buildings for projects like this, particularly if the building has a history of financial problems or the upgrades are considered too risky. Buildings held in LLCs may also face challenges when obtaining financing, as banks may hesitate to lend to an LLC without a parent credit guarantee.  

However, several financing options are available to help building owners finance these projects. These options include rebates, tax credits, and financing programs.

Rebates and Tax Credits

The New York State Energy Research and Development Authority (NYSERDA) offers a variety of rebates and tax credits to help building owners finance energy-efficient upgrades. These rebates and tax credits can offset the upfront costs of energy-efficient upgrades and make them more affordable for building owners. For example, the Commercial New Construction program presents incentives for buildings designed to be energy-efficient from the outset, while the Existing Buildings program offers incentives for energy-efficient upgrades to existing buildings.

Financing Programs

Building owners can also take advantage of financing programs to help finance energy-efficient upgrades. Partnering with an energy service company (ESCO) can help fund energy-efficient upgrades. Banks have started to be more aggressive in supporting third-party financing structures for energy service companies. This assistance enables property owners to finance projects off-balance sheets through ESAs or MSAs. Bundling many properties together and structuring credit enhancements enables property owners to bundle multiple sites into a portfolio to achieve economic pricing. Grant funding is also available to support these projects. NYSERDA offers up to $5 million in grants through the Commercial & Industrial Carbon Challenge program to help building owners pay for energy-efficient upgrades.  

This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.

Have questions on how Energetic Insurance can help you implement a programmatic partnership to deploy energy efficiency and renewables across commercial real estate sites? Reach out below.

We’ve all seen it – retail sites and commercial buildings that proudly display LEED certifications or other clean energy and efficiency achievements. What is easy to miss is how many commercial real estate (CRE) sites do not make property-related ESG claims.

The uncomfortable industry secret is that the majority of properties are ripe for energy efficiency upgrades, can decrease their energy consumption, and can procure the electricity they do consume from renewable energy sources, but they don’t - because of contracting hurdles and credit and financing barriers.

Burdensome financing requirements have inhibited green investments across the CRE sector. Creative structuring and innovative financial and insurance products can help alleviate investment barriers.  

The problem with ESG implementation, interest alignment, and credit in CRE

Property owners, building managers, and tenants have more incentives to implement energy efficiency and clean energy procurement strategies than ever before. Property owners, LPs, and REIT investors are demanding ESG action – they want goals to be developed, solutions to be found and implemented, and metrics that demonstrate impact. The same applies to many building managers and tenants.  

Regulatory requirements are further driving the demand for CRE ESG solutions. New standards are being placed on buildings and corporations – both structures and occupants need to be more efficient and reduce consumption and climate impact. The US Securities and Exchange Commission (SEC) is slated to require companies to disclose climate change risks. In California, all new builds are required to meet certain energy efficiency (EE) standards. And the list goes on.

Unfortunately, landlords and tenants often have differing incentives, which causes difficulties in building-by-building implementation. Consider the hospitality industry – often the property owner is not the site property manager, nor the hotel operator. A hotel chain that is working to achieve ESG goals can run into implementation barriers if they go to implement energy efficiency retrofits or on-site solar installation. They need property owner agreement and alignment, and the property owner will also want to share the benefit of any impact claims or financial rewards.

Structural challenges further compound the issue. Commercial and industrial (C&I) properties are typically held in bankruptcy remote LLCs, or subsidiaries that do not carry parent guarantees. This structure is non-problematic for real estate financing purposes, but creates a blocker for non-recourse project finance.

It is a perfect storm of demand and misalignment, ripe for a solution that brings together all stakeholders, and aligns interests across landlords, tenants, investors, project developers, and financiers.  

We view coordination and standardization as the key to expanding the C&I ESG market.  

The challenge of heterogeneity in C&I energy transactions

The residential market benefits from a level of homogeneity that enables contracts of adhesion or a price-taker environment. Unlike the residential market, the C&I market has more variability and is rife with price-setters and negotiators.

Standardization has been a problem with C&I energy transactions due to the inherent heterogeneity of properties, owners, tenants, locations, energy markets, and desired terms. Though a standard Solar Energy Industries Association (SEIA) form exists, contracts in the C&I sector have historically been negotiated on a project-specific basis.

Business owners are accustomed to negotiating individual contracts, whether it be employment, capex, or opex agreements. Although these negotiations can be critical for property owners and offtakers, contract negotiations can present a blocker for project developers. Developers, financiers, and customers each have their own preferences, challenging alignment across stakeholders.

C&I efficiency or clean energy deals are typically not large enough to warrant the cost and effort associated with individual contract negotiations. Site-specific contracts are simply not efficient.

Structures and why they matter

The non-recourse nature of project finance presents a structural challenge. Bankruptcy remote LLC structures work well for secured lending, like mortgage lending, because they allow for properties to be taken over cleanly in bankruptcy. Unlike secured lending, project finance for energy projects is non-recourse.

Property owners or real estate investment trusts (REITs) are not often willing to front and offer their credit (rating) and/or may be unable to provide more significant upfront cash, making it challenging for them to overcome this hurdle.

We’ve collaborated with project developers and financiers to overcome this hurdle. We underwrite the credit worthiness of LLCs and tenants and take a comprehensive view of the project and site attributes. Further, we recommend programmatic structuring, which affords contracting efficiencies and enables multi-site development.

How standardization can enable C&I energy transactions

Bulk structuring, or programmatic structuring as we call it, lends efficiency and facilitates economies of scale. Programmatic structuring refers to multistakeholder structuring events that apply to multiple sites.  

Consider a real estate investment trust (REIT) that wants to deploy efficiency solutions and enable clean energy procurement across their property holdings. Asset manager(s), developer(s), and financier(s) are brought into a single negotiation event. They align on a contract that has applicability to multiple sites at once. This means one set of lawyers, negotiating one or two contract sets for all buildings. Property owners can work with tenants, help them understand the ESG and cost benefits, demonstrate landlord alignment, and encourage tenant involvement and agreement.

This coordinated process allows for solutions to be implemented across hundreds of buildings at once under a single program with standardized contracts, and value propositions. This process facilitates replicability, helps developers overcome high customer acquisition (CAC) costs, and minimizes the costs of contracting associated with individual site-by-site contracts.

Our solution

At Energetic Insurance, we unlock economies of scale by working alongside building or property owners with a vested interest in helping their tenants and themselves achieve ESG goals, and with developers and financiers eager to support project development.

We enable all stakeholders to overcome the ubiquitous CRE structural and credit barriers.  

When it comes to energy project development, there is no aim to take over buildings or properties in the case of default. Rather, the security interest lies in the solar assets, wind assets, or energy equipment. In other words, financiers lending into equipment deals are not entitled to take over properties. Requirements pertain to the equipment and its maintenance throughout an event of default. As such, we underwrite projects through a different kind of valuation – rather than focusing on underlying property value, we assess the probability that someone will remain in and use the building. This is an entirely different approach that a mortgage lender assessment of an LLC.

We see credit risk through a different lens; we look past the problematic structures and quantify the real probability, frequency, and expected severity of losses on an actual properties. We underwrite the credit worthiness of the LLC and tenants. We take a comprehensive view of the properties, ownership, and occupancy. We understand that as long as tenants occupy the building they will pay for electricity, especially if the clean energy offered is cheaper than fossil fuel-derived alternatives.

Have questions on how Energetic Insurance can help you implement a programmatic partnership to deploy energy efficiency and/or renewables across commercial real estate sites? Contact us here.   

This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.  

All eyes remain on the Inflation Reduction Act (IRA)

As expected, the entire industry is still awaiting guidance on IRA implementation details. Most developers are budgeting a 30% investment tax credit (ITC) for all 2023 projects due to the IRA. Developers can surpass this by harnessing adders, but anything above that 30% is considered the proverbial cherry on top.

There is limited guidance on the approval process and required documentation for said adders. Consider project development on brownfields – certain paperwork, due diligence, surveys and more will be needed for successful implementation and credit receipt. Lenders and tax investors see promise in projects like these, but don't want to model projects presuming a higher ITC rate until they understand the process and are confident in their ability to deliver the requisite documentation.

Generally, the industry is viewing the IRA transferability provision as a last-case scenario for developers, suggesting that the first priority should always be to utilize tax equity as is done today.

Headwinds are top of mind

Module availability, permitting, and interconnection remain the most significant causes of project delays. The majority of developers and financiers we have spoken to recently have stated that much of their 2022 pipeline has been pushed into 2023 given market constraints.

Although some developers are pleased with the current sellers market, corporate buyers are struggling with renewable energy procurement, and developers see credit challenges manifesting, with a wave looming ahead. Commercial utility scale virtual power purchase agreements (VPPAs) are in high demand by large corporates. Demand significantly outweighs supply. Large investment-grade offtakers are competing for the limited real, near-term projects. VPPA developers, financiers, and investment bankers are already running into hurdles when these commercial offtakers procure via subsidiaries or energy holding companies. In these instances, the subsidiary entities are often unrated, inhibiting credit committee approval and prompting a need for alternative solutions like credit insurance.

The macroeconomic environment is exacerbating credit challenges

Concerns around a recession remain top of mind for financers. We’ve heard directly from bank contacts that credit committees are getting more stringent on counterparty credit quality.

Developers are interested in getting ahead of credit concerns and are seeking project underwriting support. Leading developers are seeking advanced project insights on market dynamics, loss mitigants and offtaker risk profiles.

New technologies require financing support

Stand-alone storage continues to be a hot topic among developers. Financiers are finding it difficult to finance stand-alone storage projects today due to lack of cash flow predictability as you would normally see in contracted, generating assets (e.g. solar). The stand-alone storage deals that are getting done are predominately on-balance sheet (equity) financing.

For the deals in the market that are contracted, the counterparties to these long-term tolling agreements tend to be trading firms with thinly capitalized balance sheets. We’ve heard from reputable industry advisors and investment bankers that although this approach satisfies lender requests for a contracted revenue agreement (as opposed to selling merchant or via energy arbitrage agreements), counterparty credit is a major concern.  

Community Solar

Community solar has been a hot commodity in recent years. Some sponsors and financiers are expressing concerns regarding long-term market saturation for community solar in certain regions, others remain bullish. Sponsors are harnessing EneRate Credit Cover ® as an "Anchor Maker" facilitator. This allows a sponsor to use their investment-grade offtakers more efficiently (e.g. not overly concentrating IG into one portfolio to meet financing requirements) by enabling sub-investment grade offtakers to be their anchor offtake through coverage from the EneRate Credit Cover.

Siezing opportunity early in 2023

A new year brings refreshed budgets and renewed corporate goals and commitments. These goals are increasingly oriented towards ESG, climate disclosures, and renewable energy procurement commitments. Developers and financiers are ready to dive into 2023.

As 2023 progresses, the risks of recession, budget cuts, and corporate credit downgrades increases.

Those likely to lead and win in 2023 plan to be the early birds – sprinting to capture deals and fill pipelines in the first quarter of the year.

Have questions on how Energetic Insurance can enable competitive financing, successful project bids, reduce credit barriers, support cost-effective renewable energy development and procurement, and help support the greening of supply chains and reduction of scope 3 emissions? Reach out.