Part 4 of the Energy Customer Investment-Grade Credit Support Blog Series

Credit insurance is a financial product purchased by a clean energy developer to offset the risk of offtaker default in a virtual power purchase agreement (VPPA) with a non-investment grade offtaker. CEBI spoke with credit insurance providers to compile some best practices for offtakers and developers interested in leveraging it for their deals:

1. Find an insurance provider with clean energy transaction experience: While credit insurance has been around since the 1800s to indemnify sellers against a client’s default and is particularly common in international trade, its use in clean energy transactions is somewhat new, especially in North America. To date, there are only about 15-20 North American companies who offer VPPA credit insurance, and most of these have European foundations. Therefore, make sure to confirm that your provider understands how clean energy deals work. It may be helpful to seek out a broker or consultant, who can connect you to experienced providers.
2. Help connect developers to insurance providers: Since credit insurance in clean energy transactions is not common practice yet and it is something developers have to purchase, offtakers may have to take a more active role in convincing developers to use it. Experts note that offtakers should not be involved in negotiations between a developer and insurance company. However, they instead recommend that offtakers make introductions between both parties in order to jumpstart negotiations.
3. Rely on your treasury teams: PPA negotiations are difficult, especially when newer enhancement mechanisms are part of the discussion. Engaging the treasury teams on both the offtaker and seller sides may be key in achieving the best deal. Experts highlight that allowing the treasury representatives on both ends to negotiate directly with each other has often had a pronounced effect on reducing the perceived risk and therefore the costs borne by the offtaker.
4. Think about packaging different enhancement mechanisms: Credit insurance is just one credit support mechanism. Others, including Letters of Credit (LCs) and surety bonds, are available and experts have often recommended looking at them as a package. Many sub-investment grade offtakers may still be asked to post an LC and/or surety bond even if their developer secures credit insurance. However, credit insurance can help make LCs and surety bonds cheaper. In fact, experts indicate that LCs and surety bonds alone are most affordable for mid-grade offtakers, and credit insurance may be particularly helpful for those whose credit is lower.

If you are interested in leveraging credit insurance or have done so and would like to share insight, please reach out to disc-e@cebi.org.

This is Part 4 of CEBI’s Credit Support Blog Series. Stay tuned for further installments and for our forthcoming Credit Support Primer.