$1.8 trillion: that’s the record-breaking amount of global investment in clean energy in 2023. Clean energy is booming. The low-carbon energy transition is bolstered by policy support through government initiatives in countries and regions including the United States, China, Europe and Japan.
The fast-growing clean energy space offers companies significant opportunities – and substantial risks. Here, Allianz Trade’s Dan Lewis and Ryan Wimberly share their outlook on how to navigate them.
What risks do companies in the clean energy sector face?
Economic risks
Dan: Interest rates and access to capital are key economic risks. If interest rates start to climb again during the next rate cycle, borrowing costs would rise and companies’ profitability could decline. Also, to scale up, clean energy companies need to raise capital, whether through banks or investors (including tax equity investors) such as private equity firms and pension funds. If banks lack capacity or firms reduce investment, energy companies risk insufficient cash flow for servicing internal operations and investing in new, capital-intensive projects.
Ryan: The price of energy fluctuates depending on supply and demand. This price volatility can impact energy companies’ operations and profitability, as well as make it difficult to plan for the future. In the United States, companies in the energy sector also face market variability. That’s because each multi-state region of the country has its own independent system operator (ISO) or regional transmission organization (RTO), which serves as the nerve center for power distribution there. In practice, that means there is little to no congruity in what energy companies can expect from region to region.
Supply chain volatility
Ryan: Supply chains present both geopolitical and social risks. Geopolitical factors such as wars, regional tensions, political regime changes and sanctions can all impact the flow of products. Companies must also be aware of potential risks related to providers. It’s vital for organizations to evaluate the entirety of their supply chain to assess potential environmental, social and governance (ESG) concerns. Are suppliers treating their workers well, with fair labor conditions? Are raw materials being ethically sourced? These are just a few examples.
Dan: Availability of parts is an additional risk. Say you’re a wind energy company who relies on just a few manufacturers to supply the parts needed for wind turbine blades. Your business, then, is dependent on those suppliers continuing to exist and manufacture the parts. And when demand exceeds supply – for example, of solar panels – manufacturers may require large down pre-payments or sizeable order commitments to guarantee availability.
Political uncertainty
Dan: Political uncertainty is a key risk for clean energy companies. Favorable political conditions for investing in or building new clean energy projects are not guaranteed to last. Take, for example, a European energy company that decides to build a new wind farm in the United States, thanks to tax credits under the 2022 Inflation Reduction Act. If the law were to change, reducing or eliminating the credits, the energy company could face much higher costs and reduced profitability than originally planned, along with a potential decrease in appetite from their investors.
Ryan: Uncertainty is at a high during election years like this one. Many companies in the clean energy sector simply lack the resources to weather the turnaround in investments and costs that a government change in the United States could cause.
How does trade credit insurance help clean energy companies mitigate risk?
Ryan: Trade credit insurance (TCI) provides a buffer for companies to withstand energy price volatility. As prices go up or down, energy companies with TCI can trade confidently, knowing they'll be protected if a buyer fails to pay. If a buyer defaults, Allianz Trade will either collect the payment or compensate the policyholder.
Bad debts, or uncollectible payments, could lead to complicated accounting processes and significant loss to companies. TCI protects them from bad debt and safeguards their cash flow. Put another way, Allianz Trade takes credit risks off our clients’ balance sheets and puts them on our own.
What’s more, companies who protect themselves with TCI enjoy improved access to capital. When Allianz Trade provides energy companies with TCI, we are securing their most volatile asset with our own AA credit rating. In turn, banks are often willing to provide our clients increased liquidity on more favorable terms.
How does surety enable clean energy companies to do business in a risk-filled sector?
Dan: When clean energy companies enter into contracts – whether with buyers, suppliers or partners – they can assure the other party that the contract will be fulfilled by using surety bonds.
Say you’re a solar energy producer. You sell energy to buyers like utility companies or even tech giants. But these buyers want a guarantee that you’ll deliver the energy. Surety bonds provide that guarantee. At Allianz Trade, we provide surety to help companies secure long-term contracts such as Power Purchase Agreements.
Surety has a role to play throughout the development of an energy project. First, before a power plant can even be built, it must go through a series of impact studies. Later on, the project joins the queue of facilities waiting to connect to the power grid. At both of these points, the project developer is required to provide guarantees that it will pay back costs incurred. Energy companies can use surety bonds to provide those required guarantees.
Sometimes, companies will find that their suppliers or buyers specifically require a guarantee in the form of a letter of credit. Traditionally, letters of credit are issued by banks. As an alternative, Allianz Trade also offers surety-backed letters of credit (SBLC). SBLCs have several advantages: they cost less and require less collateral than traditional letters of credit. This frees up capital for companies to deploy in more profitable ways.
A reliable partner for the clean energy sector
As an AA-rated insurer, Allianz Trade is a reliable partner for companies across the clean energy sector, from developers to operators and manufacturers. Our deep sector knowledge, together with our global network and local expertise, enables us to evaluate and mitigate risks. We provide trade credit insurance, surety bonds and guarantees, and other finance solutions, giving companies the flexibility and confidence to do business.
