Be part of the energy transition while managing risk

One of the most significant evolutions we’ve seen in the last couple of years has been the uptick in renewable energy projects, particularly in wind and solar. And the numbers show a dramatic shift in just the last few years.

In the  US, renewable energy (biomass, geothermal, hydropower, solar and wind) accounted for just under 14% of the electricity generation mix in 2011.  But by 2020, renewables made up 21% of the country’s electrical production.  And while overall energy demand fell drastically due to Covid-19, wind, solar and hydroelectricity all grew, with solar energy recording its largest-ever increase in 2020.  

In the next 30 years, the US Energy Information Administration projects the percentage of renewable energy to double, hitting 42% of the country’s electrical output by 2050. As more companies pursue business opportunities in renewables, it’s important to be aware of the specific trade dynamics and limit risk.

Let’s say that your company enters into a deal with a wind farm to provide electricity over a 15-year period. To protect yourself, you might require the wind farm to take out a letter of credit or – more recently – a surety bond  as a form of collateral. This bond ensures that you will be compensated if the wind farm does not fulfil its contractual obligations, for example if it does not maintain its equipment as agreed to ensure a high output. 

When entering trade agreements, companies buying renewable power have to consider how to mitigate the risk in this new playing field. You may not be able to see into the future, but there are a number of defined factors that you should assess to ensure that your supplier will be available to produce electricity. 

As with any trade partner, a thorough review of financial documents is indispensable. The questions you need to ask are:

- Is the energy producer profitable? 

- Does it have the financial strength and business liquidity  to continue to perform? 

- What is the level of support from the parent company, if any?