David Atherton
Director Energy & Infrastructure Practice
Aon Risk Solutions
Peter Jakszentis
Peter Jakszentis
Technical Services Director
Munich RE
View from the Top

Joint Effort Boosts Solar Developers

Wed, 02/22/2017 - 17:25

Q: What drove Aon and Munich RE to launch a joint coverage product for developing solar parks in Mexico?

DA: Aon and Munich RE have been working with the operation and construction of solar parks since they started becoming popular across the world. We now have broad expertise in the area. Solar parks offer low risks in terms of technology and installation procedures, which make them attractive to insurance and risk management companies like us. Local insurers lack the capacity and expertise to work with medium to large-scale projects, especially as those were until very recently uncommon in Mexico. Premium companies behind large-scale projects can justify the resources needed to analyze their financial and risk-mitigation strategies from abroad, which is why foreign companies in Munich, Houston or London are managing most of these projects even when they are developed in emerging countries. We saw an attractive business opportunity in the medium-scale market, which we also expect to represent the largest number of solar projects in Mexico. In the upcoming years, we expect to see an increasing number of 25-30MW projects being installed, which is our product’s target segment. The Energy Reform provided the perfect timing to release this product, which is flexible and in line with the needs of the mediumscale market.

PJ: We see great potential in solar projects due to their low complexity and different environmental benefits, including low visual impact and ease of integration in the case of rooftop installations. The results of the electricity tenders in Peru, Mexico and Saudi Arabia have also demonstrated the technology’s competitiveness, which is now reaching grid parity with traditional technologies without the need for special subsidies. We see in Mexico a particularly attractive hub for solar energy development due to the high availability of land with no agricultural value and strong solar irradiation levels. Sonora and Chihuahua’s deserts offer the same solar conditions as the Sahara, which is estimated to have the potential for covering the entire world’s electricity demand. With our innovative product addressed to this market, we are enabling higher inflows of investment to the sector, promoting further development of the Mexican solar industry.

Q: What are the biggest risks for solar project developers and how do your products address them?

DA: The biggest risk for an energy investor is failure to complete the project. This might be caused by internal or external factors such as unexpected weather conditions, inadequate financial planning, innacurate production estimations, wiring theft, earthquakes or social issues. Our goal is to identify all project risks from its early stages and provide strategies to mitigate them in an optimal way, including those that take place elsewhere. For instance, our products cover solar panels from their manufacturing origins to the project location. By using the products that we have with Munich RE, an international company with top financial ratings, project developers can ensure their investors and financing providers that all uncertainties are taken care of.

PJ: We have shifted from the pure compensation of physical damage to a comprehensive scheme that ensures all the projected cash flow is returned to investors. The insurance sector has specialized markets for each of the different areas of a project, meaning that a wide range of coverage is available. However, these do not always match, leaving gray areas that result in uncertainty. We avoid the inherent conflicts of managing different policies by providing project developers an integrated coverage service that excludes transition periods, for instance, from shipping to construction coverage. In project finance, insurance accounts for around 1.5-2.5 percent of the total project cost even though it is the bank’s collateral for repaying debt.

Q: In which ways do your products and services improve a project’s overall financing costs?

PJ: Our products offer the advantage of avoiding delayed payments. We have optimized our process to ensure the down payment is provided within the first 30 days after submitting a request, accounting for at least 30 percent of the total coverage. Munich RE can support this guarantee because it works with its own capital, a factor that differentiates us from other insurance companies that might take years before they start paying their clients. When a company is paying back its debts, a delay in the insurance might also delay the repayment process, forcing the company to apply for more investment capital or a higher credit line. This situation could put the company in a difficult negotiating position, which could have been avoided if it had used Aon and Munich RE’s services. Our offering shuns the use of interim financing with relatively high interest rates, therefore minimizing the total cost of the project.

Q: How do you ensure that your clients’ projects are correctly assessed given that you offer a 48-hour response?

DA: Once we get all the information needed from the project developer, providing a response in less than 48 hours becomes a straightforward process thanks to our companies’ expertise in the sector. Our experience and knowledge allow us to give a quick response, which is the added value that we offer. To optimize the assessment process, we have defined a risk baseline to benchmark our clients’ projects.

PJ: Our insurance products can cover a wide range of scales in record time due to our companies’ human capital and innovative risk-assessment tools. Our analytical system allows us to provide a quick service by considering a range of risks that have been previously rated and classified in specific clusters, defined by factors such as the project’s location. Munich RE can provide this service in a short time due to its long experience in the sector and simplified approach. For instance, we can avoid wiring theft by advising developers to use aluminum cables, a simple but effective solution that can bring huge economic savings as the substitution of missing wiring is highly expensive once the project is up and running. This tool is the first of its kind in Mexico that provides a transparent and rapid-risk assessment for energy projects in their early stages. Banks and financial institutions require technical and economic viability analyses as part of their process, as well as the correspondent environmental and social studies. The information contained in these documents is all we need to perform a quick and effective risk assessment.

Q: What new products are you working on to serve the needs of the new niches arising in Mexico?

DA: We always keep track of the new trends in the market to adapt our offer to its evolving needs. We are prepared to provide products and services in all the niches gaining importance in Mexico due to the experience that we have acquired in other emerging and developed markets. Q: What new trends will shape the future of the energy industry in Mexico according to your experience? DA: We expect to see greater investment in smart grid development. CENACE is controlling a spot-based market, dispatching energy according to their production costs and always prioritizing the cheapest energy source. However, Mexico does not only need to have cheap electricity but also a diversified and reliable energy matrix. We would not be surprised to see plans to construct one or two new nuclear reactors. Nuclear energy has the potential to become the country’s main source of baseload power. Geothermal might also become popular because it can also provide baseload power using the country’s enormous geothermal potential.

PJ: Solar energy will play an important role in the future because Mexico offers higher solar irradiation than Germany, a reference in solar energy production, as well as an unsubsidized market where solar power already enjoys grid parity. Solar power is becoming increasingly important in emerging markets worldwide.