TIGER Report: The Ocean Energy Accelerator
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Executive Summary
The UK is the global first mover in tidal stream power project development; a low carbon source and predictable decades ahead. If there was enough equity investment from either the public or the private sector to fund enough demonstration projects through to commercial deployment, then there would be no need for this document to exist.
But we are forced to think outside of the equity box as even relatively mature offshore wind requires project finance to reach financial close. And all lenders to infrastructure projects, especially those located offshore, do not want to be left holding the keys to a stranded asset. They simply want to know that they will get their money back through regular debt servicing, plus interest. Herein lies the rub: their ‘lenders’ insurance advisor’ must be satisfied that loss of revenue will be indemnified by insurers per the policy wording. In emerging ocean energy projects, and other new risks, this is not the case.
A recent narrowness of ‘insurability’ with less cover for new projects is leading in turn to a reduction in ‘bankability’ which reduces ‘investability’ since the equity internal rate of return (IRR) is less leveraged by debt. Our proposed financial innovation will stimulate the cascading effect of insurability on bankability to enhance investment through the leveraging effect of risk-averse debt on equity. Only through market-pull, achieved through scale deployment of power generating assets, will emerging technologies cross the ‘valley of death’ towards commercial readiness.
This document envisages the formation of a protected cell company (PCC) captive insurer as a structure to overcome the failure of the insurance market to provide sufficiently robust insurance products to enable new ocean energy projects to be demonstrated and commercially deployed. The insurance market is unwilling to commit capital to relatively untested technologies with limited historic performance data, and with the ensuing lack of insurance cover in turn discouraging investment into the sector.
Despite London being a key global marketplace for offshore and emerging renewables, insurance is becoming more expensive and less fit for purpose. In order to deliver on its climate objectives, the UK does not have the luxury of waiting for market forces to rebalance. The time is ripe for risk policy tools that enable industrial evolution at commercial scale across the UK nations and further afield.
There is potential that; to rapidly decarbonise power, secure energy supplies, and place downward pressure on energy bills, it might be time for ‘Energy Re’. The Ocean Energy Accelerator could become a useful pilot for Governments to adopt across other renewable energy and climate technology sectors, such as: carbon capture, utilisation and storage (CCUS); hydrogen; energy storage; and floating offshore wind.
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