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Benefits of surety to accelerate renewable energy projects

Discover how the use of surety can accelerate project development for renewable energy projects in the US.

22/05/2024 · 4 minute read

Renewable energy continues to increase as a percentage of all generation in North America — 21% of electricity produced in the US came from renewable sources in 2023 — and recently passed legislation to accelerate project development to support the energy transition. However, despite ample capital and opportunity, a challenge remains around investment, given that the complexity and scale of projects can carry substantial financial risk. Moreover, project development faces strong headwinds associated with certain financial obligations. In today’s competitive marketplace, stakeholders demand certainty of contractual promises, a focus on cost reduction, and seek increases to working capital.

One potential solution is Marsh’s creative application of surety bonds, which are already relevant in the renewable energy sector. Marsh’s Surety Practice is keeping pace with dynamic shifts in renewal energy development through various adaptations. Our working relationships with the global surety marketplace and the majority of US power utility and grid operators can help facilitate productive outcomes for all sides of the surety agreement.

What is a surety bond?

Surety bonds are guarantees underwritten by an insurance company  (“the surety”) on behalf of a firm (the principal, developer, or contractor) in favor of a beneficiary (project owner, grid operator, or power purchaser). They provide third-party financial protection against non-performance, default, or other breaches of contract.

Bonds are often required to ensure the completion of renewable energy projects, including bid, performance, advance payment, and maintenance bonds. The demand for security — typically in the form of a letter of credit (LC) or cash around interconnection (IX) and power-purchase agreements (PPAs) — has left developers with difficult liquidity decisions. 

Advantages of surety bonds

Surety bonds can increase development capacity, boost developer liquidity, and minimize financial exposure. Here’s how:

Freeing up other credit. Surety bonds are generally more affordable to procure and maintain than an LC. Furthermore, surety bonds may often not require posting collateral, typically in the form of cash, and there are no transaction fees for the issuance of surety instruments. Our experience suggests the bonding rate associated with IX or PPA security typically results in approximately 10% in annualized cost savings because no cash is required to be posted behind a bond.

Alleviating or eliminating cash or LC utilization has advantages for renewable energy developers. This added liquidity can help to strengthen balance sheets, allowing for stable developers access to more credit and an enhanced ability to invest in further projects to spur the energy transition.

Credibility. One of the primary advantages of surety bonds is the surety company’s rigorous prequalification, which can enhance the project stakeholders’ credibility and assurance. As a result, potential partners, investors, and clients gain greater assurance of the contractor’s/developer’s capabilities, resulting in increased opportunities for business growth. Often, by instituting performance and financial security through a development, project stakeholders can secure more competitive financing terms, which can be helpful in a higher interest rate environment.

Compliance. Most bonded obligations in the US are mandated by law, making surety bonds a more reliable form of security than an LC. Further, when a beneficiary receives a financial guarantee bond with a specified pay-on-demand period, the surety company will pay within that timeframe — contrary to popular belief about surety claims associated with performance bonding. By holding businesses accountable for their actions, surety bonds can protect the public interest and uphold industry and best practice standards.

Assurance. Like many construction projects in the US, renewable energy project execution is often at risk due to rising costs, shortages of labor, and the availability of materials. High inflation can also result in a higher cost of credit. By requiring a bond, project owners gain assurance that their investment is protected. For example, if the contractor fails to complete the project or meet its specifications, the surety will cover the costs of completion up to the bond amount. 

Playing a part in accelerating the energy transition

Cost savings and freeing up cash flow through bonding are essential for the energy transition. The added liquidity can be deployed to additional projects, and the associated cost savings can be passed down to consumers, making the price of energy more affordable.

As demand for renewable energy projects continues to increase, organizations that manufacture, distribute, supply, or finance renewable energy resources will need a more sophisticated approach to project performance and financial security. There are many ways in which companies can support and capitalize on the energy transition. However, opportunities can present significant financial risk, and solutions to this risk can come at a high cost and impede progress. As a reliable form of financial security, among other benefits, there are good reasons to access the surety marketplace and think more creatively about project security.

To learn more about how surety bonds can facilitate your business please reach out to our dedicated US Surety and Energy & Power teams.

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