Biogas Book speaks with Marsh McLennan about the value of Process Guarantee and other Insurance on a Digester RNG project.

Paul Greene – Biogas Book

Payson Davis – Marsh McLennan

 

Biogas Book: What does Marsh McLennan do?

Biogasbook SponsorsMarsh McLennan: Marsh McLennan is an insurance broker. We sit between the client who’s buying insurance and the insurance companies. The insurance companies use us as a distribution arm. But more importantly, we’re able to represent clients and tell their story to the insurance company.

Within the biogas space there are a lot of misperceptions of the business. Marsh takes it upon itself within the insurance community to really explain this asset class in detail to make sure the insurance companies truly understand and know the asset class.   We help them evaluate the risk profile of a well setup waste to value company and judge if a particular partner is somebody that they want to work with.

Biogas Book: What does your Company do for biogas projects? How does the biogas project benefit from this?

Marsh McLennan:  There are many ways to look at Insurance in a biogas project. The easy way that everybody looks at is having your common insurances, and that’s something that we certainly do when it comes to property insurance or business interruption, insurance, or environmental insurance.

What makes us different is we look at insurance more through the lens of finance. We ask how can we use insurance as a tool to help enhance the financing package.  We have conversations around performance guarantees where we’re building a backstop of insurance that provides a performance guarantee on the project typically tied to the debt service amount. We guarantee a certain level of performance that correlates to the project debt, so that even if there is under performance, the debt is always covered.

Insurance can also protect IRA tax credit transfers and backstop and ensure against any recapture events. We make sure that if the project has any enhancements from the IRA tax credits or Domestic Content, Prevailing Wage, or Energy Community bonuses that the ultimate buyer of those credits is comfortable to be protected from a recapture event.

We also can hedge RINs or hedge LCFS prices to make sure that the project will pencil for the long term. What makes us different is that we’re looking to the financing of existing projects, and newer projects and make sure that on the project level and on the asset ownership level that the project provides the most advantageous finances possible with using insurance.

Biogas Book: How else can projects benefit from this Value Proposition?

Marsh McLennan:  In its most basic form insurance transfers risk from the project owner, or the project operator to the insurer. Insurance can pull that risk off them where you’re able to use insurance as both a backstop and protection on the downside. Whether the projects are protecting against a natural event like a lightning strike, or hailstorm, or something along those lines where insurance is coming in to make the project whole, to going ahead and mitigating the risk on the financial side. Whether that be looking at different levels of loan reserves or different ways to protect the off-take streams.

Biogas Book:  When do you make a policy offer?  Is that after, say, the 30 percent design, or once you’re getting closer to FID?

Marsh McLennan: We are commonly engaged throughout the life of a project.   Many times, we’ll work with clients who have existing projects and look at ways of streamlining their portfolio to bring economies of scale into the insurance process.

As to new greenfield builds we’re usually engaged in a few different spaces. We’ll get engaged on the extreme front end to go ahead and build out insurance budgets that can be dropped into early financial models. There’s no set time for us to come in and help set the project insurance budget and put it in the financial model.

We do get engaged at the 30% Design level often, to tune that in from the insurance price to go ahead and build the program.   Also many times, we get brought in close to project financial close, to vet out and ensure the program meets counterparty requirements. We’re working with the banks and the lenders and the developers to make sure that all the project requirements are consistently met, but also that the structure of the insurance goes ahead and meets expectations according to the expenditure and what the bank is looking for. We want to make sure the project pencils. Insurance is a large expense, so ideally, we want to offer the broadest coverage to meet counterparty requirements but no the areas to push back to bring the spend down.

Biogas Book:  What bumps in the road do you sometimes see on the way to getting clients insured?

Marsh McLennan: It’s honestly the debt or equity/ tax equity term sheet. Where we see a lot of investors, both debt and equity, that come into this space who are familiar with solar, familiar with wind or familiar with another type of energy technology. They don’t necessarily understand the waste to value world as well as they do some of these other asset classes. Sometimes their requirements for insurance are just not obtainable within this space.  So, there’s a lot of processes and a lot of deals that end up getting stagnant or end up slowing down. During the financing process, because the equity or the debt isn’t familiar with the asset class and is trying to impose insurance obligations that are not realistic in in this space.

Biogas Book: What about others that are on the project and their insurance requirements. So take, for example, the general contractor or the EPC. How does the decision get made on how much insurance they need to carry?

Marsh McLennan: That’s a great question. What’s helpful to us is we work across the full value chain Iin this world. We’ll work with developers. We’ll work with EPC’s. We’ll work with debt. We’ll work with equity we’ll work with project owners. We have a good view across the spectrum of what everybody is going ahead and holding, and that’s something that that we work a lot with our clients and prospective clients on is building out a matrix to go ahead and show this is kind of everyday what the insurance stack looks like between developer. EPC, and all stakeholders. This is kind of where the outliers are.  So it’s a good process to go ahead and learn from the project side so they have a good opportunity to push back on an EPC. If the EPC says they want to carry more insurance than is really needed, or it’s a good way to go ahead and ask the debt provider to push a requirement onto an EPC, because it’s more easily attainable by an EPC and potentially cheaper to the project. Figuring out ways to wrap the project and make everyone in the value chain happy is the goal.

Biogas Book: Does the idea of bonding a project overlap or come into proximity of insurance.?

Marsh McLennan: Absolutely. That’s a great question. Within this space bonding is super important. It helps again move the risk off of our clients balance sheet to the surety company. Also there is a lot of use with bonds to replace letters of credits, that is a useful tool to help free up cash for our developer and owner clients.  Looking at bonding for operating sites you’ll typically have to get bonds for PPA’s. You’ll have to get bonds for decommissioning. You’ll have to get environmental bonds in some cases, and those go ahead and dovetail nicely into to what Marsh offers. We’re a full-service shop that can help with insurance as well as bonds. So when you look at it bonds on the operating side that I just mentioned. But bonds are always important on the construction side as well by going ahead and building the EPC wrap scenario that that everybody is looking at using bonds as a tool to achieve that.

Biogas Book: Are there many Insurance Companies that want to get into this space or is it just a small handful that you can lean on.

Marsh McLennan: It’s growing where if we were having this conversation 3 years ago, there were probably 4 or 5 that that were willing to really look at this space and commit to the space that number has at least tripled over the last 3 to 4 years and what we’re seeing is there is a lot of interest in projects that are over that $50 million Capex threshold. There’s a lot of interest from insurers in general as they explore this asset class.

Biogas Book: Can you give an example of a client that you worked with that found benefit from these products particularly the performance guarantee

Marsh McLennan: Absolutely. Yes. So, in a specific case of that, we were, we were working with a client that was using a somewhat novel technology. And the AD space where there had been some use of it in Europe. But this would be the first application within the United States and the scale was gonna be much more so as they were going through the financing process, there was a lot of hesitancy with the project debt holders involved on performance of the system, since it hadn’t been deployed here in the US. And the scale up was, was quite a bit more then what was in in practice in Europe. So what we were able to do to help make the lenders comfortable is attach a performance guarantee to this this technology. So where the technology is operating it goes ahead and ensures a a certain level of performance. So if to meet the project’s debt service, the facility needs to operate at 70%, and the project only operates at 40% insurance goes ahead and pays that delta. So the project’s debt service is made whole and this product really helped get a project across the line where before we got involved, there was a lot of talk about scrapping the European technology and going to something else. But because of this this product it was it was a good bolster and helping the financing get across the line.

Biogas Book: Coverage of the delta between target performance and actual performance and is an ongoing thing, correct?  That’s not a once and done payment?

Marsh McLennan:  These policies can be written in some cases 15-year non-cancelable term to run parallel with the debt service term. The policy starts at mechanical completion. It goes ahead and its backstops that the project passes commissioning and then hits operation and then can guarantee that level of performance up to a 15-year period so it’s locked in. A good thing about the policy is that if you have underperformance in in year 3 they can’t cancel. The policy can’t be cancelled. It stays on. If it’s under performance in year three through ten the policy continues to pay out what that delta is.

Biogas Book: What does your type of insurance cost for a project?

Marsh McLennan: If you’re looking at performance guarantees there’s a lot of moving metrics. On that based on the technology that’s in place, the tenor of the actual policy you’re looking at somewhere between 3% to 6% of the total value that’s being insured. Is kind of a rough metric for where that performance guarantee per year it’s one time It’s a one-time payment. So. If the debt on this this project is $50 million dollars it would be a one-time payment of 3 to 6% of that to cover the insurance cost.

Biogas Book:  Thank you.  This is very helpful.  All the best of success to you.