aon power newsletter q1 2014 - risk - retirement in the event of non performance. ... mozambique is...

Aon Risk Solutions | Power >> Power Newsletter, Quarter One 2014 page 1

Q1 2014

Contents

Message from the Global Power Chairman

Passive behaviour of owner’s representatives increases offshore wind contractors acting in breach of warranty

Investment opportunity in emerging countries rises, but political risks are still underestimated

60 Seconds with... Hugo DesRosiers, Symbior Energy

Innovative use of tax opinions in the Power Sector

A green milestone - Aon UK opts for renewable energy

News from the Global Power Network

Message from the Global Power Chairman

Power Newsletter

Dear Readers,

Welcome to Aon’s Q1 Global Power Newsletter.

2014 is already shaping up to be an exciting year for the power industry, with further investments in emerging markets as well as the launch of new technology. Whilst identifying such growth opportunities is natural to many Power industry professionals, recognising the risks, which can impact and influence such opportunities, are not always as obvious.

Working closely with clients around the world and via our global network team spanning 120 countries, we recognise risks are becoming increasingly complex calling for a structured global and multi-disciplinary approach. Having recognised this trend I am delighted to announce the creation of Aon’s Global Power Committee. The Committee is designed to ensure Aon is best positioned to provide access to all of the resources you need when considering the risks facing the Power industry.

The Committee is made up of industry leaders from Aon’s Power network, including experts in construction, operational, nuclear and renewable risks. Alongside my role and involvement as Aon’s European Power Leader, I am honoured to chair this Committee and will be supporting the Regional Power leaders to keep you informed of the latest topics and innovations affecting the Power industry. If you would like more information about the Committee or this newsletter please contact myself or Gemma Avey, who also sits on the Committee as our Strategy Development Manager.

In this edition of the Global Power Newsletter we have highlighted: � The importance of the owner’s representative for offshore wind projects

� The risks of investing in emerging markets � Tax opinion risk in the Power sector

We have also had the pleasure of grabbing 60 seconds with Symbior Energy’s Co-Founder & CEO, Hugo DesRosiers.

I hope you enjoy the Q1 Power newsletter and I look forward to hearing from you regarding topics you would like us to cover and how our network of global resources and expertise can help you achieve your goals in 2014.

Kind regards,

Denis Waerseggers

Power Newsletter, Quarter One 2014 <<Aon Risk Solutions | Power

“A breach of warranty is often seen as an opportunity to deny coverage or delay payment”

“Acting in the interest of owners it should be the owner’s representative’s obligation”

“His active intervention can prevent a breach of warranty occurring or at least giving an insurer a reason to delay payment”

Passive behaviour of owner’s representatives increases offshore wind contractors acting in breach of warranty

For more information, please contact:

Bruce Grant Renewable Broker +44 (0)207 086 0813 [email protected]

Bruce Grant, Aon’s Offshore Wind Broker, explores how the role of the owner’s representative is often underestimated by project owners, whilst the role is crucial to ensuring that a project is not in breach of warranty.

An owner of an offshore wind project pays an insurance premium to the insurer in good faith that if a claim arises, the insurer will pay the claim. “What we have increasingly seen is that insurers are questioning the root cause of the claim, and a breach of warranty is often seen as an opportunity to deny coverage or delay payment,” Grant explains.

He adds that it is firstly important to understand how insurance is supplied and what the contractual relationships are between all parties. Assuming the owner has received all licences, the project has the go ahead: now there are a number of parties consisting of owners, contractors, insurers, lawyers, brokers, marine warranty surveyors (MWS) and many more who have a direct or indirect contractual relationship with one another.

Source: Aon 2014

In order to protect his interests in the project the insurer will usually stipulate a panel of MWS from which the owner can choose and will also set out a scope of work for the MWS to follow.

The owner will then have a contract with the insurer, one with the MWS as well as separate contracts for all suppliers and contractors. The owner will likely appoint an owner’s representative, who will go on site to monitor the works the contractors perform. Whilst there is no direct contract between the insurer and the MWS, it is implied by the scope of work set by the insurer in the contract of insurance.

The owner passes on the benefit of his insurance to the contractors, and contractors are additionally incentivised to carry out their works through the application of deductibles the owner stipulates and having liquidated damages in the event of non performance.

“For instance the contractor might want to “rush the job” if they are in danger of not finishing the work on time, “Grant says. “The contractor will obtain a certificate of approval from the MWS, which describes how the contractor will carry out work, and complete steps say A,B,C,D. Yet the reality is that often, for various reasons on site the contractor might complete steps AB and D and skip C or do them in a different order.”

If then the contractor believes he is at risk of breaching the MWS certificate, he can always call the MWS. “But the owner’s representative should also tell them that they might be in breach of the insurance contract. And if they continue to carry out the works in the intended manner they could jeopardise the owner’s insurance.”

Grant explains that many owner’s representatives are not taking on an active responsibility to do this. Acting in the interest of owners it should be the owner’s representative’s obligation to inform the contractor when they are coming to the limits of what the insurance covers and if they jeopardise this then the contractor will be without cover if they operate outside of the MWS certificate.

“This is a regular problem we see,” Grant says, “prevention is the key here as nobody wants uncertainty when there is a claim”. It is this uncertainty that the owner’s representative is best placed to avoid.

His active intervention can prevent a breach of warranty occurring or at least giving an insurer a reason to delay payment. “This all comes back to trust between the parties of course, and making the owner’s representative aware of this responsibility must be to the benefit of all.”

Owner

ContractorMWS RepInsurerBroker

Contractual relationships between parties


“There are many companies who desperately require more support analysing the upcoming risks and putting the correct risk mitigation tools in place for their whole value chain”

“Regional or state interference like creeping expropriation or sudden changes in the underlying contracts made with a sovereign entity can jeopardize the entire long-term project”

The International Energy Agency (IEA) predicts that the demand for energy consumption will more than double by 2040. Investments in the power generation sector have therefore become increasingly appealing especially in emerging markets. Nations with a large amount of natural resources, a high skilled labour force and growing economies are the new markets for power project investments, according to Silja Leena Stawikowski, Aon’s Head of Political & Special Risks in Germany.

As an example Mozambique has witnessed an increased investment in its power generation, Mozambique is a resource-rich country in East Africa and has a moderate risk of political violence, according to analytics carried out by Aon in 2014, which are highlighted in the Aon 2014 Terrorism & Political Violence Map. Although Mozambique is open to foreign investment, the regulatory framework for power generation that is sought by foreign actors, is being reviewed, and some sort of resource nationalism is possible, which could delay projects and could harm a company’s value chain.

Stawikowski, believes that whilst we are seeing increased investment in the power infrastructure in these countries, companies are still not protecting themselves enough against the diverse political risks that are part and parcel of investing in these parts of the world.

“We see some companies, particularly large multinational that are astute about the additional risks of investing in these countries, but we can see that there are many companies that desperately require more support analysing the upcoming risks and putting the correct risk mitigation tools in place for their whole value chain.”

Stawikowski adds: “Our team is also seeing a remarkable interest in investing in projects in politically less stable countries that also use less proven technology such as solar and wind. This is mainly due to the pressure of needing to secure increased power production as well as meeting national and global targets for cleaner energy”.

She explains that investing in emerging countries contains increased political risks that companies need to be aware of: “Regional or state interference like creeping expropriation or sudden changes in the underlying contracts made with a sovereign entity can jeopardize the entire long-term project. There is also the risk of increased political violence as, unforeseeable political unrests and commotions are more prevalent in these countries.”

Investment opportunity in emerging countries rises, but political risks are still underestimated

Aon 2014 Terrorism & Political Violence Map

Source: Aon 2014


“Adequate risk management and insurance cover should be discussed prior to any sales activity of an investment in an emerging market”

“Furthermore unexpected changes to the regulations for currency inconvertibility and transfers can make the whole initial business investment plan void and lead to major impacts to the company’s value chain,” she adds, “Adequate risk management and insurance cover should be discussed prior to any sales activity of an investment in an emerging market. We often see that based on internal and external pressures, existing governments or newly elected ones may see a necessity for unpredicted actions that could have an impact on your investment,” Stawikowski explains.

She says that “A state is always allowed to change its laws and regulations but it should bear in mind that indemnifications at a true value rate should be paid if exporters or investors are damaged by these changes.”

Depending on the individual project insurance can be obtained for:

� Insolvency & Non Payment

� Political Risks

A distinction should be made if products are delivered to private or public debtors or if investments are made. But in every scenario the underlying enforceable and legally valid contracts and/or foreign balance sheets, e.g. a company’s foreign subsidiary or joint venture, forms the basis of each insurance solution.

As examples the following political risks can be covered:

� Public Measures and State Interference

� Cancellation or non-extension of licenses

� Import and export embargoes or border closures

� Currency inconvertibility and transfer risks

� Breach of Contract with a public entity

� Confiscation, Expropriation, Nationalization and Deprivation

� Political Violence i.e. war, civil war, business interruption, breach of contract, terrorism and sabotage

� Non Honouring of Arbitration Award

“There are several ways we tend to cluster risks”, Stawikowski says, “We differentiate between:

� Exchange Transfer

� Sovereign Non Payment

� Political Interference

� Supply Chain Disruption

� Legal & Regulatory Risks

� Political Violence

� Risk of Doing Business

� Banking Sector Vulnerability

� Inability of Government to provide stimulus

Companies wishing to mitigate these risks are advised to speak to specialist political risk brokers and underwriters, who have strong connections to the local export credit agencies (ECAs) as well as the private insurance market and supranational global players such as MIGA.“

Aon’s Political Risk Map 2014 will be launched on the 10th of April. If you would like a printed copy of this map or of the Aon 2014 Terrorism & Political Violence Map please contact [email protected].

Following the launch of the Political Risk Map 2014 in April we will also be publishing a more in depth though leadership report on how political risks in emerging markets are impacting the power sector.

For more information about this article, please contact:

Silja Leena Stawikowski Head of Political and Special Risks +49 40 3605 3331 [email protected]

For more information about Aon Political Risk Map, please contact:

Matthew ShiresHead of Political Risks+44 (0)20 7086 4373 [email protected]

2001-2010Angola 11.1

China 10.5

Myanmar 10.3

Nigeria 8.9

Ethiopia 8.4

Kazakhstan 8.2

Chad 7.9

Mozambique 7.9

Cambodia 7.7

Rwanda 7.6

2011-2015China 9.5

India 8.2

Ethiopia 8.1

Mozambique 7.7

Tanzania 7.2

Vietnam 7.2

Congo 7.0

Ghana 7.0

Zambia 6.9

Nigeria 6.8

World’s ten fastest-growing economies Annual average GDP growth %

Source: Economist; IMF “A distinction should be made if products are delivered to private or public debtors or if investments are made”


What do you most enjoy about your role?

Playing a role in the acceleration of business innovation in the energy sector, and seeing from the front row how big of an impact it can have in emerging markets.

What do you think will be the biggest change in your industry over the next 2 years?

The development of legal, financial and insurance products for decentralized energy generation and distribution, and the marketing push from the traditional large players on the importance of distributed energy solutions. The launch of GE Distributed Power in end of February is a good indicator of this trend.

What has surprised you the most this year about the power industry?

The rapid expansion of well-defined programs throughout SE Asia for non-fossil fuel power generation.

What do you find most challenging about the insurance industry?

Its complexity, and the limited range of support that is available to startups and SMEs. It seems to me that the mentality is still very much all-or-nothing in the ability to work on insurance package, as it used to be in the telecom world for getting an office PBX.

What do you remember about your first claim in insurance?

The first claim we saw was by our feedstock supply incubee in China, for a large biomass grinder engine fault. The process turned out to be slow and cumbersome, and even though the claim was successful, they ended up loosing much more on revenues from downtime of the machine than they would have lost from paying immediately for the repairs and forego the claim.

If you were not doing your current role what would you be doing?

I’d be working on urban development in challenged areas.

What do you wish other people know about your job?

That I love it! It’s an amazing mix of strategy, challenges, learning, discovering the world and meeting people that I am so very happy to be doing.

What might readers be surprised to know about you?

Even though I was born and raised in Quebec, my favourite climate is hot and humid!

60 Seconds with... Hugo DesRosiers, Symbior Energy

Hugo DesRosiers co-founded Symbior Energy four years ago after discovering how much capital was looking for deal flow in the energy sector of emerging markets and was finding so little sophisticated companies to invest into. Initially trained as a mathematician and information technology scientist, his passion for entrepreneurship quickly took over. After having spent 20 years transforming high-tech opportunities into companies around the world, he switched in 2009 to the energy field. In Hong Kong he heads a team of innovative business developers which incubate energy ventures and provide private investors with the kind of sophisticated companies they are looking for.


For several years the US federal government’s electricity production tax credit (PTC) has been a key factor driving US renewable energy growth, particularly solar and wind. However, prior to its expiration at the end of 2013, the US Congress passed legislation for the allowance of the wind PTC or ITC, if construction commenced prior 1 January 2014 and was either:

1. considered to be continuous

2. or that a safe harbor investment provision had been made. That is, a safe harbor investment of 5% of the project completed cost that was made in 2013 would also qualify for the wind tax credit.

Failure to comply with the IRS requirement for continuous construction, or to comply with the safe harbor provision will not only result in an immediate loss of PTC, but a loss of the credit for the ten years for which it would have been eligible.

The IRS Notice states that a taxpayer may establish the beginning of construction by starting physical work of a “significant nature.” Alternatively, a taxpayer may establish the beginning of construction by meeting the safe harbor provided in the Notice. Although a taxpayer may satisfy both methods, a taxpayer need only satisfy one method to establish that construction of a facility has begun for the purpose of qualifying for the PTC or ITC.

Marshall Nadel, Managing Director of the Aon Power Team in the US, explains that “many companies in the Power sector have been turning to their legal advisers to help them interpret what the IRS Notice actually means. There is a lot of grey area around this subject and this concerns owners and developers.

For example, what if construction had to be disrupted due to a major rainfall and was therefore not technically continuous – would it then not be eligible for the tax credits? As a result of this interpretation grey area, there is a significant tax risk for owners and developers with active wind power construction projects.”

“For a 100MW project we are talking about $100m of tax credits that are at stake, so this Notice should be taken seriously”, Nadel adds, “especially when al lot of the projects in the US are still trying to attract equity. It would be logical to assume that an investor would want to invest in a project that has the clearest opinion on the Notice and a clear strategy such as a risk transfer solution if there has been a misinterpretation.”

“We are seeing companies ask if there is insurance to cover the “grey area” around this tax opinion,” Nadel says.

He reassures that “insurance products have been developed to address this potentially large exposure and bring certainty to the tax credit equity.

Owners and developers of US wind projects face significant tax opinion risk

The rankings in the KPMG Green Tax Index provide an indication of which

countries are most active in using green tax incentives and penalties to drive sustainable corporate behavior and

achieve green policy objectives.

Source: KPMG International, The KPMG Green Tax Index,

August 2013

Green Tax Index

0 10 20 30 40 50

Russia

Mexico

Argentina

Brazil

Australia

Finland

Germany

Singapore

South Africa

Canada

Spain

India

Belgium

Netherlands

Ireland

China

Korea

France

UK

Japan

USA

“There is a lot of grey area around this subject and this concerns owners and developers.”

“Insurance products have been developed to address this potentially large exposure and bring certainty to the tax credit equity.”


Specifically, in this context, the tax opinion insurance would provide coverage that if the IRS successfully challenges that a project did not timely commence construction, the insurers would indemnify the tax equity investor for tax, interest and penalties with respect to claimed PTCs and the lost opportunity for future PTCs. Insurers consider this “tax opinion insurance” because it essentially covers the risk that the tax advisors opined correctly on the tax treatment of the transaction structure (although an actual opinion is not required to obtain the insurance)”.

Gary Blitz, Managing Director of Aon Transaction Solutions and the leader of Aon’s tax insurance practice also notes that our insurers also are interested in insuring other risk to PTC and ITC transactions, such as whether the investment vehicle will be respected, whether the equipment otherwise qualifies for the tax benefits and recapture in the case of ITCs.

Gary also points out that the IRS in various tax credit guidance has viewed insurance as a preferred means of protecting tax equity over developer guarantees.”

Whilst the IRS Notice is specific to US projects, there are also many other countries currently using tax credits as an incentive to drive green policy objectives.

Similar to the US, owners and developers in other countries could also face questions around the interpretation of amendments to the tax credit regimes in their respective countries. Tax opinion insurance is therefore an interesting risk transfer tool for many global solar and wind projects.

� Under US federal law, the PTC provides an income tax credit of 2.2 cents per KW-hour generated from renewable energy sources

� The incentive was created by the Energy Policy Act of 1992 and was renewed by Congress several times

� The PTC applies during the first ten years of energy production of a facility

� Through Section 1603 of the American Recovery and Reinvestment Act of 2009, owners/developers can choose to receive a 30% investment tax credit (ITC) in lieu of the PTC

For more information, please contact:

Marshall Nadel Managing Director +1 (214) 989 2220 [email protected]

Gary Blitz Managing Director +1 (212) 441 1106 [email protected]


If you have any comments regarding this newsletter, contact: Gemma Avey: [email protected], or Tayler Houlihan: [email protected] Aon UK Limited is authorised and regulated by the Financial Conduct Authority

This information is for general purposes and guidance only and does not constitute professional advice.

Due to the nature of this type of bulletin, Aon UK Limited cannot be held responsible for any loss or damages caused through the use of any information contained herein.

While we try to comment on issues we know to be fact, we are fully aware that in gathering the information contained from various sources there is always the possibility of inaccuracy.

We can therefore only claim that the information in this newsletter is correct to the best of our knowledge at the time of publication.

Reproduction permitted with written authorisation.

Registered Office: 8 Devonshire Square, London, EC2M 4PL

Registered in London No.210725 VAT Registration

No.480 48

© Copyright 2014 by Aon UK Limited. All rights reserved.

News from the Global Power Network

A green milestone - Aon UK opts for renewable energy

Bronson John Saudi Arabia

Bronson joins us from Marsh Saudi Arabia, with whom he has been working since 1996. He was based in Riyadh in his initial years and then moved to the Eastern Province to head up Marsh Branch operation. Prior to him joining us, he held the position of “Head of Power and Energy Practice for Marsh Saudi Arabia”.

Bronson has built up considerable expertise in managing major client accounts of Marsh in Saudi Arabia particularly in the Energy and Power sectors and he has been the account executive for several major organisations, including Saudi Aramco, Saudi Electricity, Tasnee Medevac and ACWA.

His specialities include Energy, Power and Construction.

I had the pleasure of working with Bronson for 10+ years. Bronson is a self-made individual who is very dedicated, hard worker and thinks outside the box. He handled many of the complicated risks in Saudi Arabia involving energy projects, Aviation insurance, Construction projects, Power projects, etc. in His 14+ years in KSA he gained tremendous experience in the various insurance products by servicing some of the major local and multinational clients and demonstrated excellent leadership in motivating his team and achieving results. I would like to wish Bronson all the best in his new role as I am sure he will add value to Aon Middle East with the tremendous experience he brings on board.

Sid Obied - Managing Director of Specialties, Dubai ”“

In a great step forward on the journey to becoming greener, Aon has recently agreed that 100% of its UK energy will be provided by renewable sources such as wind, solar, or hydro.

The electricity we receive is from the same grid, but is backed by renewable sources. This is not costing us any extra money, but it's helping reduce our carbon footprint and meet increasingly stringent expectations from our clients.

At the moment we source our energy from a traditional supplier, but in future, we're looking to buy our electricity from a specific renewable energy project at a fixed price over many years. This will protect us from fluctuating market rates, and because we will be buying a fixed amount of energy for a fixed time period, we will be able to get a more competitive price. This is called a power purchase agreement, or PPA.

Compared to energy intensive industries, Aon is not a massive consumer of energy (though we still consume the equivalent of 5,300 homes!) so many larger renewable energy types, like wind, aren’t willing to supply us as they produce too much energy in comparison to our consumption.

This is where solar power comes in. There are many solar projects in development with attractive outputs that meet our consumption and financial needs. Some of them are even Aon clients. We are currently discussing opportunities with several of these project developers and are hopeful that we will have PPA in place by the end of 2014.

The project will help us become more environmentally friendly and cost efficient.

aon power newsletter q1 2014 - risk - retirement in the event of non performance. ... mozambique is...

Documents