OFAC revokes so-called U-turn authorization for Cuba-related financial transactions
OFAC published a final rule that modifies the Cuban Assets Control Regulations to revoke the so-called "U-turn" authorization.
The infrastructure projects market in the UK has seen the rise of a new insurance solution – insurance against the risk of loss of statutory renewable energy incentives. We explore here the “what”, “why”, and “how” of this new insurance solution and its implications for the market for insuring “cliffhanger” situations in large energy and infrastructure projects.
A new biomass-fuelled combined heat and power facility in the UK, backed by European project financiers, that recently reached financial close has witnessed the rise of a novel insurance solution in the market for construction delay insurance.
Traditionally, “delay in start-up” insurance cover, that is commonly taken out in large-scale construction projects, only provides indemnification for actual lost revenue during the indemnity period (the insured period of delay). The new solution breaks new ground by supplementing the traditional project insurances, construction all risks, and delay in start-up, to protect the developer and the funders against the risk of the project losing an entire future revenue stream, which in this case was dependent on the project securing the benefit of the UK Government’s Renewable Obligation Certificates (ROC) scheme by the statutory “cliff-edge” deadline for its closure.
The ROC scheme is essentially a subsidy regime through which the Government offers support to generators of renewable energy, but which is in the process of being phased out to pave the way for a successor regime (known as “contracts for difference” or CFDs). It is this “transition” that makes it interesting from an insurance point of view, as (in the case of the aforementioned biomass facility) a dedicated biomass-fuelled combined heat and power project (CHP) that qualifies for ROC support, but does not commission and apply for ROC accreditation on or before the set deadline of 30 September 2018, would lose the benefit of the ROC regime, and consequently a significant long-term revenue stream for the project1. It was this risk of “going over the ROC cliff” – which could result in financial losses worth millions of pounds – that various project stakeholders, including the developer, the funders, and the construction contractor, were faced with.
An obvious way to manage this and other similar sorts of construction risks – where the financial success of a project depends on meeting an immovable, and often arbitrary, deadline fixed by policymakers – is proper due diligence and construction programming before works are commenced. Another, is careful contractual risk allocation. Developers can contractually allocate some part of such risk to other project parties where they may be better placed to manage the risk, such as the construction contractor or the feedstock supplier.
However, the appetite and financial ability of various project participants to assume liability for loss of a substantial source of revenue varies, and can be particularly constrained where the liability is disproportionate to the reward under the contract. Our experience suggests that there are contractors that will contractually assume varying degrees of such risks. However, most are likely to stop short of taking on a substantial liability where the risk event is outside their control, such as delay to construction works or inability to supply feedstock as a result of non-culpable events (for example, inclement weather, industrial disputes, changes in law or other government action, and natural calamities).
It is in this context that “cliff insurance” has emerged as a vital risk mitigation tool. In the case of the biomass-fuelled project referred to at the start of this article, Norton Rose Fulbright LLP and Marsh jointly developed a new “cliff insurance” policy that would protect the developer and the financiers and allow the project to proceed. Marsh was able to source insurers who were willing to provide this coverage as an addition to the traditional project insurance covers, construction all risks, and delay in start-up.
When triggered, the “cliff insurance” policy is designed to pay out, on an upfront basis, the net present value of the projected revenue foregone as a result of the project’s failure to achieve accreditation for ROCs by the hard deadline of 30 September 2018. The developer and funders are therefore not required to wait for the expiry of the full life of the project in order to be made whole in line with anticipated revenue accrual in the event that accreditation had been achieved.
In terms of the trigger for cover, the indemnity under the “cliff insurance” policy is dependent on the occurrence of a delay in achieving the relevant milestone (in this case, accreditation for ROCs) resulting from either:
The “cliff insurance” policy is triggered when this delay to the project programme causes the relevant deadline to be missed.
One of the challenges to insurers and insureds looking to enter into this type of policy is the management of the “float”, that is, the period between the date on which a relevant milestone is expected to be reached, and the final, hard deadline – the longstop date. Insurers are likely to be concerned that the float could be consumed by uninsured delay only for an insured peril occurring in the final hour to cause a delay (potentially very brief) which is sufficient to push the project timetable over the “cliff edge”. One response to this concern, which was adopted in the “cliff insurance” policy, is to exclude cover for the loss of incentive revenue in the event that uninsured delay exceeds a certain length of time.
In order to determine and agree the trigger and pay-out of the coverage, interests of all parties needed to be aligned. The underwriting and structuring process therefore included specific attention to the applied calculation of a net present value for the coverage pay-out.
Challenges and complications aside, there are financially strong, global insurers who have appetite to underwrite structurally similar solutions. The emergence of the “cliff insurance” solution is likely to continue to see further evolution, with application across various industry sectors and jurisdictions internationally. Many industries are eligible for government incentives which are subject to the fulfilment of certain criteria. This may be seen mainly on renewable energy programmes, but not exclusively. Therefore, this type of coverage could be applicable to a wide spectrum of industry segments. The solution is particularly appropriate in circumstances where the regulatory framework imposes a strict deadline for project completion, without regard to the project programme. However, the solution may have broader application. Investors and insurers can appreciate how this innovative solution could apply to projects such as school or university accommodation construction projects which require construction to be complete before term begins, or renewable energy projects with complex build-profiles under the CFD scheme which are required to commission before a contractual longstop date. The solution might also develop to mitigate other regulatory risks, for example, “topping up” revenues where the failure to commission before a certain trigger event or date means that project revenues under a regulatory support regime are reduced compared to the investment case.
On 5 September 2019, Professor John McMillan AO’s Final Report (Report) on the operation of the Narcotic Drugs Act 1967 (ND Act) was tabled in Parliament. Section 26A of the ND Act required the Minster to cause a review of the operation of the ND Act to be undertaken.