Opportunities in new technology risks for ECAs
Yuichiro Akita, Vice Chair, Berne Union ECA Committee and General Manager, International and Strategic Policy, NEXI, looks at both the state of play for ECAs, and the opportunities presented by new technology risks.
Policy perspective: ECAs and new technologies
According to the International Energy Agency, reaching net zero emissions by 2050 requires the deployment of available technologies and the widespread use of emerging technologies. Nearly half of the proposed reduction in carbon dioxide emissions originates from current technologies that are either in the demonstration or prototype phases. [1]
By addressing global climate challenges, industrial policies around the world focus on climate-related technologies. Additionally, industrial policies highlight critical and emerging technologies, such as digitalisation, semiconductors, artificial intelligence (AI), and wireless communication, because economic security concerns linked to these technologies heighten the need to accelerate technology transformation.
Technological leadership underpins economic prosperity and national security. Therefore, ECAs are expected to play strategic and critical roles in terms of (i) the promotion of new technologies related to the strategy under global competition and (ii) the protection of technology flows required by geopolitical considerations. On the promotional side, ECAs support existing industries to help with the evolution of new technologies and assist startup companies in creating new industries/markets through disruptive innovation.
Barriers to the deployment of new technologies and ECAs’ role
‘Valley of Death’ and ‘Darwinian Seas’ are two major hurdles in the ‘commercial transition from an invention to an innovation’. [2] The metaphor Valley of Death relates to the entrepreneurial challenges in the transition from invention to innovation when it is necessary to overcome resource scarcity, primarily the capital gap. Major countries have funding schemes from the research and development (R&D) stage to the initial development stage, corresponding to the practical challenges that arise in the Valley of Death.
The other challenge, called the Darwinian Sea, refers to the commercial validation period of a new technology, during which a business case is assessed as having ‘low enough cost, high enough quality, and sufficient market appeal’.[2] The value of the technology is realised in the final stage when the company commercialises the new technology faster than its competitors and can capitalise on the first-mover advantage in terms of profit and market share. Thus, ECAs are relevant for supporting companies and/or projects in later stages.
Typically, ECAs finance projects with NOAK (Nth-of-a-Kind), or ‘proven’ technologies, and are supported by a ‘bankable’ project structure. However, ECAs are facing projects with FOAK (First-of-a-Kind) technologies or technologies without sufficient track records, and the business models may be different from what ECAs are accustomed to. In such cases, limited private capital compels ECAs and other policy banks to address liquidity and risk capacity.
ECAs that are willing to increase their risk appetite to accommodate and support companies and/or projects aimed at expanding a complex set of new technologies and business models may considerably shape the transition trajectory, potentially tilting the playing field in favour of their domestic innovators.
Berne Union ECA Committee’s new technology panel
To highlight this emerging issue, the Berne Union ECA Committee organised an inaugural special panel discussion featuring new technology risks at the BU spring meeting in Brussels. To better inform the discussion, the ECA Committee conducted a pre-panel survey to understand the state of the ECA industry and current ECA approaches to support new technologies. The primary results of the survey and the conclusions from the panel discussion are as follows:
ECA survey results
Of the 33 ECA Committee members, we received responses from 30 ECAs that can be summarised as follows:[3]
- Types of new technologies:
ECAs registered interest in new technologies, with 90% favouring renewable energy (see Figure 1).
Figure 1: What type of new technologies would your ECA consider supporting today and in the future?
Out of 30 replies (multiple answers possible)
2. Bankability concerns arising in new technology risks:
Scale-up risk (86%) and concerns related to the quality of Engineering, Procurement, and Construction (EPC) contractors (>50%) as well as the underperformance risk of the adopted technology and price risk that relate to the stability of the project's revenue (see Figure 2).
Figure 2: What are your bankability concerns and risks related to new technologies?
Out of 29 replies (multiple answers possible)
3. Financing projects embedded with new technologies:
As an initial assessment, ECAs replied as follows: 69% said that they would consider corporate or sovereign-based finance, while 55% noted that they would also treat it as project finance with standard risk appetite (55%) or greater risk appetite (41%) (see Figure 3).
Figure 3: When you finance or underwrite a project involving new technology risks, what would be your initial approach?
Out of 29 replies (multiple answers possible)
4. National Interest Account:
Some ECAs have a national interest account (NIA), established separately from the standard ECA book of business (or commercial) accounts. Broadly, the NIA supports projects with strong national interests. However, the risk is high for the ECA underwriting transactions in line with its standard underwriting practices. One-third of the respondents (10 ECAs) reported access to an NIA. Nine ECAs would be able to apply the NIA to support projects involving new technologies, and half the ECAs indicated that they would apply a higher risk tolerance (appetite) than they would apply to standard transactions.
Figure 4: Is it possible for your ECA to apply to the NIA to support projects embedded with new technologies?
Out of 10 replies.
5. Factors for underwriting new technology risks:
Nearly 77% of the respondents considered expanding the technical capabilities of their underwriting teams in various ways (e.g. enhancing collaboration with external consultants, hiring engineers, and establishing in-house engineering teams) (see Figure 5).
Figure 5: What must your ECA consider for supporting projects with new technologies?
Out of 30 replies (multiple answers possible)
Panel discussion: ECAs’ role in supporting new technologies
The panel included three ECAs and two experts from the banking and insurance sectors.
One ECA shared a recent experience involving a new landmark project supported based on a conventional project finance approach. Although the scale-up risk of existing technologies and the interface risk related to the project-on-project structure were challenging, the overall transaction was structured as bankable, while balancing flexibilities for successful project implementation.
Recently, another ECA introduced a new domestic financing programme for green tech startups. Unlike typical corporate finance transactions, an ECA relies more on the company’s business plan (projections) than on its current balance sheet. In addition, flexible financing terms, such as a repayment profile, allowed the ECA to match the client’s business.
Finally, one ECA introduced its NIA, explaining its political rationale and justifying its use.
In the panel, a commercial bank referenced a technical team to advise ECAs on new technology transactions. A technology risk-specialist company also showed a performance guarantee product for financiers, including ECAs, to transform new technology risk into credit risk for insurers who provide the performance guarantee. It may be worthwhile for ECAs to expand their collaboration with new partners.
New technology risks provide ECAs with an opportunity to transform their business models and society. Notably, ECAs’ support for new technologies and/or startups is important for climate change and other social issues addressed under the UN Sustainable Development Goals (SDGs).
Although each government or ECA’s approach towards new technology issues varies by country and national strategic priorities, ECAs face common challenges in reconsidering risk appetite, underwriting capability, risk management, pricing, and relationships with the government, all of which are fundamental elements of an ECA’s business model. These challenges potentially provide ECAs with opportunities to update their existing business models and contribute to societal transformations.
It is anticipated that this BU ECA Committee survey and panel will contribute to further discussions on concrete ways in which the ECA industry will be able to promote the social and commercial deployment of new technologies.
Acknowledgements:
I am grateful to all the committee members who responded to the survey and contributed to the panel. I thank Peter-Paul Ekelschot (ING Bank) and Tom Dickson (New Energy Risk) for their insights. I extend thanks to Isabel Galdiz (ECA Committee Chair, USEXIM) for guiding me in preparing for the panel, as well as providing thoughtful comments on this article. I acknowledge the support provided by Didem Bayseferogullari and Jin-Ho Seo (BU Secretariat). The views and opinions expressed in this paper are those of the author and do not necessarily reflect the official policy or position of the employer or organisation.
References:
[1] International Energy Agency 2021: ‘Net Zero by 2050’.
[2] Auerswald, E Philip and Branscomb, M Lewis, 2003: ‘Valleys of Death and Darwinian Seas: Financing the Invention to Innovation Transition in the United States’, Journal of Technology Transfer 28, pp227–239.
[3] Berne Union ECA Committee, 2023. ‘ECA Committee PMS Results on New Technology Risk,’ Spring Meeting 2023 (private document).
