HOW FINANCE SUPPORTS COAL
Commercial banks, insurance firms and investment companies play an important role in enabling major coal projects such as coal mines, coal power plants and the associated infrastructure and allowing the coal industry to operate. This webpage describes the financial services that each of them provides to projects and companies in this sector.
Dedicated finance at project level
Coal projects come with striking price tags and are often financed through a financial package that combines both equity and debt. Both are paid back from the cash flow generated by the project.
- Equity, a direct share of ownership of the project, is provided by investors which can be coal companies or institutional investors like pension funds.
- Debt is provided by commercial banks, often operating together as a syndicate.
- Public finance is also very common in project finance: loans from developments banks or guarantees from export credit agencies lower the financial risks of a project and facilitates the participation of private investors and banks in highly risky markets.
Commercial banks are not only instrumental in financing new coal projects through project finance or other kinds of dedicated finance; they also play an essential role in making projects bankable: Through advisory mandates starting at the early stages, one or two banks are usually responsible for making the project fly and for structuring its financing.
Insurance coverage at project level
In addition to funding, coal projects need insurance. Coal mines, coal-fired power plants and associated facilities (such as railways and coal ports) are capital intensive and face serious physical, technical, legal, political and management risks; as well as the risk that other parties to a contract will not meet their obligations. Few such projects would advance without some kind of insurance cover, which is required to secure project financing and obtain authorisation. Insurers thus play a critical role in new coal projects.
Beyond the construction coverage, property coverage for projects that are already built are necessary and insurers are also crucial in enabling the operation of existing coal projects. Cover can be provided on a project basis, through stand-alone insurance (also called single-site), or to several projects together. In that case, existing coal projects might be insured along with other types of assets.
Not all insurers underwrite the risks related to the coal industry. The market is quite concentrated, with few major insurers able to have the expertise required to insure such gigantic risky projects.
New coal projects tend to require reinsurance coverage, when insurers transfer all or part of the risks they underwrite to reinsurers (such as Swiss Re, Munich Re, Hannover Re, and Scor), mainly through facultative reinsurance.