Last week, we published a case study on the uncertain fate of Engie and Tokyo Gas’s Golden Eagle renewable energy portfolio in Mexico in the context of President Andrés Manuel López Obrador’s controversial energy policy (PFR, 6/25). But political risk is not confined to Latin America, and project finance bankers may do well to consider the risks in the US, too.
In January, political risk advisory firm Eurasia Group placed US domestic politics as its top risk for 2020. “We’ve never listed US domestic politics as the top risk, mainly because US institutions are among the world’s strongest and resilient,” wrote Ian Bremmer and Cliff Kupchan, the consultancy’s president and chairman, respectively. “This year, those institutions will be tested in unprecedented ways.”
They were thinking primarily about the election in November and the possibility that the outcome could be contested or declared illegitimate, whichever party wins.
For the power and renewable energy industry, the more immediate risk is that posed by President Donald Trump’s May executive order banning the use of equipment from countries designated as “foreign adversaries” in the US bulk power system (PFR, 5/1).
The wording of the order gives the government wide leeway in how to enforce the new rules, if and when it ever does.
Some market participants have taken the order more seriously than others, according to Norton Rose Fulbright partner Keith Martin, who notes in a recent article that some tax equity investors, but not all, are requiring sponsors to set aside funds to cover the potential cost of replacing “foreign adversary equipment.”
Meanwhile, some construction lenders are asking sponsors to perform cyber-security audits, the results of which they can show to any government agency that takes an interest in the project down the line.
“You can break it down into technical risk and political risk,” says a project finance banker. “Political risk is not something you can control, but on the technical side, you can structure something so that whenever that executive order is put to use, you can confidently say that we have a compliant project that should not concern you in terms of hacking.”
However, the banker noted that not all of his peers seemed to be quite as concerned. “People are not thinking about how critical this issue really is.”